How Apple’s outsourcing strategy created two giant competitors

Apple is well known for being one of the world’s leading design companies but their outsourcing strategy inadvertently created two of their biggest competitors and two of the world’s largest technology companies.

No other metric is more important to an organization than its profitability. Profitable companies can invest and acquire while unprofitable ones slowly sink into the abyss of Chapter 11. But while profitability is one of your organizations biggest motivators, the unchecked pursuit of it can eventually destroy shareholder value and create your next, fiercest competitor. This is what Apple (AAPL) and its shareholders found out to their peril when the stock plummeted from it’s high of $700 to a value of $566, wiping out over $150 Billion of shareholder value.

Company executives are increasingly compelled to report profit in percentage terms so naturally they promote and reward the behaviors that increase margins. As such the pursuit of higher profit margins, rather than the pursuit of voluminous profits becomes the dominant behavior.
Today we’re seeing several sectors of the western economy, such as manufacturing, assembly and engineering decline as many of the world’s largest first world organizations progressively outsource cost intensive segments of their businesses to the tiger economies and risk becoming nothing more than high margin, damaged marketing agencies who have outsourced everything but their brand.

The two primary methodologies organizations, analysts and Wall Street use to measure profitability are the Internal Rate of Return (IRR) and Rate of Return on Net Assets (RONA), because by describing profitability as ratios it allows us to neutralize differences and compare the profitability between different industries. IRR inadvertently motivates organizations to focus on smaller, faster wins because if they use their money to fund programs that don’t pay off for years then the ratio is at best modest, meanwhile, RONA motivates organizations to reduce the number of assets they hold on their books.

Consequently, organizations have a strong incentive to shed their cost intensive or lower margin operations so they can concentrate on business units that have higher margin returns. There are, of course, a number of ways that organizations can divest these operations in a way that boosts their overall average margins. Some organizations like IBM choose to dispose of their commodity business units while others like Apple, Amazon, Cisco, Sony, Nokia, Dell, HP and many more prefer to outsource specific operations, which allow them to tactically withdraw or transfer their own resources and sell the related assets.
At first glance outsourcing looks like a win-win for both the organization and their shareholders and it’s hard to fault the approach. Disposing of the related assets improves the organizations cash reserves while the reduction in overheads lifts the organizations average margins and earnings per share. However, what very few organizations see – at least until it’s too late – are the downstream effects and how outsourcing can create their fiercest competitor and destroy long-term shareholder value.

Once an organization has made the strategic decision to outsource their operations – irrespective of the industry, it’s incredibly difficult and costly bring them back in-house. The assets have been sold, the supply chains and skilled teams have been dissolved and the intellectual capital has long since been lost, and once an organization has embraced the outsourcing habit it’s one they’ll find hard to break.

Consequently, what started as a simple way to eliminate costs and increase IRR and RONA suddenly becomes an easy to repeat addiction and as an organization outsources more and more of its operation with every turn of the handle they may be unwittingly equipping their next, most formidable competitor. Whether it’s HP’s x86 server ODM (Original Device Manufacturer), Quanta who now sits in second place in the worldwide IDC Server Market Share rankings ahead of Dell, or IBM’s ODM Lenovo who are now pounding their Systems and Technology Group in markets around the world, it’s inevitable that at some point outsourcers will examine how they can leverage their new insights, assets and skills to become a brand and competitor that reaps higher than average industry margins.

Beware of the lure of outsourcing

Today there are a myriad of organizations who have outsourced segments of their business and inadvertently helped enhance their future rivals competitive capabilities. But despite this, it’s arguable that none of the competitors those organizations helped create come close to the two super powers that Apple has unwittingly created – I am, of course, talking about Samsung, and their sister company Samsung Electronics, and Foxconn who since its association with Apple began have increased revenues by 11,461 percent and 6,002 percent respectively.

Many bystanders are more likely to view the emergence of these two giants onto the global stage as business evolution rather than revolution. While Samsung declared their competitive intentions in 2008, Foxconn has only recently reached the starting line of its long journey. In each case I will show you how both companies have combined renewed board ambition and the investments they made in equipment, processes and people to service their contractual agreements with Apple with the strengths of their core business models to fuel their meteoric rise to fame and fortune.

To understand Samsung’s rise to dominance we have to go back to the turn of the new millennium when Apple released its first generation iPod in 2001, quickly followed by the iTunes store in 2002. Always publicized as the only alternative computing platform to the then dominant Wintel alliances of Microsoft, Dell, HP and IBM Apple always had an iconic – dare we say cult like following even if it didn’t have the revenues to match.

