One of the facts of life in outsourcing is that risks are involved. “Therefore, you have to manage to those risks, and expectations should be set with those in mind,” says Dennis McGuire, president of Technology Partners International (TPI). Contract management, according to McGuire, is the key to successful outsourcing.
“What we have seen is that customers do not do a good job of managing the contract,” says McGuire. Better processes and tools to help the sourcing executive who manages outsourcing deals must be developed to enable those individuals to manage problems and better leverage their relationships. McGuire believes more consultants and suppliers will focus on this issue in 2000 as relationships and competitive strategies become more complex.
He explains some of the complexities and changes in outsourcing for 2000, which are based primarily on the Internet and the economy.
The Bottom Line
The most significant development in outsourcing for 2000 will be the impact of e-commerce, McGuire says. “In the e-business world, if you just play defense, you are going to lose. You have to play to win,” he states. Explaining the differences between the two broad categories of buyers, he says that big, established companies want to save money but must compete against start-up companies, whose issue is time to market and functionality.
Big companies need to get into e-commerce and e-business solutions but they lack enough financial resources to do it, McGuire says. Their current networks will not support e-commerce because most networks cannot handle imaging, video, and streaming. To get into e-commerce, most of those companies need to replace legacy systems with ERP systems. “That means they will need variable pricing,” he says. “so that when they use less of the legacy environment as they move work to e-commerce compatible systems, the prices would go down.” He believes that this will have the effect of causing more large companies to outsource than before and also more billion dollar deals than ever before.
Large, traditional companies also realize they need to make decisions faster in an Internet-speed world. McGuire believes that, as these companies move into e-commerce, they will look at their current accounting, customer support and similar types of functions and decide to outsource all non-core processes and focus on the new way of doing business.
The other category of outsourcing buyer is the start-up companies, whose existence is made possible because of the abundance of private equity money now available. “Because of their funding from venture capital companies,” he says, “start-ups need to grow a business really fast. They also need to be first to market.”
The venture capitalists will want start-ups to team with companies that have a highly reliable and scalable environment. “The only way to do that is to outsource it,” says McGuire. Additionally, it is becoming clear that many start-ups have new, good ideas; but they have no business background and experience in infrastructure or administration and will need to outsource all non-core services. “So there will be a tremendous amount of outsourcing there, and start-ups will be a huge growth area,” he says.
McGuire believes the time to market in e-commerce for the older, established companies will take approximately nine months. For the start-ups, it will take about three months, because they don’t have existing people or assets, and they are less focused on cost. “The start-up is going to have an incredible advantage over the established company, according to McGuire.
The Biggest Players
We will see four categories of players in 2000, McGuire says. “If you believe that our economy is going to be driven more and more by the Internet players, what that really says is that what is most important is networks.” He believes we will see more deals where the network is the first priority. “I think you will probably see new communications companies getting into this market,” says McGuire. “And if network is key–well you know IBM has sold its network and EDS doesn’t have a network. So you are going to see the MCIs and EDSs teaming. You’ll see IBM and AT&T pretty close. And we’ll see who CSC goes with.”
A second category involves start-ups. He explains that the biggest players in this area will hire the best people from current big suppliers, invest in new tools and practices, and then sell those services. “You will see this model over and over, where a start-up is able to get an unbelievable amount of money. They will cherry pick the best people, pay them half of what they were making but offer stock when the start-up goes public. Then they go to a company and say, ‘You have this function that is overhead. We are going to buy it from you. You will get reduced costs, some equity in our new company, your people will have jobs and be valuable resources.’ That story is going to sell,” says McGuire. “There is so much money around that everybody is looking for a half decent deal.”
The third category is the top-tier vendors who currently provide a full range of services. McGuire believes these companies will start to focus their expertise in specific areas to distinguish themselves.
A fourth category is web-hosting and ASPs, which will be very effective for start-ups. This category’s growth will be due, in part, to existing companies having difficulty in changing their culture to the Internet. More often than not, he says, it will be easier to do a spin off for the e-commerce, and they will hire ASPs for their e-business solutions.
Approaching the Best Solutions
TPI, a sourcing consultants firm, helps its clients achieve an independent, objective approach to success in outsourcing, leveraging its extensive experience and methodology. “The key this year,” says McGuire, “is going to be how to better manage deals, problems, and risks. At TPI we have decided that this is the number one issue facing outsourcing, so we have made it our new priority.” The company extended its tool kit of methodologies and best practices to the contract management phase. “We are in for some tremendous change over the next few years–maybe even frightening changes,” states McGuire. The issues will be how to effectively manage those changes.