The Timing of Outsourcing Decisions | Article

Outsourcing’s Life Cycle

Hand holding stop watchBest-selling author, Geoffrey A. Moore, writes about companies achieving a competitive advantage in a high-tech world. Laying out the concept of the technology product adoption life cycle in his books, “Crossing the Chasm” and “Inside the Tornado,” Moore explains how and why technology is adopted into any given market at various stages acceptable to that market, as well as the chain reaction of adoption into succeeding markets.

Outsourcing Center has examined when companies are most likely to take advantage of outsourcing. Our studies clearly indicate a strong correlation between the surety of technology with the motivation and timing for outsourcing.

Borrowing Moore’s technology life cycle framework and applying it to outsourcing decisions, I have developed a definitive model for a Product Adoption Outsourcing Life Cycle, as illustrated in the graph below. Each of the four stages in this model (Early Market, Tornado, Mainstream and Transition) is distinguished from the others by its unique response to outsourcing at that point in time. It’s clear that buyer behavior, motivation and decision-making processes differ in each stage; thus, the nature of outsourcing changes at each stage.

Outsourcing Life Cycle Chart

Buyers that come to understand the motivation behind outsourcing at each stage will know what qualities to seek in an outsourcer. It also behooves an outsourcer to understand this phenomenon and apply the outsourcer’s offerings and sales presentations to the types of buyer motivation occurring at each stage.

In this issue of Outsourcing Journal, we present several case studies that illustrate the motivations for outsourcing at each stage, as well as the benefits achieved by outsourcing. But first I want to explain the basic differentiators at each stage of the outsourcing life cycle.

Early Market Stage

At the early market stage, visionaries rule, and their innovations are born. Their work is secretive, and few other people know of the technology being developed. These pioneers sometimes bring in consultants and experts on a contracting basis to assist with development of various components. An example of what happens in the Early Market stage is the people who first exploited Internet technology as an avenue for selling products to consumers, forever changing the marketing tactics of brick-and-mortar businesses.

During the Early Market stage, no outsourcing takes place. This is because there is nothing to leverage — nothing has been built to provide economies of scale, and there is no established process.

Tornado Stage

At this stage, a particular technology has validated itself, and its market is growing exponentially as people try to catch up with the first movers. Many organizations are in a whirlwind rush to adopt the technology, and it’s not unusual for CEOs and CIOs to lose their jobs if they don’t implement the technology quickly. There is enormous, chaotic growth as everyone tries to implement the technology at the same time. During the Tornado stage, the cost of a new technology is not as important as rapid time to market. The current rush to adopt wireless technology is an example of Tornado outsourcing.

Historically, this was only a large revenue channel for integrators and the Big Five consulting firms, and outsourcing did not exist in the Tornado stage. But the Internet now drives the pace of change to days or months instead of years or decades, and this has caused outsourcing to be the primary strategy for the Tornado stage. It’s not unusual now to see six-month outsourcing agreements for Tornado-stage technology. Two characteristics describe the activity in the Tornado stage:

  1. an organization wants to adopt a new technology but doesn’t want to spend millions of dollars developing it in-house;
  2. the executives of the buyer organization are not yet convinced the new technology will succeed and are not sure how they want to use it internally.

The solution is to outsource, so the organization can determine which technology it wants to adopt, evaluate its performance in the outsourcer’s environment and decide whether or not to bring it in-house.

A current example of Tornado-stage technology is eProcurement. There’s a lot of buzz in every industry about the benefits of using this technology, but there’s an equal amount of buzz about failures and less-than-anticipated results. Wise leaders are ensuring their companies can evaluate the use and benefits of the technology -on a risk-free basis by outsourcing.

High-Quality Impermanence

During the Tornado stage, there is a high velocity of change because the technology is still being refined. Buyers outsource at this stage in order to eliminate investment in infrastructure for an evolving technology. They want the benefits of the latest advancements without the headaches of expensive and time-consuming changes. They don’t want to be left behind, but they need to mitigate risks in adopting the technology. Organizations can spend two years and an enormous amount of money and other resources on major projects, only to find the technology is already, or soon to be, outdated. By outsourcing, it’s not unusual to cut two years down to six months.

