The troubling thoughts re: outsourcing

Watch this space for future problems!

There’s a lot going on in the outsourcing world lately. Things like:

- Perot Data Systems being acquired by Dell

- ACS getting bought by Xerox

Add to these deals, consider that:

- Accenture is providing guidance suggesting zero growth

- Accenture cutting back its executive ranks

- A colleague telling me that outsourcing, traditional & BPO outsourcing, is on the way out

Let’s look at that last supposition. BPO, business process outsourcing, is built on the idea that an outsourcer can assemble a great collection of technologies, design & enable them with a specific set of business processes and deliver a step-change improvement in a customer’s business operations. Generally, BPO providers can take a customer experiencing 3rd or 4th quartile performance levels to 1st or 2nd levels and at a lower cost than the customer was able to deliver on their own.

BPO deals are tough, though. Customers fight the urge to adapt standardized processes and often end up with processes that have some best processes and some of their old bad habits (and cost structures) embedded within them.

BPO solutions have traditionally been built around older ERP solutions. They’ve been constructed with the stuff your firm was using before it went to BPO. Many use older client server software and not newer SaaS (software as a service) products. These solutions may or may not have a SOA (service oriented architecture). They may be built from the parts of several ERP and specialty software firms. Sure, the vendors are selling an outsourced process and not a technically elegant solution. But, what happens when BPO buyers are looking under the hood and see a solution that’s long in the tooth technically? Just last week, I spoke with a vendor whose firm is still selling a COBOL-based, HR Payroll product with a runtime compiler in it. Oh, did I mention it was a green-screen solution that an outsourcer is using.

There’s another issue with the traditional BPO solutions. They may not be economical for the solution providers and their customers anymore. True SaaS products can be great deals for the provider and the customer as they have multi-tenancy properties. Multi-tenant solutions permit the provider to operate one-version of the code for all customers while logically (not physically) separating each customer’s data. In contrast, many BPO solutions are not multi-tenant. Actually, they are far from it. Each customer has their own configuration and version of the code. Their data is logically and physically separated. BPO solutions in this fashion are more expensive to update and operate. Every time an old-school BPO provider needs to update their software (e.g., scheduled maintenance, new functionality, security patches, etc.), they have to do it one customer at a time. It’s expensive and, ironically, it’s inefficient.

Buyers are going to look at other solutions. Solutions that come with best practices built in and are capable of instant updating. They can be updated simultaneously for all customers. New processes can be enabled immediately. Buyers will want solutions built for cloud platforms and offered by vendors who can really get their cloud costs down. They’ll want a solution provider who uses Linux and not some proprietary operating system. They’ll want a provider who builds their own servers using commodity parts. Likewise, they’ll want a provider who offers disk storage at prices closer to the sub-$100/terabyte prices you and I pay at mass retailers and not prices form factors higher from brand name hardware vendors.

Pricing will fall for the hardware, software and services in the mostly back office enabled BPO world as these are all commodities now. SaaS will just exacerbate the drops.

Traditional outsourcing, that space where clients transfer entire data centers to a third party, may be on the way out, too. Non-core applications will go to the cloud as more and more of the hardware in a data center is scheduled for retirement. It’s a predictable route given the need to free up capital and labor. Customers will continue to move troubled, non-strategic apps to outsourcers or SaaS solutions. They will do so just as many of us trade-in our messed up old cars for newer ones. Problem is, too many traditional outsourcing solutions aren’t too different from the old cars…

Traditional outsoucing made sense when labor arbitrage was a key value driver. It isn't anymore.

Today – Today, outsourcers are taking calls from acquirers, private equity firms and others. They know tough times are ahead and are looking for an exit strategy for their investors. Who wins? Well, the investors in the outsourcer might see a bump in their stock price but it won’t be long lasting. Structural changes introduce turmoil in markets and we should see some here.

Gartner recently published an analysis of this space and predicts 25% of outsourcers are going to disappear.

That’s a lot of change and it will disrupt a number of firms. Just make sure yours isn’t one of them.

I'm concerned that some of the buyers of outsourcing firms may have rose-tinted glasses on and their employees (and clients of these firms) could get hurt. Let's hope not.