Outsourcing – A Business Strategy

Date: 2020/08

Should I outsource, and how much should I outsource? Your response to the question may well make a difference to your company’s market competitiveness, standing and sustainability. While the article enlists compelling reasons for IT outsourcing in an increasingly digital world, making the decision a no-brainer, it also highlights the risks that one should consider while making the commitment.

One of the most strategic decision that CEO and CIOs need to undertake is about if, what and how much to outsource their IT development. Outsourcing could be one of the key levers for enterprises to gain competitive advantage, besides influencing P&L outcomes. Traditional theories preach that voluminous and non-critical business tasks are the best, and only, candidates to outsource. However, the growing need to adopt to digital trends are forcing companies to be open minded and undertake a holistic approach for outsourcing.

Top 5 reasons to consider Outsourcing

The following represents some of the compelling reasons for outsourced development:

1. Time-to-market:

Most of the industries are now supported by mature product companies offering well-engineered off-the-shelf software and scalable service models. Companies can tap into these options available in the market and drastically reduce the time for market of new business systems and thus support their business more efficiently.

2. Industry Best Practices:

Many outsourcing solution providers invest heavily in researching on industry standards and best practices, and embedding them into their software. Through outsourcing, companies can adopt to these practices and remain competitive.

3. Innovation:

The pace of digitization in the market demands companies to continually innovate and adopt to new business models. Outsourcing provides companies access to technology, skills and intellectual capital that can help it to quickly respond to the digitization needs of the business and remain at the cutting edge.

4. Cost Efficiencies:

In-house development requires extensive investments in technology, infrastructure and people. A mature outsourcing market allows access to inexpensive business solutions deliver cost efficiently – for example, through Cloud.

5. Focus on Core Competency:

Outsourcing allows companies to remain focused on its core business competencies and avoid any compromises on management bandwidth. It can look at external vendors with the right expertise to deliver it the business-enabling tools, while focusing on what it does best: Conduct business.

There is little doubt that forward-looking enterprises should consider outsourcing as a business strategic. However, there is a need to weigh these benefits against possible shortcomings of outsourcing and define an appropriate mitigation strategy. The following represents some of the best practices that companies have adopted and have been successful in their outsourcing programs.

Outsourcing Risks	Mitigation Strategy
Supplier Risks	Institutionalize an Outsourcing PMO (Program management office) Conduct an exhaustive credibility check on parameters such as Project delivery and management Engage vendors which have proven track record with peer companies Reference checks
Delivery Risks	Define a multi-level Governance program with vendor Adopt Agile development methodology and practices Demand periodic status reports and live access to project data Communication tools, to get direct access to the project teams Reverse knowledge transition post project delivery
Contractual Risks	Explore outcome or output based pricing, as against traditional models like Time & Material Include ‘Exit clause’ that is non-conditional, always
Confidentiality Risks	Sign up NDA (Non-disclosure agreement) Assess vendor’s security credentials: certifications, mechanisms and programs Study vendor’s previous experience of working with sensitive data Background check of vendor employees
Reputational Risks	Investigate vendors involvement in legal, political or social issues Engage vendors which are recognized by industry or trade organizations or reputed independent analysts Investigate vendor’s financial track record and ownership

A careful consideration of the business environment, risks and benefits will help companies to arrive at the right outsourcing strategy. A strategic vision, a clearly articulated business case and a well-defined risk mitigation plan are the right ingredients for successful outsourcing.

Last but not the least, enterprises should not ignore the ‘softer’ aspects of outsourcing. An equal emphasis on relationship management and strategic alignment with vendors will go a long way in developing a successful outsourcing program.