Apple was the bullish underdog that kept nipping at the heels of the Wintel alliance, but one that rarely came up in any of their competitive planning sessions. Over the next 10 years Apple sold over 320 million iPods and as they introduced more products such as the iPhone in 2007 and the iPad in 2009, which at the time of publishing this article have both respectively sold 421 million and 170 million units their annual revenues grew from $5 billion to an eye watering $171 Billion. It’s this growth and the insights into Apple’s operations that helped Samsung and Foxconn craft their own spectacular rises to power.

Almost from the start of its journey Steve Jobs and the executive board shaped Apple into an innovative design company and this is an important distinction to make. Design companies focus on creating beautifully designed, frictionless products and are commonly less interested in administering the cost intensive, low margin manufacturing and assembly operations that inevitably rely on facilities that have to be built, managed and supplied in order to create the final product.

Consequently, Apple was determined to outsource both of these areas of operation from the outset. The lion’s share of manufacturing, many of Apples most bespoke and critical components, including the screens, Flash and DRAM memory and the fabrication of Apple’s bespoke logic processors for all of Apples flagship lines was outsourced to Samsung Electronics (SSNLF) and the responsibility for assembling the iPod, iPhone and iPad was outsourced to Apple’s long standing partner Foxconn.

In the early days, when volumes of Apple branded products were lower than they are today, Samsung and Foxconn were happy with their position in life, but as time progressed and as they saw Apple’s money pile growing into a $150 billion mountain their Board’s ambitions grew. When you feed off of the scraps of the kings table for long enough – and when we say scraps we of course mean when you collectively only make $52.68, at an average margin of 12.02 percent for Samsung and an average margin of 1.70 percent for Foxconn, from the sale of each iPhone vs. Apple’s staggering $368 – sometimes your mind turns to thoughts of rebellion and what you’d need to do to be the next heir apparent …

Why be the iconic customer’s manufacturer when you can be the icon? Why be the assembler when you can be the venture capitalist behind the next big technology wave? In each case both Samsung and Foxconn had the same ambitions – to push themselves up the Value Chain and become the Brand where they could realize higher margin returns and that’s precisely what they did.

Over the course of their 10-year partnership with Apple both organizations had developed highly efficient global supply chains capable of supporting their new aspirations so it was simply a matter of filling the capability gaps in their value chain – namely ‘design’ and ‘brand’ development. Their manufacturing and assembly plants, processes and employee skill sets had all been honed over time to make and assemble Apples products so it was inevitable that the products that they chose to produce and invest in themselves, namely smartphones and tablets, would eventually put them in direct competition with their largest customer.

Samsung was the first company out of the blocks in 2009 and their new strategy put them firmly on a collision course with Apple. They spent billions, struck up a relationship with Google Android and worked hard to boost their design and innovation practices by investing heavily in new multidisciplinary satellite centers around the world. Ultimately, these created the Galaxy S3 and S4, the world’s best-selling smart phones and the world’s number two tablet, the Galaxy Note.

Later, in 2013, Foxconn chose a less confrontational approach, preferring instead to create a venture capital backed hardware accelerator program that invests in and supports designers and innovators of interest, helping them refine their products ready for the mass market and, with Apple expected to release the iWatch it’s probably not by coincidence that the first product that they chose to invest in was a smartwatch.
Given the rise of these two new co-petitors and their increasingly dramatic impact on Apple the organization had to make a number of tough choices, all of which were made even more complicated by the depth of relationship, integration and business insights between the triumvirate. Their choices included fighting Samsung for market share with all of the downstream implications that that would undoubtedly have on their revenues, margins and share price, alternatively they could work diligently to innovate new products for the mass market or they could choose to do both. Irrespective of the choice though everyone knew that they were on a collision course with two of their largest strategic partners.

In late 2013, with their share price stalled for over a year at $550 and activist Carl Ichan pressing for the introduction of a $150 billion share buyback program Apple CEO Tim Cook implemented a raft of new initiatives designed to build new growth and reduce Apples dependency on their co-petitors.

The first initiative to be announced was the introduction of the iPhone 5C, a scaled back, low cost iPhone assembled by Foxconn’s smaller competitor Pegatron and squarely positioned to compete with Samsung’s cheaper alternatives. Next came the decision to bring manufacturing of some of Apple’s smaller flagship lines such as the iBook back to the U.S. and then finally the announcement that in 2014 Apple was switching all of its $10 billion annual memory and processor orders to Samsung’s arch competitor TSMC.

As for the future as Apple strives to create and dominate untapped mass markets it now looks certain that they will be introducing two highly hyped, revolutionary new products in the iTV and the iWatch.

Conclusion

Outsourcing has clear cost and scale advantages and managed correctly it will let you refocus your organizations resources on areas that drive growth – however, as we can see from our example, outsourcing areas of your business that underpin your organizations key revenue generators – such as software development, manufacturing and product assembly can have dangerous long-term consequences.

