What is Outsourcing ?
Outsourcing is the business practice where a company (referred to in this blog as hiring company) chooses to hire an external company (referred to in this blog as outsourcing company) to perform a set of services that were previously done in-house.
IT outsourcing is a tool that has been used since the 1980’s by large corporations to meet their IT needs. The main advantage of outsourcing has been considered the associated cost savings.
While this model has proven to be highly effective in the past, the change in our business environment has negatively impacted the industry. Today, outsourcing is perceived as highly risky, transactional, and ineffective.
If non-technical companies and technical outsourcing firms want to thrive, they need to shift their perception if IT outsourcing and move from transactional IT to long-term strategic IT partnerships.
The Short Falls of Transactional IT Outsourcing
What is Transactional Outsourcing?
Transactional Outsourcing is a type of outsourcing where the hiring company and the servicing company, both act in their own self-interest, even when it is detrimental to the other party, as they see their working relationship as an one-off transaction.
As the cost of tech professionals continues to increase, outsourcing firms struggle to pass cost savings to their clients. As such, many tech firms are forced to increase profitability by following one of these two strategies:
- Specialize in a niche
- Decrease the quality of their work
Unfortunately, companies who hire outsourced services are negatively affected by these strategies.
What Are The Negative Effects?
Firstly, as tech firms narrows their services to a niche, hiring companies need to start sourcing various service providers and managing multiple relationships to successfully complete a single tech project.
This results in an increase in overhead cost for the hiring company, as they need to allocate people to source and manage tech partners. Additionally, the price of specialized tech partners increases as there is less competition in their niche market.
Secondly, some outsourcing companies started decreasing the quality of their services to save costs. In many cases, the low quality work becomes inadequate for the standards of the hiring company.
Ultimately, the hiring companies may need to redo the project numerous times with different service providers. Multiple iterations by multiple companies significantly increases the overall outsourcing cost.
That's why hiring companies have begun seeing the outsourcing of their IT as high risk as their reputation could be significantly damaged by low quality projects.
Reputational risks associated with outsourcing include the shipping of low quality or non- functional products and the release of hackable or insecure software.
Even though there are many disadvantages associated with transactional outsourcing, the demand for IT services still surpasses its supply.
Hiring in-house talent is becoming progressively harder and more expensive. Non-technical companies struggle to recruit talent which make the use of IT outsourcing more common.
However the reality is that the nature of transactional outsourcing is not beneficial to either the hiring company or the outsourcing firm, and a shift in this relationship has to happen to meet IT demands and achieve mutually beneficial growth.
Transitioning Into Strategic IT Partnerships
To leverage the business benefits of outsourcing technology, there needs to be a transition from transactional IT outsourcing to strategic IT partnerships.
What is an IT strategic partnership?
An IT strategic partnership is a mutually beneficial relationship where both the IT expert company and the hiring company work together to increase overall value to both businesses in the short and long-term.
What Are The Main Differences Between IT Transactional Outsourcing and IT Strategic Partnerships?
1. Short-Term vs. Long-Term Mentality
In a transactional outsourcing relationship, the hiring company tries to get as much work done for the lowest price. They only take a project which has been completely thought through before sending it to the IT company.
The IT specialist then does the implementation, even if they know there are some items that are not needed. Usually, they might take shortcuts to deliver the project on the expected time and budget.
After the project is delivered, the relationship usually ends until the software needs urgent maintenance or updates.
Because the software was developed poorly, the cost to update is substantial and sometimes the software would need to be built from scratch again.
On the other hand, in IT strategic partnerships, both partners are involved in the project inception, planning process, and implementation.
Both parties share with each other their financial and time limitations. Together they strategize to determine the most effective and efficient way to cater for the ever-evolving IT needs of the hiring partner.
The relationship is not over once the main portion of the software is built. The partners hold maintenance agreements to make sure the software is kept up-to-date, moving from reactive to proactive approach.
When the software requires a big update, it will be done quicker and cheaper.
Usually when a programmer takes over somebody else's code, they need to spend significant time understanding the logic behind the code and the actual code, before restructuring and adding changes.
In the case of strategic partnerships, the IT partner was the creator of the software and they know the thought-process behind the code, enabling them to immediately implement any changes needed.
