A common trend in IT is outsourcing. The allure of smooth sailing, fewer headaches, and lower cost generally capture senior leadership’s attention. The sales pitches about all of the success stories are often compelling. However, just like calm (but murky) waters on a mild day hide the rocks under the surface, so do many of the outsourcing vendor claims.
With some background understanding (and a lot of due diligence), you can avoid most of those rocks and navigate the waters.
However, this due diligence does take work– work that your outsourcing vendor will never tell you about.
Any thoughts of getting the “best and the brightest” from outsourcing are misplaced. You may get competent resources, but you will not get the “A Team”
Outsourcing Vendor Incentives and Motivation
First of all, let’s dispense with the biggest myth about outsourcing: It will save you lots of money. Don’t get me wrong, it can, but lower cost is the sales pitch from the outsourcing vendor and a key motivator, not a key part of how outsourcing vendors operate.
Outsourcing Vendor SAP Resource Skills
An outsourcing vendor’s motivation is to grow revenue and margins, just as you do in your business. So, what does that mean for you? They will find the cheapest resources they can and charge you the best rate they can get for themselves (think profit margin). There is nothing wrong with this standard practice in any profitable business. What it means for you as a client is that any thoughts of getting the “best and the brightest” are misplaced. You may get competent resources, but you will not get the “A Team.” For commodity IT functions, outsourcing works. However, for the higher-level delivery that involves business solutions, I will say “buyer beware” or caveat emptor.
What Happened to the Outsourcing Savings?
Revenue growth and profit margins are the growth engine for any business. Many outsourcing firms provide financial incentives for their employees to grow revenue, raise their utilization, and increase their footprint. Just like many other organizations, an SAP outsourcing vendor provides bonuses and other financial incentives, as well as growth opportunities to employees who help them grow their revenue. What starts out as a contract arrangement that costs “x” can quickly become 1.5, 2, or even 3 times “x” without aggressive vendor management. An outsourcing vendor’s goals are not to save you money; their goal is to grow their footprint, increase their billings, provide additional resources, and find ways to ensure you are locked into their services.
Seeking Vendor Lock-In (or, Locking You Up!)
ERP outsourcing vendors, or system integrators, may say all the right things in meetings or in sales presentations. At the end of the day, however, their actions tell you their motivation. Customized solutions, complexity, and difficult ongoing maintenance ensure they are the incumbent insider who you “need” and can’t replace. These types of “solutions” also lead to additional staffing and support needs, which in turn generates more revenue. It creates a vicious cycle of “more, more, more” cost for the host organization and a virtuous cycle of revenue growth for the ERP outsourcing provider. The vendor becomes more deeply entrenched and more knowledgeable on how to fence out any competitors.
Managing Your Outsourced SAP Vendor
Outsourcing can provide cost reductions, efficiency benefits, and many other benefits the outsourcing vendor promoted during the sales pitch. Don’t expect these things to be easy.
If you think outsourcing will reduce or eliminate your people management burdens, you are headed for significant trouble. The underlying idea here is the vendor will handle the people management, and to some extent they will. If you leave key management functions primarily to the vendor, you are setting yourself up for serious cost surprises. The vendor will ultimately do what is in the vendor’s interest, and what is in the vendor’s interest is revenue– and you are the source of that revenue.
The moment you outsource, your management must become more aggressive, not less. Otherwise, you will face the vicious cycle of “more, more, more” cost for your organization and provide the virtuous cycle of revenue growth for the outsourcing provider.
In the next post, we will look at specific tactics and strategies for successfully managing outsourced vendors.