My advice is to think carefully about which areas of your operation to outsource and focus on outsourcing areas that have a low value to your organization as well as a low value to any future outsourcer who may, in years to come, decide to become your competition. If, however, you do outsource areas of your operation which they could leverage to compete with you, then you must work diligently to determine the long-term, downstream implications, build a comprehensive, time-sensitive risk register and adopt a multioutsourcer strategy.

Source: CIO.com – How Apple’s outsourcing strategy created two giant competitors by Matthew Griffin

4 ways to cut app development and maintenance costs

A managed services or fixed-fee outsourcing model for application development and maintenance can ultimately yield major savings for IT organizations that embrace it.

A well-planned managed service delivery contract for application maintenance can yield a 25 to 45 percent cost reduction over staff augmentation in the first year alone, according Steven Kirz, managing director with outsourcing consultancy Pace Harmon, with many organizations seeing 50 to 75 percent savings after five years. Likewise, when IT organizations move from a time-and-materials approach to fixed-fee deals for application development, they can cut costs in half, according to Kirz.

Many large companies, however, continue to work with their outsourcing providers in man-hours mode. “The reason most development projects aren’t fixed fee is that the client hasn’t spent enough time or effort figuring out what they actually want built,” says Kirz. In addition, staff augmentation may make more sense for IT shops that are pursuing agile development processes.

When it comes to maintaining apps, some companies may simply be used to the status quo or lack the data required for providers to accurately estimate the effort required to maintain their systems. A managed services approach may not be a good fit for unclear or unstable environments, such as when a new application is released into production, Kirz says.
But while a staff augmentation approach comes at a premium, there are opportunities to control the costs of this model for the many IT organizations that still use it. IT leaders can reduce their IT outsourcing rates by proactively managing the four factors that unduly drive up these costs, says Kirz.

1. Roles

When adopting a staff augmentation model, standardizing roles is critical. “We’ve seen different companies and even different parts of the same IT organizations refer to the same roles with varying nomenclature,” Kirz says. “Standardizing roles allows companies to establish a baseline and benchmark these roles, as well as ensure that rates being applied to roles are the same across the board.”

In order to establish accurate market rates for these IT services, outsourcing customers first need to insure that the IT organization agrees on not only the nomenclature for application development and maintenance roles (e.g. developer, technical architect), but also their corresponding responsibilities, capabilities, qualifications, and required certifications.

2. Experience

IT professionals with more experience naturally command higher rates. Kirz advises IT outsourcing customers to establish three to four bands of experience levels for all applicable roles in order to avoid overpaying for overqualified resources. “Because roles typically require a separate set of responsibilities, capabilities, and qualifications for each band of experience, organizations can expect approximately 100 different combinations of role descriptions.”

3. Technology expertise

Each role has requires specific skills, knowledge, and training requirements. When technology expertise is widely available across the market, standard rate levels apply while hard-to-find experts command premium market rates. “To ensure that a company pays the right price for a specific role within a band of experience, it needs to be sure that rates also incorporate the continuum of technology expertise required, [such as] Java, SAP, or mainframe [skills],” Kirz says.

4. Location

Man-hour rates for IT outsourcing are much like real estate prices. It’s all about location. The most dramatic difference in how much you pay for a resource is based on geography, which many companies still define generically as either onshore or offshore. “However, service providers have delivery centers worldwide and resources associated with one account are often dispersed,” says Kirz. “As a result, companies should examine rates for all locations delivering services for their project.” Consider whether staff are located in India, Argentina, or the Philippines and whether they are tier-one, -two, or –three cities. Rates per hour can vary by as much as 15 to 20 percent within a country, says Kirz. “Major service providers are also developing large delivery centers throughout the rural U.S. Like their tier-two counterparts in India, using these U.S. centers can mean paying a premium for those customers using generic onshore/offshore rates.”

Source: Computerworld- 4 ways to cut app development and maintenance costs

Whitepaper: Outsourcing IT Projects to Managed Hosting or the Cloud: 12 Critical Success Factors to Consider.

Outsourcing is here to stay – especially the kind of “outsourcing” that means moving an application or workload from your data center to a third-party managed service or cloud service.   Whether you want to move an entire IT function like e-mail, or simply provision more storage or processing for a small team, well-executed outsourcing can deliver compelling benefits:   -Moving costs from CAPEX to OPEX  -Eliminating mundane IT chores  -Reallocating staff to more strategic projects  -Preserving the same governance you’ve always had   This white paper outlines 12 critical success factors to consider when outsourcing IT to managed hosting or the cloud. To compile this list, we drew from the 15+ years of hands-on experience Rackspace has gained helping hundreds of thousands of customers move workloads to managed hosting or the cloud.

Download the Whitepaper at: Rackspace-Outsourcing IT Projects to Managed Hosting or the Cloud: 12 Critical Success Factors to Consider.