Furthermore, IT partners build a code base with low technical debt, which makes the software highly structured and easily changeable.
In this format, the IT partner benefits from recurrent and growing IT work whereas the hiring partner earns a high ROI (return of investment) from the efficient implementation of value-adding technology.
2. Misaligned Communication vs. Open Communication
In transactional outsourcing, both parties are acting on their own self interest. The hiring company may be increasing the scope of work and pushing to get work as quick as possible.
On the other hand, the IT expert is taking as many clients as possible to increase profitability and juggling them all to deliver fast low-quality work.
In this case, the interest of both parties are misaligned and the communication is kept to a minimum to avoid conflict.
There is also no transparency because parties don't really care about each other's needs as they are only working together for a limited time
On the other hand, IT partnerships have aligned goals and objectives. Therefore, they prioritize transparent and frequent communication, which leaves no room for errors, misalignment or mismanagement.
Partners have established channels of communication and agreed relevant frequencies. They don't over or under communicate.
They focus on being proactive with communication and being highly responsive to optimize collaboration and implementation of solutions.
Partners are quick to let each other know of problems and risks that arise to leverage joint expertise and come up with mutually beneficial solutions.
3. Low Risk Processes vs. Value-Adding Processes
Transactional outsourcing uses processes that seek to minimize risk for both parties. A common process to build transactional software is the waterfall approach.
The scope, price, and timeline is fixed. Should any change occur, the party who initiates the change will need to absorb that risk. This creates a winner-loser scenario.
In our current business world change is inevitable. Adaptability and speed of change are of utmost importance to compete effectively.
As such, it's crucial to create partnerships that are flexible and highly responsive to changes in customer behaviour and business environments.
This is impossible in transactional outsourcing, as change means loss to one party, who will then resist the change and negatively affect the success of such a project.
IT partnerships completely change the process of tech creation to maximize value creation and adaptability. These long term projects use the Agile methodology, where scope is flexible and value-adding functionality is prioritized.
While limitations on budget and time still exist, collaboration between the IT experts and the hiring company ensures that the allocation of resources goes to the most value adding items based on the customer requirements, even as they change.
This ensures that the hiring company will earn return on investment (ROI) faster. At the same time, the IT Expert, who bills per hour, will no longer associate change with lower profitability.
Instead, they will be motivated to change and innovate because their work will add more value and have a higher impact to users.
Benefits of IT Strategic Partnerships
While cost reduction is part of the business case of using IT Partners, there are numerous other benefits which make this option attractive to hiring businesses.
Below are the top four benefits of developing IT Strategic Partnerships :
- Leveraging businesses and technical expertise: If the goals and objectives of both partners are aligned, their combined expertise improve the quality of the project and its chances of success.
- Scalability of services: If both parties work together and succeed, the project will grow. This may result in the need to expand IT outsourcing. If they plan together, the IT partner can grow with the hiring firm to help meet their needs.
- Quality Consistency: As the partners are committed to working together long-term, both parties benefit and prioritize high-quality software. Continuity means that the future software quality is expected to remain the same.
- Cost Savings: If IT partnerships seek the most efficient and effective ways to manage IT, costs will be saved in the process.
Continuity also lowers costs of sourcing and managing partners and decreases the learning curve of working on a new software.
Furthermore, the overhead costs of hiring and managing tech employees for non-tech companies remain higher than outsourcing to a strategic partner.
IT Strategic Partnerships are crucial as it's imperative to leverage tech in an era of digital transformation to remain competitive in this business environment.
While SaaS is becoming widely available for SMEs and corporates have access to SAP and other ERP systems, no existing solution is customized to a business unique needs. Customization is crucial but it often does not justify in-house hiring for non-technical businesses.
Leveraging IT Experts through a mutually beneficial strategic partnership will enable non-technical companies to thrive in the short-term based on current needs and in the long-term as new exciting opportunities arise.
At Appstrax, we have strong long-lasting relationships with corporates, startups, and governments. We pride ourselves in constantly maintaining, updating, and doing recurrent innovative projects with our partners.
Would you like to find out more? Check our website or request a free project advisory session.