One of the hot trends in IT is outsourcing. The allure of smooth sailing, fewer headaches, and lower cost generally capture senior leadership’s attention. The sales pitches about all of the success stories are often compelling. But just like calm (but murky) waters on a mild day hide the rocks under the surface so do many of the outsourcing vendor claims.
With some background understanding (and a lot of due diligence) you can avoid most of those rocks and navigate these waters.
It does take work, work that your outsourcing vendor will never tell you.
Any thoughts of getting the “best and the brightest” are misplaced–, you may get competent resources but you will not get the “A Team”
Outsourcing Vendor Incentives and Motivation
First of all, let’s dispense with the biggest myth there is about outsourcing–, it will save you lots of money! Don’t get me wrong, it CAN, but while that is the sales pitch from the outsourcing vendor, and a key motivator, it is NOT how outsourcing vendors operate.
An outsourcing vendor’s goals are not to save you money; their goal is to grow their footprint, increase their billings, provide additional resources, and find ways to ensure you are locked into their services.
Outsourcing Vendor SAP Resource Skills
An outsourcing vendor has a motivation to grow revenue and margins just like you do in your business. So what does that mean for you? They will find the cheapest resources they can and charge you the best rate they can get for them (think profit margin). Nothing wrong with that, it is the standard practice in any profitable business. What it means for you as a client is that any thoughts of getting the “best and the brightest” are misplaced–, you may get competent resources but you will not get the “A Team”. For commodity IT functions this works, however for the higher level delivery which involves business solutions I will say “buyer beware” or caveat emptor.
What Happened to the Outsourcing Savings?
Revenue growth and profit margins are the growth engine for any business. Many outsourcing firms provide financial incentives for their employees to grow revenue, to raise their utilization and increase their footprint. Just like many other organizations an SAP outsourcing vendor provides bonuses and other financial incentives as well as growth opportunities to those employees who help them grow their revenue. What starts out as a contract arrangement which costs “x” can quickly become 1.5, 2, or even 3 times “x” without aggressive vendor management. An outsourcing vendor’s goals are not to save you money; their goal is to grow their footprint, increase their billings, provide additional resources, and find ways to ensure you are locked into their services.
Seeking Vendor Lock-In (or, Locking You Up!)
ERP outsourcing vendors, or system integrators, may say all the right things in meetings or in sales presentations but at the end of the day their actions tell you their motivation. Customized solutions, complexity, and difficult ongoing maintenance helps to ensure they are the incumbent insider who you “need” and can’t replace. These types of “solutions” also lead to additional staffing and support needs which in turn generates more revenue. It creates a vicious cycle of “more, more, more” cost for the host organization and a virtuous cycle of revenue growth for the ERP outsourcing provider. The vendor gets more deeply entrenched and more knowledgeable on how to fence out any competitors.
Managing Your Outsourced SAP Vendor
Outsourcing can provide cost reductions, efficiency benefits, and many of the other things the outsourcing vendor used during the sales pitch. Don’t expect these things to be easy.
If you think outsourcing is going to reduce or eliminate your people management burdens you are headed for significant trouble. The underlying idea here is the vendor will handle the people management, and to some extent they will. If you leave key management functions primarily to the vendor you are setting yourself up for serious cost surprises. The vendor will ultimately do what is in the vendor’s interest, and what is in the vendor’s interest is revenue and YOU are the source of that revenue.
The moment you outsource, your management must be more aggressive, not less, than before outsourcing. Otherwise you will face the vicious cycle of “more, more, more” cost for your organization and provide the virtuous cycle of revenue growth for the outsourcing provider.
Next we will look at specific tactics and strategies for successfully managing outsourced vendors.
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