These 25 Successful Startups Were Built With Outsourced Development

Starting a venture and developing your product or service requires working quickly and efficiently. You need to ensure your startup offers value in terms of innovation, quality and convenience, even though you have limited resources and may be racing against the competition to be first to market.

So, how do you strike the perfect balance?

It’s up to the talent you bring in to make this happen. The problems are you (much like myself) have limited funds to hire talent, who may be new to the process. There is an alternative approach that many companies have actually used during the startup phase: outsourced development.

While this may be little known, perhaps because there is considerable controversy over using outsourcing, here are 25 large startups that have succeeded using this strategy to launch their highly-valued businesses:

• Slack: Now valued at nearly $3 billion, this company used outsourcing to develop its solution in its earliest days.
• Fab: This large startup partnered with developers in India to maximize funding while scaling up when their business showed signs of growth.
• Skype: They used a team of developers in Estonia to help them build out their business.
• Klout: To get its technology in the right place before launch, Klout relied on many outsourced developers.
• AppSumo: The company has used many freelancers in various fields, including marketing, content and IT to grow its business.
• Staff.com: Serving as a company that offers outsourced talent and freelancers for other organizations, Staff.com utilized the same model to grow from a start-up into a globally successful business.
• Branchout: This app was created entirely with outsourced development.
• Github: The company has used numerous people who completed development work virtually from home.
• Basecamp: The same practice of outsourcing worked for Basecamp as it developed itself into a technology leader.
• AlertBoot: The company decided to outsource infrastructure-as-a-Service (IaaS) and cloud hosting to speed those areas of development.
• MYSQL: From the start, the company believed and proved the success of a growth strategy that included using a mostly outsourced staff in various countries to ramp up operations in each location.
• SeatGeek: This company found a considerable cost benefit to outsourcing specific tasks to talent in other countries. That helped them build their infrastructure quicker at less cost than hiring in-house staff.
• Squawker: This company partnered with an outsource provider to build its platform solution.
• JPay.com: Outside developers built their technology and infrastructure. They used people in India, China and Israel for quality assurance, engineering and hardware. It helped to have the outsourcing in place to handle growth. They eventually sold the company to Securus Technology.
• Splunk: This company, known for search and analysis of data, has used outsource agencies to find the talent that rapidly developed their infrastructure and solution.
• Opera: This web browser company relied on developers in other countries to create and implement its platform.
• Pingar: The company helps organizations with data analytics. While establishing itself in its industry it called on outsourced talent to develop its business.
• Axeda: The company relied on developers to create the software and platform to offer its cloud-based solution.
• Solix: Even technology outsource companies have used outsourced talent to create its infrastructure as Solix has done.
• Cloudmunch: This Platform-as-a-Service (PaaS) company utilized an Indian outsource company to cull talent it needed to start up its operations.
• Gliffy: This web-based diagramming tools company has turned to outsourcing for specific aspects of its technology development.
• Net2Text: The company outsourced the development of its mobile payment platform.
• Proximate Global Inc.: This company used an outsource service provider to create a location-based service for smartphones called Face2Face.
• Mailburn: This iPhone email client solution developed thanks to a partnership with an outsource service provider that helped with many of the technical aspects of the solution.
• Mindspark: This mobile app development company has used outsource providers to create its business and many of its current apps.

After learning about this list I started researching good companies that could build my invoicing for freelancers startup. I now have a large team of developers who are cranking away at new features.

These startups and many others, like myself, have recognized the value that outsourcing brings, whether that is talent in other countries or homegrown experts who work virtually. The primary driver is that outsourcing costs startups much less an in-house team. Outsourcers come with skills already in place, so you do not spend time training. The low costs and knowledgeable talent means you can get infrastructure developed faster and your company launched sooner.

My one tip for success is, before you engage long term, test a couple developers and make sure the code is clean. There are numerous horror stories, so make sure that you have someone who understands code to manage this outsourced team.

Here’s to growing all of our businesses online!

Source: entrepreneur.com-These 25 Successful Startups Were Built With Outsourced Development by John Rampton

Apple’s Indian Outsourcing Activities Uncovered

The mystery surrounding Apple’s outsourcing relationship with Indian providers has been revealed, thanks to research by the Times of India (ToI).

Service providers are secretive about their agreements with the California-based giant, signing non-disclosures in exchange for lucrative contracts. However the ToI has spoken to research firms and industry sources to reveal that TCS, Infosys, Wipro and Tech Mahindra are all Apple’s primary vendors, working across various divisions including enterprise applications, customer care and product lifecycle management.

Speaking to the ToI, Peter Bendor Samuel, CEO of the research advisory Everest Group, said “It looks like Apple is considering a significant reworking of its provider portfolio. Given their spend and what they are doing in the market place, this could be very substantial not only in terms of the revenue from Apple, but also in terms of partnerships.”

