Customizing outsourcing IT operations critical for midmarket CIOs

When outsourcing IT operations, midmarket companies sometimes find that a better and less expensive workforce lives much closer than India.

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For many midmarket CIOs, outsourcing IT operations is a necessary part of doing business. Enabling a midsize business to compete against larger companies that have greater and more sophisticated IT resources requires relying on outside help, including low-cost labor in offshore locations.

Stephanie MooreStephanie Moore,
principal analyst,
Forrester Research Inc.

This strategy can backfire badly, however, if the business takes a one-source-fits-all work approach, according to CIOs who have been there and done that. The key is finding the right resources for the job, even if that means juggling multiple providers. CIOs also should be prepared to change course when an outsourcing arrangement fails to perform to expectations.

Terry Orletsky knows this well. Over the past several years, Orletsky, vice president of IT for The Ken Blanchard Cos., has outsourced security operations to a local firm in Escondido, Calif. He also has outsourced mobile application development to a local firm that uses offshore developers, and enterprise system custom development to another local firm with a national presence. In each case the firm has a required expertise that isn't available in-house.

"Midsize organizations have to outsource to keep up with the rest of the world," Orletsky said. "We may have the expertise but not the bandwidth. Sometimes we lack the expertise, so we have to hire it in. Outsourcing is a fact of life in the smaller organization."

Still, the strategy requires constant tuning, Orletsky said. Outsourcing security and custom system development, for example, have paid dividends in cost savings and high skill levels for The Ken Blanchard Cos. The same couldn't be said of application development. That work wasn't up to company standards, he said. Offshore app design skills were lacking. Communication also became an issue: It proved difficult to work with the local project manager, who was unable to transmit the company's needs to the offshore developers. Orletsky's mobile application was a one-time project -- and not a large investment in time or money -- but the results were disappointing enough to put him off seeking outside help on mobile apps again, he said. If the company decides to pursue such a project in the future, he will consider hiring someone full-time for the job, he added.

William Floyd also has experienced mixed outcomes -- from very good to poor -- with outsourcing IT operations at financial firm MB Trading. Over the past 20 years, Floyd, the firm's chief technology officer, has been involved in offshore-outsourcing software product maintenance, development and quality assurance to four India-based companies. For him, the biggest challenges were timely delivery and communications breakdowns.

We are confident we can do much better than the outsourcing company. We also feel we can do this in-house at similar costs, due to the recession.

William Floyd,
CTO, MB Trading

"Due to the long distance of India and cultural differences, the communication within and between teams was often poor, so miscommunications led to incorrect deliveries. In some cases, they were delayed significantly," Floyd said. All this was true of his most recent experience in outsourcing IT operations at Plano, Texas-based MB Trading. As a result, those jobs are being reincorporated in-house. "We are confident we can do much better than the outsourcing company," Floyd said. "We also feel we can do this in-house at similar costs, due to the recession. For product development and quality assurance jobs, U.S. salary costs are much closer to those in India."

Context, timing top issues in outsourcing IT operations

A lack of contextual understanding between U.S. companies and their offshore vendors is a main driver of current domestic outsourcing trends, according to analyst Stephanie Moore at Cambridge, Mass.-based Forrester Research Inc. In a July 2012 report on outsourcing IT operations trends, she argues that in order to build technology solutions that drive business objectives, technologists need "contextual understanding": They need to be able to intuit what the business wants. It's expensive and difficult to get this knowledge from a non-native worker without years of training. "These dynamics favor local IT professionals who have contextual knowledge as well as technical expertise, and who can interact with the IT or business customer in a real-time, iterative way," she explained in the report.

Moore cites the ability to work in real time as a key driver of domestic outsourcing. Given today's rapid pace of business change, Agile development is crucial. Offshore outsourcing vendors struggle to make Agile work across time zones. According to her, the top Indian vendors who built their businesses on traditional Waterfall development methodologies have failed to scale or perfect Agile development. "The fact of the matter is that the 9.5- to 13.5-hour time zone difference is too great to allow distributed Agile team members to communicate in real time," she said.

Exploring new trends in outsourcing

For Richard Broome, CIO and vice president of operations at Host Analytics Inc., location was the difference between a nightmare and a dream-come-true outsourcing strategy. When the Redwood City, Calif.-based cloud corporate performance management, or CPM, provider was first starting out, it needed a cost-effective way to scale the business and support its CFO customers. A decade ago, it turned to outsourcing providers in India. What it found instead was an impassable communication gap that left it unable to translate the processes required to support the customer. The domain expertise wasn't there.

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After two years of trying unsuccessfully to cultivate that contextual understanding, Broome realized that customers' needs weren't being met by outsourcing IT operations. "One thing that became obvious we were never going to do was we were never going to get them to be experts on our customers," he said.

In 2005, Broome broke the outsourcing relationship and "brought it all back in-house." After investigating the idea of rural sourcing, Host Analytics opened a professional services center in Oklahoma. Proximity to local colleges has provided a workforce pipeline, while the cost of living allows workers to live comfortably.

"It's been as close to a dream as I can imagine," Broome said. "We're able to execute on our founder's vision of attracting and keeping a highly skilled and dedicated workforce … that understands the space our customers work in on a daily basis, and keep them and grow them."

Is this the death knell for outsourcing IT operations to India? "It's very cyclical, like anything else. We're going to go through phases of offshoring and onshoring and 're-shoring.' I think rural sourcing is one that is really exploding," Broome said.

Floyd agrees, adding that the trend for outsourcing IT operations comes down to a question of value as well as cost. "I believe the CIOs [and] CTOs will look to do key-skill-set jobs in the U.S., where skill sets are known to be reliable. Outsourcing will be done for menial and lower-skill-set jobs, such as system and product maintenance."

Let us know what you think about the story; email Karen Goulart, Features Writer.

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