Recently a customer of ours gave me a copy of the ‘Outsourcing Performance 2016’ guide published by Giarte. It had caught my eye when I was in his office, because the title was ‘Simplicity’. One of my favorite topics, and one that I fail to understand would be at all applicable to the outsourcing industry…
Struggling to survive
For years I have seen outsourcing companies in bad weather, resulting in many layoffs across the board. It seems that a lot of companies are struggling to survive, now that their customers are beginning to see the true nature of many of these companies.
The report summarized this problem very clearly: “For years the buzzword ‘partnership’ has been abused by the IT outsourcing market. Much was promised, but innovation and transformation hardly ever emerged. The result: a huge lack of trust between the partners, managed by using very strict contracts and a tight, direct control structure.”
It is evident that this lack of trust and the absence of promised results leads to many companies taking a different approach to outsourcing. General Motors, for example, has gone from a maximum of 50% of IT being outsourced to a 10% maximum. Similar reductions are seen in many other companies as well.
The future of outsourcing
The lack of trust is also exactly our own experience in the outsourcing market. When we started with our first company, we were in the outsourcing business. Customers would often not trust a deal, and we had to make a huge list of specifics to show that what we offered was realistic. Even if we offered a deal as fixed price.
The Giarte report also concludes that the future of outsourcing lies in making different choices. Letting go of the focus on technical specifics, instead managing on output and business goals. I couldn’t agree more. Outsourcing companies have a broken business model. Can this be fixed, or is it too late?
Broken Business Model
I have been in the IT business for about 15 years now and for as long as I can remember, outsourcing companies have had the billability business model. A junior consultant costs X per hour, a senior costs Y and a principal consultant costs a lot more. If you need a number of hours of consultancy, simply multiply, haggle a bit for a discount and you’re good to go.
The problem of course is, that you need to ask the consultancy firm how many hours something takes. Not a big deal, I hear you say. You just ask for 3 different offers, from different companies. Choose the least expensive one, and you feel you have done a great deal. But now the problem manifests itself….
You want a change in your software, or need to expand your IT because you expect more customers to be using your website for example. Now you are stuck with the outsourcing company you hired, because they have all the knowledge. The Giarte report states this as one of the major downsides of how outsourcing has been done in the past years. This, in effect, puts all the power in the hands of the outsourcing company and leaves companies fully dependent on the outsourcing company. These outsourcing companies will now drive up their price, because switching to a competitor is more expensive.
In my perception, the issue is that your success as a customer, isn’t necessarily the success of the outsourcing company. You’d want the outsourcing company to be successful if you are, and to suffer enough if you aren’t due to their work.
In 2014 I was in a meeting with the board of a big consultancy firm. They claimed to do things differently, they were no stranger to making deals based on the results of the project, they said. So I asked them what percentage of projects was done using a results based model, instead of invoicing the hours spent. They couldn’t really say. So I asked how many projects they had done this way, in absolute numbers. The answer? None.
And I can’t blame them. It is easier to be able to invoice the effort, and not the result. It is easier to not take responsibility when a project doesn’t bring what it was supposed to. And there we are; the problem. How to align the success of the outsourcing company with the success of the customer?
A truly results-based, longterm business model
At Triggre we ran into this exact same issue. As I said, we came from outsourcing originally (granted, a long time ago), and we got fed up with this issue. Old school software companies don’t need to pay attention to the customer, because they care more about their outsourcing partner eco-system. If their partners are happy, they will sell the product for them. To make partners happy, all they need to do is make sure the partner can spend a lot of hours. So there is no need to fix any non-critical defects very quickly, or make a new release completely backwards-compatible. The partners will solve these issues for the customer, by spending additional hours on implementation. Happy partner, happy software company. And if they’re very lucky … a happy customer.
The solution lies in making the (financial) success of the software company and partner dependent on that of the customer. And the model doesn’t need to completely change. For example, a good first step would be to charge cost-price for hours during the project, and charging a percentage of the financial gains the customer makes. If there are no direct financial gains such as extra turnover or saved costs, a similar agreement could be made based on the improvements the customer intends to achieve with the project, e.g. a price per point that customer satisfaction increases. Sadly, there are very few companies that are willing to take this risk. And think about it; is that really testament to how well they will perform for the customer?
I truly hope that outsourcing companies world-wide can change their business model to a fair one, a more value-based pricing model. Because if they don’t, their business will dry up very quickly. Rightfully so, if you ask me.