"So, can both parties in existing outsourcing deals survive the downturn with their relationship intact, or is it a zero-sum game?"

Opening Statement

Even in good times, outsourcing presents many challenges for buyers and sellers. It's never an easy thing to create a collaborative environment rather than a disjointed combination of parties, or to invest in innovations that are of mutual benefit, or to continually demonstrate that the deal is providing value. And now, both outsourcing customers and providers have less money and greater fear of what the immediate future may hold for their organizations. Customers are demanding price cuts (without necessarily making commensurate cuts in scope) at a time when providers can least afford even small cuts in their decreasing margins. The labor arbitrage offered by offshoring -- which was conducted on more of an exploratory basis in the past -- is now looking like a very compelling argument to client organizations, despite reported difficulties regarding quality and rework. New outsourcing deals have retreated from "value for money" as the objective to "the cheapest price that meets the specification."

Without question, existing outsourcing deals will change. A Webinar I conducted for Cutter in December 2008, "The Effect of Recession on Outsourcing," showed that no one was looking to terminate their outsourcing contracts early, but 70% of the participants were planning to renegotiate their current contracts. So, can both parties in existing outsourcing deals survive the downturn with their relationship intact, or is it a zero-sum game? It was interesting to me that in all the articles we received for this issue of Cutter IT Journal, from practitioners and academics alike, there was an almost stoic conviction that, yes, this marriage can be saved.

To be sure, there are cost efficiencies to be gained by working together on the problem. The solutions offered in this issue are many. The parties have a host of lower-cost, Web-enabled technology platforms to choose from for IT delivery, and business process management (BPM) applications can provide transparency, control, and continuous improvement. Outsourcing customers can pluck substantial low-hanging fruit just by looking at how their deals are being managed day to day. For their part, providers have much to gain by leading the discussion on how to reduce costs (but not necessarily margins) and generate innovations.

Our first article is by Leslie Willcocks and Andrew Craig from the Outsourcing Unit at the London School of Economics. Willcocks and Craig set the scene for this month's issue by laying out four high-level strategic options for managing IT in a recession. In the short term, you may want to "sweat the assets," making do with what you have or doing projects with a very short ROI. In the longer term, you may want to "slow the (IT) strategy," stretching it out over a longer period or, alternatively, revising your infrastructure to cater for standardized technologies and applications. The authors note that outsourcing is no quick fix, in bad times or in good. But with the market's rapidly maturing business process outsourcing (BPO) capabilities, and the offshoring capabilities of developing nations such as Ukraine and Egypt giving India serious competition, every CIO needs to look at how the market can be leveraged in the short term and later in the upturn.

Among their many insightful observations, Willcocks and Craig note that organizations' back offices will be increasingly replaced by Web-enabled, self-serve portals offered by providers. This is a perfect lead-in to our next article, by Cutter Fellow Steve Andriole, who tells us what is on the horizon in terms of alternative IT delivery solutions and thus the services offered by outsourcing providers. Andriole issues some strong challenges to today's CIOs. To truly save money, are you willing to forgo Microsoft applications for open source software? To get rapid solutions, are you willing to publish your problems via Web 2.0 technologies? Can you let go of your software/hardware empire and rent it instead from as-a-service providers, which are faster and cheaper? Can you persuade your users to let go of their large-footprint machines and move to netbooks? Many of these solutions have been around for a while, but they have not yet achieved critical mass. Andriole argues that the downturn may very well provide the impetus for more organizations to move up the adoption curve and truly revolutionize the way IT is delivered.

Also on the technology front, our next author, Eric Deitert, shares a technological solution to a real problem: the lack of trust between parties in an outsourcing deal. Deitert quotes research that found 50% of outsourcing deals fail in five years, mostly because the customer did not believe the provider was doing what was expected of them. He discusses how business process management suites (BPMSs) can be used to build a collaborative, open, and integrated service offering for outsourcing customers, replacing an "us vs. them" style of outsourcing with efficient and transparent day-to-day operations. But this is possible only if both parties are willing to invest. After decades of outsourcing, in which we've seen the construction of walls between the parties rather than the elusive seamless integration, adoption of BPM technology represents a real breakthrough. To realize the potential, however, the provider will have to let the customer into the operations and stop acting like a black box.

