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The Evolution of Outsourcing

By |2019-04-08T17:33:51+00:00April 8th, 2019|

Business have always strived to maintain competitive edge, ultimately to increase profits. Since the Industrial Revolution, businesses have applied different philosophies to achieve this outcome, from the direct ownership practice of the 20th century to an emphasis on core competencies in the 1990s. To free focus on their core offering, businesses turned to outsourced, or contracted, work for tertiary focuses, and outsourcing was born. Outsourcing is the use of a third party to perform work that was previously managed in-house. The model can reduce operating costs, streamline organizational focus, compensate for thin internal resources, and share risks between multiple businesses.

The Evolution of Outsourcing

The Evolution of Outsourcing

Today, outsourcing has undergone numerous transformations, evolving from a rigid, transactional engagement to strategic, longer-term partnerships. Over the past three decades, the model has evolved in response to heightened demand for technical expertise in particular, including: software development outsourcing, QA outsourcing, mobile app development, web development, remote programming, and other technological expertise.

Outsourcing for Fixed, Specific Projects: 1990-2000

With the Internet boom in the 1990s, businesses gained access to professionals across the globe. At the same time, the technology economy was expanding and IT departments faced pressure to maximize resources. US-based resources were in short supply, and by the end of the decade, the cap on H-1B Visas, a temporary visa enabling employers to petition for highly specialized foreign professionals, was temporarily increased to 195,000 to combat the shortage. (Today, and prior to that boom, the cap sits at 65,000 plus 20,000 for US university grade degree holders).

The practice of managing increasingly complex technology and adopting dynamic new advancements made it difficult to find skilled IT workers, David Parker, then-vice president of IBM Global Technology Services’ Strategic Outsourcing operations said when Levitt Communications reported on the trend in 2007.

In its original inception, outsourcing was a very specific, pre-determined engagement leveraged primarily in SOW or project work. The key selling point for most businesses was lower resource costs, typically calculated at a cost-per-hour rate and charged to the client. Providers retained their talent on a bench, providing them to clients for limited, specific engagements without any option to extend contracts beyond the project. No relationships were developed between the technical professionals and the clients, as providers handled all client communication. With this model, work per hire was often poorly defined, often translating to partially secure IP protection at best.

Adapting with Augmentation in Outsourcing: 2000-2010

Around 2000, vendors began to adapt to rampant technology expansion with alternatives or additions to the traditional outsourcing model, such as IT staff augmentation. Using this outsourcing strategy, organizations assess the staff they have available, and then fill in talent and knowledge gaps with outsourced employees. During this time, augmented staff were still employed by the provider, with venders setting pricing at a per-employee rate. To provider greater provider protection, non-solicitation clauses were increasingly included, with high-value penalties attached.

Among key market accelerators driving the staff augmentation market was the economic downturn in North America, which pushed businesses to upgrade existing investments to demonstrate return on investment (ROI) and answer the burgeoning e-commerce disruptors coming on the scene, according to a 2002 Gartner report. Smaller overall project sizes and a growing interest in enterprise resource planning (ERP) and CRM application suites also bolstered interested in this model, as leading business enterprises at the time had demonstrated success by using these solutions, according to the Gartner report.

Embracing Client Involvement in Outsourcing: 2010+

About a decade after providers began offering team augmentation, outsourcing options evolved again. Still rebounding from the 2008 economic recession, businesses were often focused less on transforming entire operations and more on optimizing existing ones, according to a report by CIO. One key function in a more conservative environment is better control. Clients could still choose between the original project-based solution or staff augmentation with the vendor-employed model. However, unlike earlier models of staff augmentation, providers began including clients in the hiring process, allowing them to participate and select new team members who would augment their existing staff. Although the client began to play a larger role, HR services related to hiring and employment were provided by the vendor. At the time, this was really the best of both worlds.

Increased Transparency and Client Ownership: 2016+

Technology continued to transform businesses at unprecedented rates, with organizations scrambling to capitalize on innovative technology solutions to maintain – or gain – competitive advantages. Across sectors, technology allowed businesses to have greater control, faster insight, and more transparency. And businesses expected the same from their outsourcing vendors. To bolster client confidence that their costs were fair, and not needlessly inflated, vendors evolved pricing models for more transparency, based on the actual cost of the resources plus a fixed allowance, or percentage, for the vendor’s overhead costs.

Price remains a central point for the outsourcing model: 59% of participants in a 2016 Deloitte survey said cost cutting is the primary driver to outsourcing, followed by its ability to enable a core business focus (57%) and to solve capacity issues (47%).

For the first time, outsourcing enabled more flexible, less defined models, able to adapt to specific business needs. Employee ownership transitioned from the provider to the client, with vendors relinquishing their rights to employees until the client elects to release them. Generally, once an agreement comes to an end, the client determines if they want to retain the employees, relocate them, or move them to direct hires. Therefore, the vendor only resumes control of the employees if the client decides to release them. With the TechGenies model, clients are also protected from attrition or poor performance by a one-year replacement guarantee (at no cost) included in the warranty for employees who leave or are let go.

This more agile practice has enabled greater relationship between client, technical professionals, and vendors. The overwhelming majority (89%) of participants in the Deloitte survey said they turned to their existing provider always or sometimes for additional work beyond the first engagement.

Outsourcing Evolves into Strategic Partnership

While staff augmentation has certainly evolved outsourcing into a much more flexible solution businesses are able to adopt, the amount of technical resources required can be cost prohibitive, unless the vendor can offer better long-term partnership that can offset costs. Even IT services for startups may require IT project management, programming, software development, mobile app development, web development, and of course, quality assurance (QA). TechGenies partners with the client by investing a portion of the resource cost, become a shareholder in the client and established a strong, long-term relationship.

For startups, this kind financial and resource partnership and investment provides a tangible means to scale IT resources that often isn’t possible otherwise. Even in the early stages of a start-up business, TechGenies’ “virtual CTO” and remote offices enable IT teams to build dynamic platforms aimed precisely at the business need – without a start up having to shoulder the burden of location and costly expertise.

Without continued partnership between the vendor and their clients, many organizations will struggle to stay on top of dynamic, transformative technology, falling behind on technological advancement and losing competitive edge. But when vendors and their clients can establish strategic partnerships, both organizations are more vested in – and more likely to ensure – successful outcomes.

To learn more about how to partner with TechGenies, visit https://www.techgenies.com/services/.