Blunders of Outsourcing

Source: Offshore IT outsourcing

It was 25 years back when the first corporation thought of this bright idea of farming out part of its IT department to somebody else. They called it time-sharing, and it was supposed to cut costs dramatically. These days, the hot money-saver is off-loading Internet-related functions to application service providers (ASPs) that rent out software applications. Between the two, businesses experimented with giant agreements that saw entire technology operations shift to outside companies.

No matter what the current term, the basic concept is outsourcing. And seeing as we've had a quarter century to work out the kinks, one would think that by now it would be a trouble-free, fill-in-the-blanks process.

But that would be wrong. Outsourcing, it seems, is one place where it's a snap for history to repeat itself—with some calamitous results. While many companies have undoubtedly saved money, several others have seen costs spiral, quality plummet or, worst of all, IT operations crash. Why is it that this seemingly simple idea has spawned so many disaster stories?

The plain truth is that outsourcers commonly repeat a painful learning cycle every time a new technology gets outsourced. Because it can take years for both outsourcers and their customers to learn a technology and understand how best to manage it within the scope of the outsourcing agreement, they often make mistakes that have long-term effects. For example, when technology is new—such as customer relationship management and supply chain management—outsourcers often under price their offerings to such a degree that they either go out of business or are forced to cut back on service. Customers, who mistakenly think that outsourcers are the experts in any technology, often do not know how to protect themselves from bad deals. The importance of Vendor Evaluation can not be overemphasized.

When outsourcers began to offer the maintenance of desktop PCs for the first time, a multitude of outsourcing companies sprang up to meet this demand. Eager for customers, they priced their services too low. A shakeout followed, leaving only a handful of companies and a host of dissatisfied customers. But as both customers and vendors gained experience with how to best structure desktop deals, satisfaction levels rose.

It is noticeable that so far, the ASP phenomenon is following the same trajectory. A year or two ago, new ASPs were appearing overnight. Today, the ASP consolidation is well under way as both businesses and customers get smart about how to handle these new projects. In the meantime, mistakes happen.

Given the high margin for error, why would anyone outsource a new technology? Simply put, you may have no other choice. Cycle times are shorter than ever, money is tight and skilled personnel are hard to find. For many companies, outsourcing offers an attractive path around these constraints. But regardless of why you outsource, mistakes happen—and often enough for us to compile a list of five classic outsourcing blunders. Here's hoping that you can learn from a host of others' missteps.