How to structure an outsourced IT project for less risk, more leverage

Large-scale IT outsourcing deals are doomed to fail if you don’t structure the project properly. Therefore, it’s imperative that during the negotiating and contracting phase you lay the groundwork to mitigate the risks and maintain leverage.

In 2015, big, monolithic outsourcing deals are regarded just about as negatively as huge, enterprise IT projects: They are seen as lengthy, costly and practically doomed to fail. Just as IT organizations have broken down their large IT tasks into more discrete deliverables, they’ve also dissolved their mega outsourcing deals among multiple providers.
Today, the prospect of outsourcing a major technology project to a single vendor may seem like an antiquated notion. And the risks of such an approach abound.

“There are several reasons that one provider may not be the best decision for a long-term project,” says Andrew Alpert, principal with business optimization and outsourcing consultancy Pace Harmon.

“First, there may be aspects of the projects that require specific domain expertise and functional, technical, organizational change, or industry specific knowledge that are not available from a single provider. Second, providers that have strong business requirements and design expertise may not be the most effective and efficient development and testing organization or the best development and testing provider may have comparatively weak change management teams.”

In addition, locking in one IT service provider can limit a customer’s ability to minimize costs, ensure commercial and performance accountability, and maintain resource quality.

But … sometimes having one vendor is the only option

Yet IT organizations still must take on transformative, enterprise programs. And farming that work out to a variety of IT suppliers isn’t always feasible. Certain specialized software expertise may reside only with a certain vendor, for example. “Indeed, this is especially the case when implementing specialized software solutions where the marketplace expertise tends to reside only with the software provider,” Alpert says.

Certain types of enterprise projects may naturally lend themselves to the one partner approach. “This comes into play when implementing a software-as-a-service platform,” says Alpert. “In these implementations there is typically a much smaller software development and testing lifecycle and more focus on agile configuration and testing.”

An IT organization may also like the clarity that can accompany working with a sole provider. Unfortunately, “the perceived accountability benefits of ‘one throat to choke’ are typically unrealized due to poor commercial structure and provider unwillingness to accept real risk,” explains Alpert. “With a single provider, future phases of work are often overpriced due to lack of competitive leverage, and the project scope is not yet well defined to determine the discrete schedule, deliverables, requirements, and timeline to hold the provider accountable.”

Mitigating risk when structuring a large-scale IT outsourcing project

However, there are ways to structure an outsourced large-scale IT project that mitigates the risks of the project and maintains an IT organization’s leverage with the sole provider. And that groundwork must be laid during the negotiating and contracting phase.

Specifically, when approaching a major, single-sourced program, IT organizations should contractually commit only to the work that can be discretely specified, scoped and planned in the near term.

“We recommend that buyers limit the scope of work to that which can be defined with specific activities and deliverables that are within the control of the provider,” Alpert says. “With this, the provider can commit to a fixed or capped fee for a known quantity of work that is within their control. In exchange, buyers receive the comfort of knowing what they will get in the form of deliverables and budget certainty.” Then they can use the traditional design phase of the project to identify detailed functional specifications.

These deliverables “enable the client to scope and potentially compete the next phase of work (for example, technical design and build) vs. [creating] a higher-level of design with provider promises to ‘capture the additional design detail during the next phase of work,’” says Alpert. In this way, buyers will ensure that project milestones are structured to maintain the ability to compete future phases of work if the incumbent provider is not “staying hungry,” Alpert explains.

The goal is to make the most of the single-sourced approach while managing the inevitable drawbacks of locking into one supplier. “The optimal approach is to leverage the potential scale of the project to create a comprehensive structure that provides for committed rates, discounts, governance structure, resource and staffing requirements, commercial terms, and performance structure,” says Alpert.

Source: CIO.com-How to structure an outsourced IT project for less risk, more leverage by Stephanie Overby

IT Outsourcing Shouldn’t Hinder Innovation

Nine out of ten Fortune 500 companies currently outsource some component of their IT function, but many of them still haven’t realized the benefits. They are often locked into long, inflexible contracts which deliver disappointing cost savings, and experience limited agility and responsiveness through the loss of control. However, times have changed; technology has evolved and business priorities have been redefined. In the digital era, traditional information technology outsourcing (ITO) models no longer work effectively. It is time to rethink and reshape the conversation.

Digital transformation is here and now. The convergence of cloud, social, mobile, analytics and the Internet of Things (IoT) is creating new products and services — even business models — which were inconceivable just a few years ago. Research shows that companies that believe strongly in the benefits of adopting new technologies are more likely to lead in both revenue growth and market position.

