2015 KPMG study on outsourcing for technology-related services

Articles covering outsourcing topics by analysts such as Gartner and consulting firms like Accenture often stay at such high level that their practical application requires engaging these firms. Once in a while these articles could be very informative and helpful The latest KPMG study is worth taking look at. That study covering outsourcing for technology-related services shows some radical changes and interesting trends in the marketplace, to which both companies and service providers will need to adapt.

2015 study by KPMG covers over 2,100 contracts across 23 countries with an annual contract value of US$12 billion+. It provides insights into service provider performance as well as extensive insight on IT services market trends, and provides predictions on the future state of the IT services market and projected buying patterns.   The study highlights the following key findings:

  • A shift from cost reduction being the biggest challenge for IT functions to one in which IT services are increasingly viewed as an enabler for improved business service delivery and transformation.
  • Greater focus on enabling innovation via IT outsourcing, especially via enabling greater organizational agility and accelerating the pace of investment into technologies such as cloud
  • The above being said, cloud adoption remains sluggish, with the majority of clients spending less than 10 percent of their IT spend on cloud. Data location, security or privacy are the biggest barriers to cloud adoption.
  • Governance and management of IT services and outsourcing efforts remain a major problem with mixed satisfaction from service integration and management

To access the study materials click here to download the management summary. (The full report is only available to those organizations that have participated in the survey). You can also find an infographic summarizing the key findings from the report by clicking here.

“Outsource it!” is now in beta

A couple days ago my first full size book went into beta and is now available at the publisher website – http://pragprog.com/book/nkout/outsource-it. I feel very happy and relieved that the book is finally out, writing it was far more challenging than I’ve ever anticipated. At the same time I feel happy and proud, proud to be one of the authors of the pragmatic bookshelf, the group of technology writers that earned respect across very broad and demanding technical audience.

It will take a little while before the book hits the shelves of Amazon and other bookstores, but you don’t have to wait and get your e-copy of it today. While the book is in beta your comments and suggestions would be taken quite seriously and could result in changes and additions to the content, hopefully making the book even better. I am not sure how long the beta would take but hopefully much less than it took me to get here –

Roughly two and a half years ago I came up what seemed a great idea at the time – compile my blog material into an easy to read eBook. In a couple months I produced the first volume that was dedicated to making decisions on whether and how to outsource. In a short order I received substantial feedback that made it apparent that just recompiling the blog and doing surface level clean up won’t add too much value, and probably was not worth the effort. Continue reading

Top 10 Reasons NOT to Outsource

Remi Vespa suggested an interesting topic in his 10 reasons NOT to outsource; while I agree with most of the points he made, my top 10 would be somewhat different:

1. No reasons to outsource. Let me clear a suspected circular reference here: take a look at my earlier posts Top reasons for outsourcing and My reasons to outsource; if your reasons for outsourcing are not listed there and more so after some reading and thinking appear to be superficial, they probably are.

2. Personal. If you do not believe in outsourcing, if it could present a clear and present danger to your career, or outsourcing is likely to affect your life in some tangible negative manner (take a look at Offshore Risks: Team and Personal Impacts for some hints) stay away from offshoring as far as you can.

3. No executive support / sponsorship, no organizational / team support. If you running and uphill battle in your organization – your execs do not believe outsourcing is beneficial for the organization, if getting appropriate funds is questionable, if your team doesn’t support you. Well, maybe you are agent of change, yet still, you need to pick your battles.

4. Low risk tolerance. Your organization / your boss / yourself do not tolerate risk well and have high penalties for mistakes. Trying offshoring in environment like that is a very risky proposition.

5. No appropriate opportunity. There is always a risk in applying such a powerful yet delicate weapon as outsourcing to tasks that are not made for it. And there is not much use of trying to fit square pegs in round holes.

6. No offshore-ready management resources. If you and your management team doesn’t have any experience with outsourcing you might be better off without it unless you are mentally and financially ready to sustain a lot of pain.

7. No processes. If your organization is process free or still straggling to achieve CMM1 inviting outsourcing is likely to cost you an arm and a leg, so stay away from offshore, unless of course you’ve got spares.

8. You need to cut costs, now. Properly handled and with a bit of luck offshoring is likely to show some cost savings, yet as they say it takes money to make money. Your need to invest before you realize the savings. So if your need to immediately make up for the luck of sales or some other reasons behind a deep dive in P&L you might look for some other cost saving techniques.

