The outsourcing industry is heading into a ‘somewhat turbulent’ year, driven by the center stage positioning of Y2K issues, realizations that will arise from that work, and an unpredictable economy. That is the opinion of Doug Mellinger, CEO, PRT Group Inc., who also predicts a renewed focus on quality delivery.
In the Y2K arena, he says, companies will be operating under the gun as they run out of time to achieve Y2K compliance. That has to be their first priority, says Mellinger. Unfortunately, they have run out of time to outsource the problem directly in most cases. They are having to insource it.
That, he says, can change the outsourcing landscape in 1999. Companies beleaguered by Y2K problems will not initiate as many large outsourcing deals as have happened in past years. Instead, he sees more partnering where vendors are brought in to support the insourcing initiative in Y2K.
Mellinger sees that situation as a major concern for vendors. As Y2K’s ugly head truly comes out of the water, how much does it cause companies to stop everything about the future and just deal with Y2K, asks Mellinger. That could cause big disruptions in the market. For a lot of us who are doing non-Y2K work, there is risk associated with how much clients actually will be able to continue with those efforts. If that happens, we will end up doing more Y2K work.
Economy Triggers Demands
Along with the Y2K issues, an uncertain economy also is driving change in the outsourcing industry, according to Mellinger. Companies that, for many years, have been looking for the ‘silver bullet’ related to actual delivery of vendor promises now are faced with economic pressures that force them to demand delivery of solutions that come in on time, on budget and within expectations.
The market is going to start demanding more from the vendors in terms of delivery of service level agreements, and we also are going to start using more of the available metrics, things like the Capability Maturity Model (CMM), that was developed by Carnegie Mellon’s Software Engineering Institute, says Mellinger. Companies are finally saying, ‘If you’re a Level 2 organization heading to Level 3, don’t even show up at the doorstep.’
That need to increase productivity and contain costs will drive an increase in work for vendors that have offshore resources that can operate at less cost, according to Mellinger. In addition to its software engineering center in Hartford, Conn., PRT also has one in Barbados, and a third center was scheduled to open in India in December. The Barbados center opened as a Level 3, and the Hartford center is on its way to Level 3, according to Mellinger
Dealing with the Labor Shortage
He sees the offshore facilities gaining in importance as a way to address the labor shortage problems in the industry. In 1998, when PRT ran out of visas to bring workers into the U.S. five months before the end of the U.S. government’s fiscal year, they simply moved more work to the Barbados facility.
The ever-present Y2K, however, may also have an impact on labor problems. Mellinger says projections now call for 45 percent of all IT budgets to be spent on Y2K in 1999, as compared with an estimated 28 percent in 1998 and 4 percent in 1997. If that occurs, the likelihood increases that contracts will change and vendors such as PRT will be doing Y2K-related work.
People that might be working on development or maintenance work for a client might be forced to work just on Y2K, says Mellinger. That poses certain morale and other problems for any vendor’s people side. If somebody joined your company because they want to do software development, some of them don’t want to work on Y2K. Those are things that all of us in the industry are going to have to deal with.
The labor shortage, according to Mellinger, is going to drive more international recruitment and more movement toward retention. I think you’re going to see more functions within companies solely focused on how they’re going to keep their people, he says. You’ll see more training dollars being spent. There will be more thought and budget spent on people than ever before. Those expenditures, he believes, will increase morale and, hopefully, lead to better user satisfaction.
Move Toward Partnerships
Mellinger also sees other changes in outsourcing relationships. Larger companies, he says, are realizing that they can’t just hand off their problems to a vendor and walk away. They need, instead, to work together with their vendor or vendors to deliver total solutions to the table. He believes that customers will retain the strategic capabilities of their organization and look for strategic partners to provide a tactical implementation capability and ongoing support for the internal organization. That can lead to more value-based partnerships. The industry, Mellinger says, is evolving toward that model, but he sees it as ‘at least one more step away.’
In looking at new outsourcing opportunities, Mellinger cites production support and the ongoing maintenance of systems. The Y2K work, he says, is yielding opportunities that will last beyond the solutions to those issues.
The Y2K has opened people’s eyes to what actually exists in their organizations, he says. CEOs, all of a sudden, are saying, ‘Why do we have 4,000 different systems running our company? Why do we have code that was written 30 years ago within a mission critical to our company, and what are we doing with 100 million lines of code?
That awareness, he says, is going to drive much more movement towards packages in the years after 2000. He also sees ‘magnitudinally large movement’ toward Internet-based technologies, an area where he says, We haven’t even touched the surface.
As companies move toward the Internet, says Mellinger, the skill sets don’t necessarily exist inside the company, so I think we will continue to see more† and more Internet-based outsourcing. Senior management is not happy that they have all these people dealing with old stuff, and I think they don’t want to build their future legacy. So outsourcing becomes a much better way for them to get the work done.