In order to be flexible, agile and realize the potential of digital transformation, businesses can no longer be tied into inflexible service delivery models. The constraints of traditional outsourcing models — with their rigid scopes of work, siloed operations and KPIs, and cumbersome multi-year contracts — are no longer acceptable.

Digital transformation demands the adoption of flexible models to encourage innovation, and this is having a major impact on IT sourcing decisions. Conversations are being shaped by three factors:

Performance: IT outsourcing has historically focused on cost savings at the expense of flexibility and future innovation. To ensure that this doesn’t happen again, measurement needs to be completely focused on core business metrics and suppliers rewarded with outcome-based contracts. This encourages partners to integrate their own solutions with third-party products adding-value and continuous service improvements that deliver value throughout the entire contract lifecycle.

For example: Security, a mission critical function, is often outsourced as many firms are unable to keep up with the real-time threat landscape with limited in-house resources. Specialized security providers can offer global visibility across the Internet to identify new attacks and develop countermeasures. It also lends itself to measuring outcomes, such as the time taken to patch zero-day vulnerabilities or helping an organization achieve compliance with the Payment Card Industry Data Security Standard (PCI DSS).

Platforms: The digital business revolution, driven by cloud, social, analytics, mobility and the Internet of Things (IoT) will continue to guide businesses as to what types of IT functions they will outsource. As-a-service models can help agility, scalability, effectiveness and cost reductions, but should only be embraced where they add value.

For example: Cloud and as-a-service offerings allow companies to move their IT provision to an OPEX-based spending model, where they pay for what is consumed. This also frees companies from having to invest heavily in assets such as data centers that may have to last 20 years. Instead they can just purchase what they require, when they need it.

Partnerships: ITO shouldn’t just be seen as off-loading a problem/service to a third party and becoming detached from it. Companies should carefully select partners and ensure that they work well together for the ongoing good of the business. Digital transformation is driving the age of the ‘Smart Partnership’ and I’ll be sharing some thoughts and guidelines around this in future articles.

It is clear that to become one of the successful digital companies of the future, organizations must find new ways to engage with technology partners and bring this expertise into their business. They need to be able to recognize and act quickly on potential business opportunities, react rapidly to changes in their marketplaces and not be tied into fixed ways of operating in order to outperform competitors.

Next week, I’ll be discussing the dawn of new ITO thinking. Can traditional ITO models support the digital era and what are the other options?

Source: news.verizonenterprise.com-IT Outsourcing Shouldn’t Hinder Innovation by Robin Schlee

IT outsourcing doesn’t provide clear cost savings

While companies often rely on IT outsourcing to reduce costs, there are better reasons to farm out IT management.

Outsourcing has been a controversial — if sometimes effective — way to reduce IT costs. Companies save money by paying for services that are not their core competence, such as IT infrastructure services. By taking over work for many other companies, outsourcers can drive efficiency, negotiate volume discounts, reduce risk, automate and attract top talent, which can reduce unit costs in a way that their customers could not match.
Outsourcing is supposed to be a viable option to companies looking to reduce cost of some noncore functions, such as IT infrastructure services. But curiously, outsourcing doesn’t always result in lower costs. As a CIO at my company, I have championed IT infrastructure outsourcing projects twice in the past 10 years, and in both cases costs ended up higher than before the outsourcing. How to reconcile this?

To start, let’s consider the corporate finance concept in this: Outsourcers have to cover their overhead and taxes and still remain profitable to exist. The arbitrage enjoyed by the outsourcer from economies of scale is not sufficient to offset this mark-up. Well-managed, tight IT shops don’t have the same cost burden, which nullifies the cost savings premise of outsourcing.

Does outsourcing automatically save money?

• To identify whether outsourcing can save money, you need to establish a comparable cost baseline, and that is typically miscalculated. Outsourcing shops are structured in a different way from in-house IT shops, and costs are charged for differently. Here are a couple of examples:
• In-house IT resources usually play many roles, while outsourcer resources are highly specialized. For example, a typical in-house server administrator does both support and project work, takes care of email and sometimes security as well. An outsourcing contract typically includes only service-level agreements (SLAs) surrounding support activities. Project work is charged extra on a time-and-money basis.
  Outsourcing services include features that in-house IT shops can’t afford or justify. Outsourcers, for example, can systematically refresh all hardware every five years, while in-house IT shops might extend the life of equipment and pay for a refresh far less frequently.

These factors can understate in-house IT costs when compared with outsourcing costs. To sign the contract, outsourcers will match current costs however they were calculated, knowing they will profit along the contract through change orders or simply growth. Unlike in-house IT costs, outsourcing fees grow linearly with the growth of servers, storage and helpdesk calls. At my current company, for example, server and storage needs are growing on average at 17% annually. If left unchecked, outsourcing costs would grow at the same rate year after year (17% annually equals 87% increase on a five-year contract).

