Edge Network Services - IT Outsourcing
Under a staff augmentation model, the cost of hiring for temporary requirements and disengaging once those requirements have been met can more than offset the higher cost of engaging more permanent resources. Moreover, staff augmentation requires minimal contracting effort, has a simple cost model (rate times hours worked), can scale up or down quickly and has minimal impact on the existing operating model of an IT organization.
Staff augmentation, however, can become problematic when it morphs into a permanent operating model. As a long-term solution, it has none of the benefits of alternative long-term external sourcing models, such as managed services (outsourcing) and, in fact, can create a number of serious risks and potentially destroy value.
Detriments of staff augmentation as a long-term solution
By its nature, staff augmentation represents higher labor costs. Contracting organizations must add overhead and margin to their labor costs and, while some of this can be avoided by contracting directly with individuals, this too entails higher administrative costs internally, as well as some inherent risks. When used as a long-term solution, the natural offset that staff augmentation provides to higher labor costs through the avoidance of hiring/de-hiring is lost.
More significantly perhaps is that reliance on staff augmentation as a permanent model tends to foster a management style that does not plan for resource consumption. Resources are too easily accessed. The consequence is gradual “staff creep” and an unrecognized “head count” that slips under the organization’s human resource governance radar.
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Advantages of IT Outsourcing
If an organization is involved in a staff augmentation engagement, transitioning to a IT outsourcing model can yield all of the benefits of flexibility and skill access it seeks, while overcoming the major disadvantages associated with staff augmentation described above.
The IT outsourcing model differs from staff augmentation in a number of ways. The essential difference between the two models is that under the IT outsourcing model, the provider is committed to delivering an “outcome” at a defined price versus an “input” as under the staff augmentation model. An input is simply the performance of an activity with no commitment that the activity will result in the desired outcome. The IT outsourcing model drives a measure of value. Based on planning, as the organization must define the requirement on a service and performance criteria basis. Pricing is tied to the outcome. Should the service requirement diminish or disappear, the associated costs react in kind.
This provides the “scalability to demand” often sought in a staff augmentation model, but scalability that is tied to service.
Linked to IT Services is a SLA commitment. Under the staff augmentation model, the only service commitment is hours of work. Under the IT outsourcing model, the provider assumes all of the risk of meeting the service commitment.
The value creation is huge. As the provider assumes the delivery risk at a fixed cost, the provider is highly incentivized to establish productivity measures required to meet the service commitment. This manifests itself in the implementation of tools and processes, as well as extensive documentation, as the provider cannot afford to risk not meeting the service commitment by relying on individuals.
Documentation and process rigor also allow the service provider to move work through a global delivery structure with ease. Through the application of documentation, tools and processes, the service provider is able to deliver services reliably with fewer, more productive resources. The IT outsourcing model therefore is structured to deliver a commercially viable, low cost service offering to the organization.
From the standpoint of what an organization really needs from IT, the outsourcing model delivers the following advantages:
- Predictable low Price/cost service/outcome
- Scalability based on business demand
- Fewer delivery risks
- Operational performance metrics tied to process excellence, documentation and outcomes.
Edge Network Services can serve multiple clients from multiple locations. As opposed to smaller staff augmentation organizations (or individual contractors), Edge Network Services has the capability of delivering a wealth of skills, capabilities, and has access to a broad base of skills, IT solutions and knowledge to meet evolving business requirements.
An IT outsourcing model delivers all of the skills access and flexibility of a staff augmentation model. Because the model relies heavily on management and process rigor, clients generally experience an elevated capability themselves.
Inhibitors to transferring to an IT outsourcing model
So, with all of the benefits of an IT outsourcing model, why do some businesses retain long-term staff augmentation sourcing arrangements? There are many reasons. A key value of an IT outsourcing model is that, with execution commitments secured, the business organization can reduce in size and focus on the strategic management of IT. Historically, the lack of strategic management is the prime value destroyer in IT. Many of today’s business leaders have a business background not an IT, and, quite frankly, prefer to manage the business execution. The staff augmentation model allows these types of business leaders to overcome the hurdles of staff limitations and retain operational control. The value of the IT outsourcing model is generally very clear at the senior management level, but often resented at the level of IT management.