9. No sufficient runway for taking off. Getting offshore engagement off the ground and getting it to the point it starts delivering value is not a trivial exercise. Do not expect immediate gratifications nor even start on that route if you have not enough runway (funds, time and energy), there is no glory in crash-landing.

10. No runway to land. No matter how skillful you are, how well financed is the project, how perfectly it is executed there is still a chance that your offshoring engagement fails. If that failure is likely to cause substantial damage, if there is no way you can safely terminate the engagement think twice before starting it.

Of course many of these reasons and the items listed in Remi’s post can be dealt with, risks mitigated, and challenges addressed. Nevertheless you should not take any of them lightly and do not move forward with your outsourcing initiative till you take the last item off your Top Reasons NOT to Outsource list.

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My reasons to outsource

I mentioned already the top reasons for offshore outsourcing typical for many organizations; let me list some of my own:

  • Diversity. Diversity in terms of bringing individual contributor with different background into the team often means a tremendous increase in productivity. A healthy portion of resources with different education, practical background, and way of operating could bring a fresh breath of air in stagnating organization. Also “diversifying” your portfolio of resources might help a great deal to deal with micro factors affecting employment / recruitment landscape of a specific geography.
  • Education. In countries such as India, Russia, China you find many people who value education to much higher degree than we do in the states. On one of my teams from St. Petersburg a majority of developers had at least MS and over 40% had Ph.D. That including QA engineers! Needless to say the brain power of the team was absolutely amazing.
  • Work Ethics. That doesn’t go across all geographies and companies, but fortunately you still can find outsourcing organizations with resources who’s work ethics are far superior to what you find for example in corporate America.
  • Talent Pool. Some outsourcing organizations instead of typical “selling mediocrity in bulk” build their team with top notch experts and people with exceptionally high IQ. Building such a team, no matter in which area of the world takes very long time.
  • Processes. Getting process right is time consuming and costly. When ISO or CMM processes are a requirement it’s often much easier to build relationship with a subcontractor who already has those in place.
  • Project Management. Project and program management is often something that a small software organization can not afford (or more often VPE can’t sell his execs / team on the need for it). Many, especially Indian vendors have that in perfect shape.
  • Cost. While I do not believe that offshore guarantees cost savings I do believe that there is a huge potential there especially with careful execution of multi-sourcing or/and micro-sourcing strategies.

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Top reasons for outsourcing

Whenever I have to introduce using offshore to executives I start with a slide with has title “Good reasons for going offshore”. The slide is otherwise empty. With all the headache it will cause why would I go offshore if I do not absolutely have to? I have been using offshore vendors since ‘92 and there is no place on my body which doesn’t have scars left by that experience – from grotesque stabs on the back to burned fingers. And yet again and again I find myself using offshore vendors and recommending them to my clients and partners. So what are the main “bad” reasons for using offshore? What typically drives companies to consider offshore outsourcing? For many companies those reasons could be roughly grouped into 3 categories:

Reducing operations cost, some most obvious examples would be:

  • Lower resource cost; this topic deserves a separate discussion but for now let me just say that if you are good at utilizing offshore you may realize 25-30% savings;
  • G&A savings (benefits, office space, utilities, etc.);
  • Other resources related savings (reasonable severance, resource add-on acquisition cost, training cost, etc.).

Reducing time to operations / time to market, some examples include:

  • Access to existing pool of resources vs. hiring; I will need to touch upon that subject in more details, for now let me just say that that in some cases that is true;
  • Establishing development / operations infrastructure vs. using existing or building upon existing;
  • Access to specific skills / domain expertise / methodology, etc.

Solving specific organizational issues, a lot of diverse and unique items here, here are just a few common examples:

  • Outsourcing legacy maintenance to motivate developers by moving them onto more glorious tasks. That is a well known double-edged sward though.
  • Dealing with sawmill of resource demand. Need for resources goes up and down if you staff at the top level your resource utilization suffers, if you target the bottom you can not react to market needs. Proper offshore supplement can help alleviate the issue.
  • Risk mitigation, for example: should you hire for dealing with substantial spike in demand? Is the change permanent or when the novelties ware off you will be facing RIWFs? Outsourcing could be a better way to handle the spike.
  • In some way the same idea as above but put into terms very clear and dear to hearts of CFOs – eliminating fixed cost
  • Using third party operational expertise, existing processes, certifications, etc.

While in a way each of the reasons above could be enough to consider offshore in my view you need more than one reason to actually go offshore. The risks and penalties are just too high. And that deserves a separate discussion.

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