Twice in the past 10 years, my decision to outsource resulted in higher costs than before the outsourcing.
Finally, alignment is a factor. As with any business, outsourcing companies have an incentive to make money, not necessarily to save clients money. More revenue for the outsourcer means more cost for the customer, which means the outsourcer and the client have completely opposite goals.

While cost savings are not intrinsic to outsourcing, scalability, stability and quality are. In-house IT shops have a hard time justifying refresh or upgrade projects that don’t have tangible business benefits, while outsourcers can do that simply to mitigate risk. In-house IT shops stretch resources beyond the limit to cope with ever-changing business priorities and limited funding, while outsourcers follow proven methodologies and best practices. Outsourcers invest in infrastructure with plenty of room to grow, so integrating a large acquisition, for example, becomes a lot easier when IT infrastructure is outsourced.

Cost savings can be achieved as a result of outsourcing, though, through concerted effort by both parties on initiatives to reduce volume, such as self-service password resets, database server consolidation, cloud offerings and data archiving. In fact, cloud computing has changed the IT infrastructure outsourcing scenario significantly by packaging services with a well-understood monthly cost and clear SLAs. But cost reduction is not always a consequence of going to the cloud, but it can be achieved through consolidation, rationalization and control, all driven by the in-house team, very much like traditional IT infrastructure outsourcing.

Outsourcers that can’t align with customers’ cost reduction agendas because they’re concerned about the impact to revenue are likely to see their customers go at the first opportunity. Disappointed with their outsourcers, these customers will repatriate services to save costs, only to revert to prior scalability and quality challenges.

However, outsourcers that are willing to establish true partnerships with their customers and see beyond the short-term revenue impact will remain profitable by taking advantage of the margin provided by economies of scale, multiplied by the growth of their customers’ success. That’s where the value proposition of outsourcing resides.

Source: techtarget-IT outsourcing doesn’t provide clear cost savings by Celso Mello

Why Indian IT firms want to shift outsourcing projects from offshore to onshore model

With the advent of automation at the heart of India’s $146-billion information technology industry, the sector’s biggest customers are starting to rethink their strategy around outsourcing and debating whether to shift some outsourcing projects onshore – a development that has the potential to make the offshoring versus onshoring debate irrelevant.

With automation having the potential of reducing costs by as much as 80% in commoditised service lines such as computer infrastructure management, customers of Indian IT are starting to initiate conversations around whether they can move more projects to onsite locations, without significantly disrupting the traditional offshoring labour arbitrage model of Indian IT in the near term.

“When you have the potential to automate certain projects, what difference does it make whether that project is onshore or offshore? It makes that debate irrelevant,” said a chief information officer of a European bank that outsources projects to one of India’s top three software firms. He requested anonymity as these discussions are private and confidential. The development, if it kicks off consistently, will signal a considerable shift for Indian IT firms such as TCSBSE -2.29 % and Infosys,  which have for years thrived on the offshoring model where they built large campuses to house thousands of engineers to help bring down the cost of software development and maintenance.

“After more than a decade of achieving value through the offshore labour arbitrage model, one would think that mature organisations that have built GICs or captives, or organisations with extensive use of third-party outsourcing providers, would be at peace with the model. We expected them to move to a model of arbitrage plus automation,” said Peter Bendor-Samuel, CEO of outsourcing advisory Everest Group, in a blog post last week. “But the level of peace and comfort with offshore arbitrage is much less than we expected, and companies are expressing their desire to use robotics automation to repatriate their work,” he added.

he emergence of robotics automation, as has been widely reported, has the potential to disrupt the traditional “pyramid model” of Indian IT. Recognising the need to gain an edge in the battle for automation, the sector’s top companies such as TCS, US-based Cognizant and InfosysBSE -1.26 % are investing heavily on building tools and platforms that can afford large-scale cost benefits to demanding customers who are tightening technology-spending budgets with each passing year.

For instance, Infosys’ new automation platform has the potential to generate productivity improvements of about 40-50%, Infosys’ head of platforms Abdul Razack said in an interview last week. Similarly others like IPSoft’s cognitive computing system Amelia has the potential to perform routine, commoditised tasks at a fraction of the cost and time it takes a human engineer.

The fact that the cost of automating software services has come down rapidly over the years is also playing its part in this debate. “Previously, about 10-15 years ago, the cost of automation was much much higher – now that those costs have come down, you can afford to keep more projects onshore,” said Sid Pai, Asia-Pacific head at outsourcing advisory firm ISG.

To be sure, this does not mean that customers will move work away from third-party vendors such as TCS and Infosys. What is likely to happen is what is commonly referred to as “rebadging” — the process where third-party vendors take over the assets of a customer and replace personnel with their own staff, experts say.

