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The headline in a recent SearchSAP.com article parses the claim very carefully: Outsourcing SAP Basis administration offers savings, flexibility. That it does—offers being the operative word.  The article goes on to suggest that companies “stand to” benefit, which is to say, they might benefit and might not.  I thought this caveat was pretty telling: “If a company’s SAP implementation is large and complex enough to support a two- or three-member SAP Basis team, the economics of outsourcing no longer make sense.”  Perhaps that explains a lot about the very large SAP shop where I used to work, with its outsourced Basis team of over a dozen constantly rotating resources, who frequently ran afoul of procedures and controls.

In another recent SeachSAP.com article, my friend and fellow SAP Mentor Jon Reed was quoted as offering cautionary advice about some risks in offshoring.  “When you turn all of that stuff over to someone else, you’re really divorcing yourself from the process of cultivating internal management skills,” Reed said. “There is something to be said for taking IT seriously as an area for competitive innovation.”

Then again, if the decision makers in your executive suite are not truly convinced that IT can be a strategic advantage, if all they see in IT is costs, it is not surprising when they jump hastily onto the offshoring bandwagon. This is why I was not terribly surprised by the findings of a Duke University study reported in a  recent article on CIO.com, that average cost savings achieved by offshoring (both third-party outsourcing and captive center operations) has declined consistently during the last five years. The study found that many companies continue to be caught unawares by so-called “hidden costs,”  which in my estimation are not really all that hidden to anyone willing to take an honest look at the risks as well as the rewards.

Another factor in the equation is the failure of American companies to continually invest in their technical workers, also reported in the recent CIO.com interview. Quick poll: how many of us have not been to a formal multi-day “training class” in 5 or more years? Yes, I thought so; it seemed that training budgets were one of the first things to go in the downturn.  Then when the layoffs come, the people sent packing were the few who actually got trained way back when and understood both the technology and the business processes; those left in house struggle to keep the lights on using offshore resources that turn over just about the time they come up to speed with the business processes and requirements and start being reasonably productive. If it seems that your internal people are not up to speed on the latest releases and technologies, let’s be honest: it was an inevitable consequence of draconian cost cutting in training and postponed upgrade projects. So do you want to pay, one way or the other, for the training of someone else’s resources, or do you want to invest in what used to be known as your human capital, the people in your community who keep your spouse’s sporting goods shop and your neighbors’ businesses in customers?

It is a gloomy picture: failure to invest in development of internal resources, replacing them with offshore resources but failing to put in place adequate oversight and knowledge retention. The lesson seems pretty straightforward to me: regardless of any rosy picture painted by its advocates, offshoring offers opportunities, not guarantees. Whatever short term gain might be realized with the quick win of cutting internal headcount, the long term benefits are only realized when careful consideration is made of all the tradeoffs. If making this quarter’s numbers and getting that bonus is all that matters, hasty offshoring decisions will continue, with predictable long term consequences.

I’d like to close with an observation that Jon Reed shared with me:

“I think the companies that break the cycle of outsourcing indiscriminately and not investing in internal employees will come out ahead. The idea that workers are no longer loyal, thereby justifying cut-throat fire-and-outsource tactics, doesn’t ring true to me. Investing in someone’s skills development does breed loyalty, and whatever turnover you lose by cultivating rock stars is almost always offset by attracting more of the same who are looking for a place where they can invest themselves without worrying about getting dropped off at the curb at the first opportunity.”

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14 Comments

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  1. Thorsten Franz
    Hi Gretchen,
    Thanks for this insightful blog. I agree with your skepticism regarding outsourcing. Somebody else makes a profit, and usually not because the quality of service gets better – from what I have observed, the quality of service is usually the first thing that goes down when IT functions are outsourced.
    Sadly, all your other observations are 100% correct, too. It’s heart-wrenching, really.
    Thorsten
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  2. Vijay Vijayasankar
    I have a lot of dear friends who lost their jobs due to offshoring, and I feel terrible about it. I also have seen a lot of business benefits that my clients have attained due to offshoring.

    Just like with implementation projects, companies have to be judicious when they select a vendor, and also carefully understand the process of knowledge transfer, SLAs etc. Anything that is repeatble typically gets tagged as a potential candidate for offshoring. However, that is only one of the many criteria – and some times some companies forget that, and end up paying dearly down the line. On the other hand, those companies which strike the right balance reap the benefits too.

