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IT departments should beware of buying additional outsourced services from their existing offshore providers. Here are eight steps to consider before signing new statements of work.
If there’s a sure sign that offshore outsourcing has hit the mainstream, it’s that it’s increasingly hard to distinguish the sales techniques of a Wipro or a TCS from an Accenture or IBM (IBM). Indian IT service providers have joined the ranks of large U.S.-based outsourcers in leveraging their relationships with existing clients to increase their market share using that tried-and-true technique—the upsell.
Offshore outsourcers are attempting to expand and diversify their offerings, and there’s tremendous temptation for IT departments to use an existing provider for add-on services.
“An agreement is already in place and requires little more than a new statement of work from the account manager—whom the company is already comfortable dealing with,” explains David Rutchik, a partner with outsourcing consultancy Pace Harmon. “Vendors foster this relationship and familiarity by playing up a customer’s high satisfaction in their core area and parlaying it into expansion areas.”
Offshore providers are pulling out all the stops in their sales pitches. “Several of the offshore outsourcers are offering very low-cost pricing to take on work they haven’t done before or are very inexperienced with doing,” says Phil Fersht, founder of outsourcing analyst firm Horses for Sources. “Their attitude is to ‘sell it and then work out how to deliver it.’ [That] strategy is worrying the Western providers greatly.”
Indian companies are also playing up their reputations in the application development arena and offering customers more flexibility than their U.S. counterparts to increase their market share, Rutchik says.
But buyers must beware. Offshore providers may not be qualified to deliver the new work IT departments need. Indian providers that made a name for themselves delivering application and development services are aggressively expanding into other IT towers today, but it will take time for them to reach full maturity.
“The offshore providers often fumble through at first,” says Rutchik. “But they listen, learn and evolve.”
In the meantime, customers should proceed with caution as the offshore IT industry works through its growing pains.
“Indian providers often have trouble providing mature, integrated offerings and corresponding processes, since they generally need to partner with third parties or [rely on] recent acquisitions in order to provide the required service,” says Rutchik. “These scenarios create problems and risk because of integration issues and less streamlined control across the organization’s service delivery.”
Offshore outsourcers also may lack industry knowledge in their new areas of focus. Adds Rutchik, “This is particularly evident in regulated industries where items such as validation are often not well understood and sometimes addressed on the fly.”
Offshore outsourcers may be incapable of providing real end-to-end services in certain areas, like end-user computing for example. “They are able to provide a robust service desk offering, but must rely on third parties thousands of miles away to provide on-site desktop support,” says Rutchik. “This creates problems in coordinated service delivery, meaningful business SLAs and other areas.”
In addition, being too quick to award extra work to your current provider—offshore or otherwise—can send the wrong message. “The danger is [you may get] the ‘B’ team as the vendor doesn’t feel any competitive pressure to provide its best and brightest,” Fersht says. “It’s dangerous to let them think they can get away with giving you second-rate service.”
While there’s nothing inherently wrong with expanding the scope of an existing outsourcing contract, due diligence is critical. “Even if a company wants to consider an existing outsourced provider for new types of services, it should still engage in a sourcing event that covers the technical, commercial and business requirements,” advises Rutchik.
To avoid getting burned, IT departments should take the following eight steps before signing any new statements of work.
1. Test the waters. “Engage in some informal, but arms length discussions with providers to get an understanding of their offerings,” Fersht says. “Try and resist having them propose on business until you are 100 percent sure you want a competitive bidding situation on your hands.”
2. Put your cards on the table. Once you’re sure you want to outsource the new area of work—and your existing partner is a viable option—be open. While you don’t want to automatically hand additional work to your existing supplier, you shouldn’t keep a valued vendor in the dark.
“Tell your current provider you are putting out some new work for tender and they stand a very favorable chance of winning it, provided the pricing is fair,” advises Fersht. “This will put them on their toes [and encourage them] to put their A team in place for the new business. It’s a very competitive market out there, and you should take advantage of it.”
3. Level the playing field. “The [current] provider should not be considered the ‘incumbent’ in the new area of work,” Rutchik says. Invite your existing outsourcer to participate in the sourcing process as you would with any new vendor, proving its capabilities through its proposal, providing demonstrations and sharing relevant references.
4. Put prices in context. Offshore providers are offering cut-rate pricing to get new business in the door, but it could cost you more in the long run. “Existing contract providers may promise an immediate or rapid ROI, but there is also a risk of quality service delivery and there is still a transition cost and risk,” says Rutchik. “Another potential hurdle with existing contract providers is price risk, as the customer likely secured a competitive pricing model through a competitive sourcing process when the vendor was first selected and will not be in the same situation if it goes only to the incumbent provider.”
5. Consider a pilot project. It can be worth the additional time and investment to test your existing vendor’s capabilities on some incremental work in new areas rather than jumping into a big, new contract.
6. Share the risk. “Investigate outcome-based pricing options with your current supplier,” says Fersht. “Challenge them to be creative and get some skin in the game.”
7. Do your homework. Depending on the extent of the new work, you may not want to engage a full-time outsourcing advisor, which can run you as much as $2 million dollars a pop. But unless you’re signing new outsourcing contracts every month, you’ll need some outside advice.
“Smart customers can access the benchmark data they need these days from analysts and advisors—for as little as $10,000 in some instances—and conduct a lot of the diligence themselves,” says Fersht. “While there is some effort involved, the discussions are normally useful exercises in understanding your needs better.”
If you’re not the do-it-yourself type, you can cap your third-party consultant costs based on the total amount you plan to spend on new work. “Engage a reputable advisor to discuss options, access some cost benchmarks, and get a good understanding and validation of the provider landscape,” Fersht says. “If the new scope if under $15 million, it may not be financially wise to spend more than $250,000 on an advisor.”
8. Get good at governance. If you do opt for another supplier (and then another and another), things will get complex very quickly. “If a company decides to pursue a multi-sourced environment, it must involve a mature provider governance organization and a consolidated approach to performance reporting and program [management] to achieve the desired cross-vendor benefits,” says Rutchik. “In our experience, ROI is generally higher when multiple, but fewer, vendors are involved.