Beware the commoditization of IT outsourcing

By Stephanie Overby, CIO |  IT Management, outsourcing

This will happen as long as the value proposition that the advisor brings is taken into account when weighing his or her costs. Otherwise, the folks who are best positioned to help unlock that value will be commoditized and forced out of the industry by the very people who should be benefiting from their expertise.

CIO.com: So how does this over-commodization of the whole outsourcing decision process play out?

Hansen: On the subject of commoditizing advisors, one example that stands out involved a very good advisor who was competed on costs and speed to contract when the client retained them. In order to secure the client's business, the advisor had to commit to a rigid time frame for RFP generation, vendor meetings, proposal evaluations, and down selection. This deal involved outsourcing for cost containment, but also to support a new global technology infrastructure, process consolidation, and other significant changes.

There were two signs of trouble right off the bat.

The client clearly envisioned using a commodity buying process, which was the first mistake. When you have a deal whose success requires as much internal change as this one did, it is not even close to commodity. The client then evaluated advisors on the basis of which one could run this process the fastest and at the lowest cost. Not only did the client misunderstand the nature of what it was buying, it compounded the problem by hiring an advisor based on cost and speed.

The process played out as predicted. In the middle of a very constructive, iterative RFP process, the deadline for vendor selection expired. The client, fully supported by the advisor who was not in a position to push back at that point, down-selected to a provider that was not yet fully vetted on a set of requirements that were being refined as the RFP process was progressing.

The vetting and deal-making process then had to continue into the contract negotiation phase, which is not the best place for it. The solutioning and contracting process both slowed down, blowing the date for transition start by several months and costing much more in unrealized value than the comparatively small savings in transaction costs.

CIO.com: That drama played out before the transition even began. What sorts of problems can a commodity-like buying process cause during the course of the relationship?

Hansen: A few years ago, I had a new client who was a long-term customer of a particular outsourcing provider. They had solid green SLAs and a well-drafted agreement, but they were unhappy. The reason was lack of innovation and partnership.

Viewing this relationship through the commodity lens, it was a tremendous success. The services that could be fully described in a contract were, and for those services it didn't really matter who the provider was.


Originally published on CIO |  Click here to read the original story.
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