    Not training employees was a common trend for last few years – but when the focus is on “keep the lights on” only, training is an obvious item to trim budgets. It sucks for the employees, and I am sure it is a terrible idea in the long term.
    But let me also point out something – I have seen many employees in my clients, and at my own employer getting trained too. The difference is that these folks made a compelling case on the benefits they will bring to the company if they got trained. Not every one who tried managed to succeed – but the vast majority I know were succesful.

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    1. Gretchen Lindquist Post author
      Vijay,
      I agree completely that judicious vendor selection can be among the factors that can make a big difference. The CIO.com interview mentions some companies that even commissioned a McKinsey study that warned them about the risks in their offshore plan. “But most of the executives did not read or comprehend beyond the first two or three sections of the report. Much of the implementation process was one of trial-and-error discovery.” As a McKinsey alum myself, I know what their reports are like, and I have to wonder if some of these execs saw what they wanted to see in the early pages and just tuned out the rest.

      Thanks for sharing your perspectives.

      Gretchen

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      1. Martin English
        Hi Gretchen,
          Reports, “Industry Whitepapers” and so can be written for many purposes. Sometimes the purpose of a good salesman / sales team seemed to be making sure we (the technicians) knew enough about Customer bias to ensure we wouldn’t suggest Windows to an AIX bigot or vice-versa 🙂
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  3. Martin English
    Hi Gretchen,
    It’s always good to see someone slap down a misinformed mantra.  Having seen outsourcing (and even offshoring) from both sides of the fence – I’ve been “sold” along with the rest of the IT department twice – it’s obvious that many of these projects don’t produce value.

    Yes, the customer business may well save money, but value is about what you get for your money.  Sometimes the plan seems nothing more than “IT is too hard, lets get someone els to do it”.  In these cases, once you add in the cost of doing business of the outsourcer (including their profit margin), there is no way outsourcers can provide the same kind of service at the same kind of cost to the customer, as an in-house service.

    @grahamrobbo just tweeted something that is relevant:
    Message for techies – your role is to serve the business, not the other way around. ( http://bit.ly/i5pMzJ )
    Where does the loyalty lie for an employee of an outsourcer ? With the people PAYING for a solution to their problems, or with the people having to USE the resulting systems ? 

    Actually, its NEITHER. Despite all the customer service and under promise / over deliver rhetoric, the employee of an outsourcer has to put the outsourcer first.  Simplistically, if you were paying for 4 FTE’s (Full Time Employees) but there was enough work for 5, some one has to get commitment for the money for the extra work, before the outsourcer will commit to doing the work for you.

    And when is the work scheduled ? Well, that depended on a lot of things.  Occasionally, this may even includ the customer’s requirements. After all, Outsourcers have their own business to run, other customers to consider, their own resource issues, their own business issues (i.e. you got better service if you were a big contract coming up for renewal), and so on.

    Now, these issues (and some of the others I haven’t described) were common, but they were mostly present in the poorly planned, poorly thought out, instances of outsourcing.  There are also  many excellent examples of true partnership between the customer and the outsourcer.  The key thing to note, though, is that in these cases, the point of outsourcing was NOT about money; It was about the extras, such as access to specialised content, software and people who could help the customer do business.

    In short, companies who treat IT as a commodity get commodity level IT, with all the attndant problems – the disconnect between IT and the business, insufficent time, knowledge of the business, and motivation to produce innovation and so on.

    I hope this adds to the conversation, and thanks for bringing it up.

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      1. Gretchen Lindquist Post author
        Martin,
        I suspect that a lot of us have heard variations on the PHB’s clueless observations. You raised some interesting points; it must be very difficult as an employee of the outsourced services provider when your required loyalty to them results in less than optimal service to the ultimate users. Perhaps that is one of the factors in high turnover rates at some such firms.

        Thanks for sharing your thoughts!

        Gretchen

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    1. Bala Prabahar
      Hi Martin,

      “In short, companies who treat IT as a commodity get commodity level IT, with all the attndant problems – the disconnect between IT and the business, insufficent time, knowledge of the business, and motivation to produce innovation and so on.”

      Well said:). S/W vendors probably are primarily responsible for creating the perception that IT is a Commodity. I know several top layer s/w companies recruit fresh graduates from colleges, give them training for a week or two and send them to customer sites billing USD200+. And what they do: they read how-to documents or review their customer-tickets systems to see if any other customers experienced similar problems or shadow another consultant with 2+ years experience who just got promoted and assigned to another customer for better billing rate. If I were CFO with no/little IT background why would I pay $200+ when someone else can do that job for a fraction of that price. This is true with employees as well. Why would CFO pay 100K+ to someone who doesn’t understand business nor help in solving business problems. They don’t bring any value to the business. I agree with CFO. I also know that CFOs don’t understand what IT knowledgable person can do.