Pricing in managed services is opaque compared to staff augmentation in which pricing is little more than a rate card (as the commitment is no more than availability to work on an hour by hour basis). The staff augmentation model therefore appeals to procurement driven departments that can issue requests for rate cards to multiple vendors and select accordingly. This bypasses the value element of service commitment entirely, but it is simple.
Pricing for managed services requires that the parties agree on defined outcomes and the pricing is tied to those outcomes. A mechanism can easily be put in place to ensure that the value is retained over time. Granted, the process is more complex, but the value opportunity substantially justifies the effort.
Of course, the IT outsourcing model requires a partnering mentality. It is interesting that in most organizational areas, the concept of long-term partnering with quality providers has been more easily adopted than in the area of IT. IT Service providers have as the core of their business model to deliver excellence and invest heavily in achieving and nurturing that capability. By partnering with a quality IT Services provider, organizations allow business leadership to focus on how to utilize technology to add value to their organizations, secure in the knowledge that effective and efficient execution is under contract. The primary hurdle is the perception that transferring day-to-day operational responsibility is giving up control when, in fact, control is always retained through relationship and contractual commitments.
For business managers and decision makers that have become dependent on the staff augmentation model, transforming these arrangements into an IT outsourcing model can create significant economic and service value. The IT outsourcing model is focused on providing “outcomes” (service levels and specific services linked to a volume of activity) for a pre-determined price versus “inputs” at a cost.
This provides price/cost predictability for the client, while shifting the delivery risk to the provider. The costs of meeting service level commitments can exceed price if poorly estimated or managed, so the outsourcing provider is highly motivated to implement productivity tools and operational “hygienic” tools and processes that promote the maintenance and preservation of operational health, both of which ultimately deliver added value to the customer.
The long-term nature of IT outsourcing models means the provider is better able to plan, manage resources, balance workload across its workforce and allocate tasks throughout a global delivery model. The result is a lower cost of delivery for a specific level of service. In general, a service provider under an IT outsourcing model can deliver service at substantially lower cost than the cost of similar services delivered under a staff augmentation model.
Ancillary benefits of managed services beyond lower costs, the ancillary benefits that can be realized through a managed services (outsourcing) model can be substantial. Price discussions for staff augmentation typically center around rate cards and are decoupled from productivity and service dimensions beyond hours worked and capability classifications.
In contrast, because price is based upon defined service levels linked to business objectives, discussions on price in the outsourcing context tend to focus on value and the alignment between service levels with business requirements. It is not unusual to observe that non-outsourced IT departments have over-engineered service levels in pursuit of IT targets of excellence (e.g., the belief that if a service level of 99.0% is good, then 99.99% is better), which often adds unnecessary costs in the process.
Flexible IT Solutions for your business needs
By creating a clear line of sight between service, business need, and cost, outsourcing tends to shift the focus from rate cards and resource utilization to optimizing the cost/service equilibrium. Indeed, once this line of sight is established, we frequently observe clients requesting service levels lower than what has been previously delivered and reducing their IT spend accordingly.
The IT outsourcing model can address other value destroying factors that typically plague IT departments as well. In a IT outsourcing model, value capture for the provider is linked to the ability to move work to the best resource/best location, which requires that the provider document knowledge. Since this documentation contractually belongs to the client, the risk of knowledge loss is minimized for IT departments.
Finally, because pricing is fixed under the IT outsourcing model and many provider costs are driven by client behaviors, the provider is incentivized to help the client resolve key issues that impact performance, such as unnecessary complexity/diversity and a lack of adherence to standards.
Staff augmentation has its place in an IT department’s arsenal. Even in a IT outsourcing model, staff augmentation is often utilized for selected services at specific points in time. However, when staff augmentation becomes the de facto operating model for an IT organization, it constitutes an ineffective form of outsourcing that involves high cost, low commitment and high risk.
IT departments utilizing staff augmentation in this manner should recognize that they are already “sourcing externally” and should seek to adopt a true IT outsourcing model to maximize value.