Plug n Play: New Paradigm of Outsourcing

For every dollar spent on IT, it is reckoned that only about 20 cents goes to gaining competitive advantage (developing unique functionality, specialized or highly customized solution, faster time to market). The bulk of the dollar spent (80 cents) goes to chasing the holy grail of operational efficiency. CXOs have been grappling with this investment and return mismatch for quite long. Additionally, the time lag between a business decision and supporting system roll out makes many of the technology investments go sour as business realities keep on changing. With technology driving operations, it is also becoming difficult to separate technology and operations. On top of it, both technology and operations are getting outsourced and managing them separately leads to higher overheads and hence lower returns.   

What is an ideal outsourcing model?

The three basic tenets on which an ideal solution should be based are

1.        Bringing the investments in operational efficiency down significantly

2.        Pay by drink approach (keep costs variable)

3.        Global delivery model that addresses both technology and operations outsourcing 

Sharing of costs between multiple firms for an operational efficiency application and supporting staff for such an application will exponentially bring down the costs. Additionally, it does not compromise on competitive advantage as the solutions for operational efficiency are pretty standard and non-unique. An application service provider (ASP) model where the application is hosted by the vendor for its clients over the internet should be able to achieve this objective. The services are priced on transaction volume basis to keep the operations costs variable. The solution addresses a business function end to end. It not only removes the need for managing technology for a business need but also makes running operations in-house redundant. Having a delivery model similar to the operating models of a global business process outsourcing (BPO) and IT outsourcing(ITO) providers, allows staff responsible for operations of business function to be located in regions which makes the best strategic and economic rationale.

This means that clients will no longer need to worry about software, hardware, maintenance, upgrades, dedicated staff and the associated resource management. The costs are shared and more predictable. This new paradigm will also bring in a concept of payments per transaction (pay by drink). The process maturity is also high as the solution is productized and hence outsourcing technology and operations becomes easy to manage.  

Definitely, this approach will solve problems at a strategy level for technology and operations outsourcing. The question is why this has not happened till now. There are few barriers to such an approach.

1.        Massive infrastructure costs for a new set up at a global location

2.        Poor and costly connectivity

3.        Data Security

4.        Replication and duplication of data and environment in the current setup

5.        Long term commitments required in globalization decisions

6.        Softer issues (acceptance of offshore)

7.        Non-interactive Communication channels 

There are some mega trends in IT that point towards removal of all these barriers. 

True Globalization: Outsourcing of technology was started so that companies can focus on their core competency. Vendors started doing work onsite and then slowly part of the work shifted offshore largely because of labor cost arbitrage between onsite and offshore. Increasingly, the emphasis has now shifted to a global delivery model that encompasses multiple locations and provides a variety of benefits, such as quality, timeliness, staffing flexibility, proximity to customers, and availability of technical skills and range of services— not simply those that are cost-related. Markets firmly believe in these trends and give a higher valuation for such a delivery model as compared to pure onsite or a pure offshore model.  

Pervasive Infinite Bandwidth: Optical bandwidth has been doubling every 9 months while costs of telecommunication have spiraled down. Even wires have become an endangered species due to advancements in wireless technologies and wireless becoming the preferred communication medium. With the tidal surge of cheap, ubiquitous bandwidth, great transformations are expected in personal and professional lives. Some of these transformations are going to have a major impact on IT Services industry.

1.        The concept of distance is going to change and “Work from anywhere” will become the way of life.

2.          The personal computers industry will complete a full circle. The computers industry started with every piece of software and data residing in servers and thin clients accessing them. Slowness of processing and network speeds led to a shift to a thick client model. This led to data and environment replication which definitely means more investments in maintenance and security.  Infinite bandwidth allows us to again work from servers without loosing on performance and gaining on maintenance and security investments.  

Full motion video on demand: Advancements in video streaming technologies coupled with near infinite bandwidth have made successes of businesses like youtube that allow sharing of video over internet. Full motion video on demand will have a disruptive influence on communications industry. Communicating live with people in all corners of the world is not going to wait much longer and should be happening very soon. 

Moore’s Law hold true for all aspects of IT infrastructure: Gordon Moore's famous declaration about packing more and more transistors into less and less chip space holds true for other aspects of information technology as well. For example, flat screen displays are coming out thinner, larger and with higher resolution, yet their prices keep going lower. Conversion from physical to electronic transformation with devices like high speed scanner has become faster and easier. This has a complementary effect on all the previous trends discussed. Setting up technology infrastructure at new locations will not be one of the biggest hurdles in globalization decisions as the amount of investments will not require long term commitments. Data can be easily made available in electronic form for processing in another location. Infrastructure investments required for communicating live will be marginally higher than current set up.  

Clearly, the barriers for a ‘Plug n Play’ approach are crumbling and such an approach has potential to solve the investment return paradox that has been discussed so many times in most boardrooms.