Source: economictimes.indiatimes.com- Why Indian IT firms want to shift outsourcing projects from offshore to onshore model

Five Scenarios Where Insourcing Makes Better Sense Than Outsourcing

The case for nearshore is clear: increased cultural affinity, technical skills in sought-after areas, acceptable English language skills and, of course, labor cost savings.Painful as it may be for the industry to admit, there are times, however, when outsourcing of any kind, even nearshore, is not the best option. The trick is determining when that might be the case.

While insourcing might not fit every circumstance or every company in that circumstance, here are five scenarios in which insourcing – taking the IT function back in-house – can make better sense than outsourcing:

1. When flexibility is crucial

Outsourcing IT functions and delivery may allow companies to tap into needed skills pools and cut labor and other costs, but it can result in unwieldy processes. Charles Arnold, Principal, Management Consulting atKPMG explained that where in the past the decision to insource or outsource would mainly have been a conversation about core vs. non-core, these days companies are focusing on other variables.

These include issues such as the ability to access talent, the ability to tap into the latest technological advancements, and, of course, the ability to drive innovation cost-effectively. “And cost-effectiveness is not just a low-cost labor calculation, but an effective – and cost-effective – integration of a service or tool into the company’s existing environment,” he said.

Arnold added: “The answer will lie in the network of related services and the ability to better control ongoing change. The most common insourcing decisions we see these days are driven by that desire for greater flexibility.”

2. When brand/reputational value is important

Esteban Herrera, Partner at global sourcing insights and advisory firmInformation Services Group (ISG), noted that many consumer brands in the CPG, Banking, Healthcare, and Automotive industries have announced large insourcing initiatives.

“Although it may not sway some purchasing decisions, most people would prefer to buy from a company that creates local jobs, all else being equal. There can be marketing and goodwill value far beyond the modest increase in cost that insourcing might represent,” he said.

3. When you’ve tried and failed

Given that the Aberdeen Group reported 50% failure rates with offshore developers, failed IT outsourcing projects are not unexpected.

Learning from mistakes is part of the business process and that holds true of outsourcing operations as well. “It almost always makes sense to allow a specialist to do what is core to them and not to you. But perhaps your company has cultural antibodies to outsourcing, or you’ve created a better process. If you’ve given it an honest try, and can demonstrate your results truly were better in-house, why not bring it back?” Herrera said.

The knowledge gained from failed outsourcing attempts can strengthen insourcing initiatives as the company has learned where the deficits are.

4. When there is true competitive advantage at stake

As technology becomes more and more intertwined with business, it is certainly possible to create differentiation in the market with it. “You may have a better chance of protecting your intellectual property by keeping key, differentiating capabilities in house,” Herrera said.

He cautioned, though, that most of what people inside an organization will call “strategic” or “differentiating” really isn’t. “If you can win in the marketplace with something that is uniquely yours and difficult to imitate, insourcing may be the way to go,” he said.

Mary Patry, Managing Consultant at Alsbridge added: “We are seeing situations where clients insource certain functions related to industry-specific business expertise and intellectual capital. These can include thought leadership functions such as architecture and business analysis. Some clients find that outsourcing those areas creates a challenge for knowledge retention and competitive differentiation.”

Patry cited the example of one large firm in the pharmaceutical sector that announced plans last year to bring IT service in house in order to reduce their dependence on service providers and to gain a competitive edge through intellectual property retention.

5. Areas where you want to build a leadership bench

Cultivating talent in a company can be difficult; cultivating leadership talent even more so. Herrera said: “I haven’t had a single client in years who thought access to talent, particularly leadership talent, was easy or plentiful. Outsourcing compounds the problem by taking the junior, high potential people out of your organization and into someone else’s. Keeping some things in house in order to build tomorrow’s leaders could be a good idea, as long as you know how to recognize, retain, and reward them.”

Deciding whether your company’s situation matches any of these identified scenarios is not always straight forward and determining the criteria under which the decision to insource or outsource is made will likely vary from company to company. Herrera said that essentially it comes down to two key questions: can I do it better/faster/cheaper than the market? And should I worry about doing it better/faster/cheaper than the market?

“Most things that get outsourced need to be stable, reliable, and compliant, but not top notch. Paying for best in class is often a waste of money because the market may not reward you for it,” he said.

Arnold added that CIOs are having to embrace a new role as “Service Integrator”, owning the way in which all the IT delivery engines such as as-a-service offerings, managed service providers and internal delivery teams work together to fuel business growth. “Many of these components are not only new, but are also shorter term than the five to seven-year outsourcing deals of only a few years ago. This means that change happens faster now than in times past, and the most-effective Service Integrators actively seek to manage and steer that change.”

Source: nearshoreamericas-Five Scenarios Where Insourcing Makes Better Sense Than Outsourcing By Bianca Wright