Imagine that you are experiencing physical symptoms of dizziness, numbness in your hands and arms, frequent interference of vision and occasional stumbling or staggering. Would these symptoms indicate separate maladies? Or would they, together, indicate that you have migraines–or, perhaps, vertigo, multiple sclerosis or even a brain tumor? To diagnose and cure yourself, you would need to keep up with all the new research, medications and surgical techniques. Or you could try some herbs and over-the-counter remedies. If this doesn’t sound too reliable, you’ll probably agree that the safest and fastest way to arrive at a diagnosis and cure is to go to a specialist. Doctors spend a great deal of money and many years learning the intricacies of the human body and its afflictions. They have invested in equipment and continue to keep up with new discoveries in medicine and research.

By encapsulating the complexities of new technologies inside an outsourcer, buyers reap the benefits of the latest advances while avoiding investment and headaches. Outsourcing is the ideal solution, for it gives the buyer a plug-and-play strategy to purchase high-quality services from an outsourcer with whom the relationship is not permanent. If the outsourcer does not keep pace with changes as the technology evolves, the buyer has a short-term contract with the option to ally with a different outsourcer. Through outsourcing, the buyer purchases services and results, not products.

Mainstream

This stage can last for decades, and this is where most outsourcing has occurred for the past 40 years. Here, most organizations that are going to adopt a particular technology have already done so. Unix and the IBM OS 390 are examples of technology that have reached Mainstream. In this stage, a technology no longer undergoes rapid changes. By this time, a technology has become so integral to an organization’s processes and strategy that a concern over whether the technology works has been replaced with a demand that the technology not fail.

This requirement for high availability results in higher operating costs, which drives the buyer to seek a high-quality, low-cost permanent solution. This motivation for outsourcing applies, regardless of whether the buyer is going to outsource the maintenance and support of an existing internal technology or acquire the technology through the outsourcer. At this stage, buyers seek an outsourcer that can leverage its economies of scale in order to reduce costs for the buyer.

Striking examples of the motivations for outsourcing and the benefits that were achieved by outsourcing Mainstream technologies and processes exist in the initiatives undertaken by the University of Pennsylvania Health System (UPHS). (Click here to request the UPHS case)

Transition

At this stage, the buyer organization has incorporated several types of technology into its business processes. Along with newer systems are older “layers” of technologies whose use is still prevalent because it is too costly to remove these layers. But new applications for the older technologies have ceased.

Sedimentary Nature of Technology

In the Transition stage, the buyer’s goal is to become more flexible. It seeks to find ways to withdraw its capital and management from older technologies so that it can focus on more important Early Market and Tornado technologies. The personnel who are operating transition-stage technologies would be more valuable to the buyer organization if retrained and transitioned to positions where they can focus on core competencies, helping the company to meet its business objectives. Buyers that continue to maintain and support their older technologies hinder their ability to be nimble in making quick, crucial decisions on competitive strategies in their marketplaces.

Lessons from the Outsourcing Primer:

Tornado
High-Quality Impermanent Solution
Mainstream
High-Quality Permanent Solution
Transition
High-Quality Permanent Solution
Activity Rush to adopt the new technology. Chaotic growth in market as everyone tries to implement the technology at the same time. Most who are going to adopt the technology have done so. Underlying technology is stabilized and is not changing rapidly. Moving away from the technology but many still have the old technology. Some are starting to adopt a new technology.
Drivers for Outsourcing Time to market.Safe way to evaluate whether to adopt the technology and how best to use it. Quality and operational efficiency.Reduced operating costs. Flexibility. Shift capital to Early Market efforts and Tornado investments.Shift employees to more important core processes.
Outsourcing Contract 6 months to one year. 3-5 years (and up to 10). 5-10 years.


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