And this is a part of the problem with outsourcing -- IT cannot simply be handed over in a one-off transaction. After the initial surge of activity to get a deal signed and operational, both parties settle into a business-as-usual comfort zone. In this zone, standardization and uniform processes become the overarching, if unspoken, strategy.

I don't know of any outsourcing client that is not, in varying degrees, disappointed with the reality of outsourcing. The more insightful clients, however, do not blame the provider. Rather, they recognize that they overestimated what the provider would bring to the organization and grossly underestimated what their own contribution would have to be. Getting enduring innovation and cost savings from an outsourcing deal requires active, systemic management by client organizations.

In our next article, Danny Ertel explains some of the ever-present barriers to innovation and what customers need to do about them, if getting more than yesterday's IT is really a goal. Moving beyond the "motherhood" statements often expressed in outsourcing contracts (e.g., "the Contractor shall provide innovative solutions"), Ertel outlines three simple steps to making innovation a regular affair. First, the parties need to work together to identify what the customer's real, not necessarily espoused, sources of value from the relationship are. This is not easy. I've observed that many (if not most) outsourcing customers prefer the "show it to me and I'll see if I like it" approach, which limits the provider to a selling role. Second, after identifying both short- and longer-term opportunities, both parties need to address the obstacles that have prevented innovation from occurring in the past. Last comes the hard work of implementation, which requires prioritization, accountability, and visibility.

In practice, I've found that the chief barriers to innovation in outsourcing deals are often the people who are too involved with day-to-day operations and demands. These operational folks, however, have a huge impact on the potential cost savings that can be derived from an existing outsourcing deal. This is the subject of our fifth article, by Lisa Shaw, Bronwyn Ross, and Wayne Llewellyn, who bring us practical advice, directly from the field, for outsourcing customers seeking cost savings in their current contracts. Beginning with the basics, the authors ask whether anyone has ever gone back to the original business case to see if the benefits have been realized. I haven't run across a single organization that has done this, and it shows a lack a strategic management -- outsourcing becomes the end state, instead of a means to an end. Having a benefits realization program, structuring governance interactions into discrete review topics, and really looking into how the provider's delivery and costs and the customer's demands are actively, not passively, managed are just a few of the techniques the authors recommend.

These techniques work. A bank I've been working with made a minor investment to create a contract management group that could sit over day-to-day operations and do just the sorts of things Shaw, Ross, and Llewellyn find so valuable. This group yielded such a high ROI that it has also been put in charge of ensuring the cost benefits of a recent merger.

Of course, it is not just the client who needs to drive innovation and cost savings. The provider has an equal role to play. In our next article, Sara Enlow tells us why providers must be proactive regarding renegotiation, while they can still influence the process, rather than simply reacting to a customer's demands. Enlow argues that providers must not shy away from renegotiation if they hope to demonstrate, or even reengineer, their value proposition. Many suppliers I've worked with in recent renegotiations took defensive positions, leading the customers to reluctantly begin to prepare for backsourcing as the only way to achieve their goals.

Certainly the old value proposition of "your mess for less" has passed its expiry date, although in bad times customers will inevitably be attracted to it once again. Yet experienced customers know it isn't quite that simple. In our final article, Mark Thias and Beth Cohen argue strongly against offshoring development work for that very reason, offering a case study that shows how an onshore agile team's productivity (and hence lower cost) greatly outweighed the labor arbitrage of the far less productive offshore team. That said, if offshoring is already well underway, the authors suggest lean-agile techniques that can be put in place to deliver better results than otherwise.

I recommend that you use this issue of Cutter IT Journal as a shopping list of ideas. As I've always found in practice, failure is certainly the easiest path, but success requires only a slightly greater investment of time and thinking. I hope that this issue will help you decide where to make that important investment in your outsourcing deals. In the famous words of Douglas Adams, "DON'T PANIC!" Solutions are out there.

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