05.26.08

Trouble in Paradise?

Posted in Best Practices, Governance, Information Technology at 2:09 pm by Gary M. Zeiss

In an article in today’s India Daily, (link) Hrithik Ratnagar suggests trouble for the Indian IT outsourcing segment.  According to Mr. Ratnagar, this trouble is caused by the slowdown in the US economy, the weakness of the dollar and the strength of the rupee, the US political climate, and internal factors within the Indian IT outsourcing community. 

No doubt, these are all significant factors in the market.  However, I think that the Indian IT market may be selling a product that it’s US consumers are beginning look away from.  Why?  Several reasons.

First, even two years ago, when the market was chugging along just fine, companies were beginning to be concerned about the value proposition promised by outsourcing.  Actual costs ran above budgets, management expenses were higher than expected and, worse yet, internal customer satisfaction plummeted.  Aside from those simply focused on “this year’s budget,” outsourcing, even two years ago, was becoming a less attractive proposition.

Second, the deals represented a snapshot-in-time approach to the outsourcing - the infrastructure was, for all intents and purposes, frozen at the time of the deal.  Changes, which in prior years would be done internally and “for free,” were now subject to a change request and discreet cost.  Now, no one really believes that internal changes were “free,” but the costs were, in fact, buried in and under layers of bureaucracy.  No one really saw them.  Now, every change is accompanied by a cost, a budget change and requires financial review.

I am going to boldly suggest that this approach did little but empower the accounting and finance department in many corporations, not just permitting them, but almost requiring them, to micro-manage every little aspect of IT infrastructure.  IT management (and IT workers) generally dislike being managed by either finance or legal departments.  Instead, I believe that they long for the day that they simply had a budget to manage and annually had to go and ask forgiveness when it was exceeded.

Finally, IT outsourcers made the mistake of underpricing during bids, expecting to make their margin through the change process.  No doubt, it was viewed as necessary to earn the business in a price-sensitive segment.  This approach, however, also created a very unpleasant business dynamic which I call “change order hell.”  In change order hell, every picayune change requires a form, several layers of approval and a payment.  They failed to recognize that American managers, particularly in IT, tend not to want to get nickeled and dimed to death - and would much prefer a simple price for services.

So, what is the answer?

First, IT outsourcers must begin to view their services as “products,” creating an identity for them that distinguishes them from their competitors and offers something extra to their consumers.  Right now, nothing distinguishes one IT outsourcer from another, not even price or reputation.

Second, they must focus on being easy-to-manage.  What does that mean?  Getting one step ahead of your customer - by anticipating their needs.  Being proactive about problem solving.  Not pointing fingers.  Not charging for every little thing.  In short, making the outsourcing process easier and better than insourcing.

Third, like their American customers, they will have to tighten their belts a bit - maybe loose a little money.  But they can, perhaps, do it a bit better than we do by not squandering their talent through massive, knee-jerk layoffs.  Instead, they should take the time to invest in their talent - so that when the market turns, they will be better off than we are.

Finally, stop looking at the election as causing a sea change.  It is unlikely that any of the candidates will do much about the offshoring issue in the main.  Instead, it is far more likely - and historically supported - that a change that bolsters the American economy will come from a large infrastructure investment - the kind of investment that creates jobs in the local, not the global, economy. 

No doubt, this is a difficult time for both American companies and their service providers.  It is a time that will, however, end.  Examining the faults in this market, however, is not all that helpful - they are pretty obvious.  Examining the mistakes that were made when business was good, however, can really shed some light on how to improve.

 

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