      I know in some cases, the customers pay $200+ for a fresh graduate(s) so they would get attention(sort of insurance) from s/w vendors when there is a crisis. Even in this case, they’re wrong. if you’ve a knowledgeable employee, he/she can get attention by asking right/embarrassing questions with an active maintenance contract which anyway is required even with USD200+ consultant working.

      At any rate, I’m not a fan of outsourcing. Outsourcing is just one of several options available to the customers. In some cases, it may make sense.

      IT as it exists today is very complex, more complex than y’day; i don’t see IT becoming simpler anytime soon.

      Thanks.

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  4. Steve Bogner
    I’ve seen this happen at too many of my clients – as you mention, the lack of real ROI from outsourcing, the atrophy of IT skills due to lack of investment in human capital and so on. It has happened so often now that firms can’t claim to be surprised or disappointed with results – they simply need to look before they leap, and then they probably won’t leap so far.
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  5. Ajay Das
    Too many people push the meme of ‘outsourcer’s resources’ being relatively poor quality.

    Most IT departments in end customer companies have more than a few who are past their sell-by date (not due to age – skill and attitude wise) but I do not see anyone talking of them on SDN – ever. But in most these places there is inertia, an elevated sense of entitlement, group-reinforced think of victim-mentality, all making this a potent meme.

    Let us take the analogy of cloud. It is basically outsourcing of certain functions/components of your IT. What is the rationale here – for it to bring to value to most organizations? Why would that, at least in theory, not apply to outsourcing of IT services?

    I my view people commenting on outsourced resources’ quality compare those resources to themselves. There are couple of issues with that:
    – Most people complaining and vocal about this are better than the crowd in their own IT department, however they never complain about quality of their insourced associates.
    – People in general have an inflated sense of the value they themselves bring to any/every thing (http://en.wikipedia.org/wiki/Illusory_superiority) – and this is more prominent in west (90% of US drivers rated themselves as ‘better than average’ in a study).

    I get the balanced view that outsourcing doesn’t always work or bring value. I do however disagree with the implied notion of some – “outsourcer’s resources being of inferior quality”.

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    1. Julius von dem Bussche
      If 90% are better than average… then the lowest 10% must have their access removed… 🙂

      While I have observed that folks in the US do drive very well and disciplined (and also ski the same way!) it is the same problem there as it is everywhere with SAP implementation and support quality – so possibly it is a product feature?

      The key IMO is to have consistency in the staffing and invest in training and experience gained in team work, but also have a healthy mix of externals and some projects. Here you have to manage the checks and balances and NOT outsource the responsibility for them.

      Managing an offshore contract is the same, except more difficult because of the fluctuation and you need to know enough about the specs and delivery, that you could have done it yourself…

      As this is seldom the case (and those who can either loose their jobs or don’t stick around for long) one sees a lot of flaming of offshoring.

      The problem is mostly a plethora of bloviators who are themselves technically not really employees, not consultants either… but rather “contractors” who try to achieve some goal, come hell or high water, to earn a short-term bonus.

      It is much the same on SDN as well with the points system which causes about 90% of the various types of problems we have to deal with, including quality. Offshore service providers are a contributor to these for sure, but second only to the system itself which accounts for 90% of the day-to-day problems and noise *without adding value* .

      Cheers,
      Julius

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  6. Jelena Perfiljeva

    5 years later this blog is still fresh as ever. 🙂

    I’ve seen quite a bit of outsourcing and offshoring over the years. A lot depends on the vendor, as noted. I would definitely suggest to look at the staff attrition rates when choosing a vendor. Also everything is relative. For example, we’ve been complaining on and off about our hosting provider until we got another SAP system with another provider. Oh boy, it turned out our old provider was awesome by comparison. 🙂  

    A lot of the decisions to outsource/offshore something are made based solely on the cost. Unsurprisingly, in such companies the managers making such decisions also rotate frequently. Who gives a hoot about the employees or even long term consequences if by the time they hit you’d be far away floating on your golden parachute? That’s the biggest problem in business overall – lack of leadership.

    As far as offshoring though in the US we see more “nearshoring” these days. Many large IT companies are opening offices in Mexico, so we’ll probably see more activity there going forward.

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    1. Matt Fraser

      I didn’t even notice until I got to your comment that this post was five years old! I thought Gretchen posted it yesterday, because other than the year the date is the same…. 😆

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      1. Steffi Warnecke

        I noticed it yesterday via her status update and was wondering why the blog didn’t show up in my Activity stream. Until I saw the creation date. So you’re not alone. 😉

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