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Outsourcing: Comparing strategic and tactical outsourcing

Introduction

There are a number of seemingly independent factors that have contributed to the emergence of strategic outsourcing and this article explores briefly, the development of software industry from this perspective and compares tactical and strategic outsourcing at the end.

Tactical outsourcing

From an Indian software industry perspective, outsourcing took shape in the early 90’s mainly in a tactical way. The concept that was sold to the global IS shops, was that of an ODC (Offshore Development Centre) model which was touted as an extended arm of the customers’ IS team. In the 90’s, before the dot com bubble burst, the CIO (Chief Information Officer) had most of the say in how IS budget would be spent and took outsourcing decisions. Outsourcing was taken up mainly to reduce staffing costs and it was mainly coding work that was outsourced. The higher-end work still retained at the customer’s side and all business-critical work was handled by customer’s team. Most of the project management was done by the customer’s team although there would be a project manager located at offshore to co-ordinate the activities at offshore.  This mode of outsourcing is termed tactical outsourcing and summarizing, factors that characterized tactical outsourcing era are –

1. The off-shore team was seen as an extended arm and outsourcing was done mostly as staff augmentation at lower cost under time & material model.

2. The customer’s team carried the project management responsibilities and the off-shore team was answerable mainly to the project manager from the customers’ organization.

3. Outsourcing decisions were made by the CIO.

4. Most of the higher-end work was retained at on-site and predominantly coding was pushed to the off-shore team.

Strategic outsourcing

This scenario changed in the next decade (’00s) which saw the Indian industry raising up on the learning curve and becoming competent to handle project management as well as higher-end project activities such as requirements elicitation and architecting. The dot com bubble burst caused a series of changes in the way IS decisions were made. Organizations became more wary of spending on IT and IT spending decisions were made by a committee involving the CIO, business sponsors, finance team etc. and not by the CIO alone. ROI (Return On Investment) measurement from IT spending became more rigorous. As a result, customers started favoring fixed-price model for software application development where end-to-end responsibilities of a project are carried by the offshore development team. With this background, the next development was commencement of strategic outsourcing initiatives where a portfolio of applications is identified and the end-to-end responsibilities of all the applications in the portfolio are transferred in a phased manner to the vendor with the IS department carrying minimum responsibilities. In a strategically outsourced project, the development team from the vendor (could be partly located at offshore and partly on-site) carries not only the end-to-end responsibilities of the project, but also manages all the stake holders of the project. With maximum possible reduction of IS staff, a strategic outsourcing initiative yields maximum cost saving but demands new competencies to manage vendors and ensure successful project delivery. The risks of project failures are higher in strategic initiatives as it provides poor visibility into how the project is being managed by the vendor.  This mode of outsourcing is called the strategic outsourcing and can be summarized as below –

1. The last decade has seen the raise of Indian software industry on the value chain where they take up end-to-end responsibilities of a software project that include, requirements, architecture, project management and management of stake holders.
2. The IT spending and decision making pattern in customer organizations has changed and ROI measurement from IT spending has become more rigorous. Decision making involves a committee rather than CIO alone.
3. Customers have started favoring fixed price model for software application development to begin with and at higher-end they prefer transferring end-to-end responsibilities of a portfolio of applications
4. Customers have less visibility into the development of applications and run the risk of losing control over the course of the project.

Comparison summary

Sl #

Criterion of comparison

Tactical outsourcing

Strategic outsourcing

1 Outlook / Philosophy Offshore team is an extended arm Offshore team carries responsibility and reduces my burden
2 Nature of work outsourced Coding, mainly End-to-end responsibility of applications
3 Responsibility sharing Off-shore team answerable to customer contact Off-shore team answerable to stakeholders of the project
4 Business model Staff augmentation / Time and material, predominantly Fixed price model, predominantly
5 Transition of work Parts of applications as and when needed Portfolio of applications in a planned manner
6 Risks Risks are fairly less as customer carries project management responsibilities Risks are more as customer has less visibility of the course of application development
7 Benefits Reasonable Higher benefits with least staff to be supported

Conclusion

In summary, strategic outsourcing can be more beneficial than tactical outsourcing but can be more risky as well.  It needs development of new competencies on the part of IS managers to ensure successful delivery in a strategic outsourcing environment.

2016-10-25T16:58:35+00:00

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