01.27.07

Managed Services and Outsourcing are a big topic in B2B these days, but people interpret these phrases in different ways, particularly “outsourcing”.  Outsourcing’s traditional meaning — paying someone else to do something for you (like ADP in payroll) — has morphed to include other meanings, including:

• Paying someone else to “employ” your staff
• Paying someone else in another country to “employ” their staff as your staff

That’s too bad, because these are not the same things at all…

Real “outsourcing” is about taking advantage of another organizations skills, scale and technology to more efficiently accomplish some task — freeing capital up for some other use, NOT finding a way to do it yourself for less money.  Many technology outsourcing firms are actually outsourcing HR, not technology.  This has gotten so confusing I tend to call our B2B outsourcing business “managed services” so that people do not think we are selling bodies.

A few months ago, I was at a very large manufacturer who is struggling to adapt to the very significant changes in the North American auto market.  Amazingly, this company had trouble getting B2B programs in place with “transplants” (foreign car manufacturers that have build factories in North America) because of resource constraints — even though their IT functions are “outsourced” to a major services provider.  To get more “capacity”, they have to contract for more people….sounds kind of like, hiring….   Just because the logo on the badge is different doesn’t mean the model has changed.

We are all so used to the world of professional services and contractors that this seems sensible, so let me reframe it and see if it still works for you.  You run the leading Web 2.0 community site for selling used Beta videocassettes — and with a recent viral marketing campaign, business is booming!  With triple the usual orders in hand, you call your favorite delivery service (DHL, FedEx, etc) and are informed that unless you are willing to pay the complete salary of a driver, six sorting operators and an airplane pilot, you can only ship the same volumes as you did last week….

Would this happen?  Of course not, these businesses exist to leverage their scale, operational excellence and technology to provide logistics services on a per unit basis.  It is exactly their ability to do this that makes all those Ebay shipments affordable (well, except maybe the boats and cars).

It is the same thing when outsourcing IT services.  If you see that you are being billed on a per-person basis, or for individual software licenses, or are directly funding equipment — you are not outsourced, you are buying professional services…  There is nothing wrong with this, professional services is a terrific business model, but it is not the same as outsourcing the responsibility for managing the operation.  Outsourcing is sold in “partners ramped”, “transactions processed”, “CRM seats”, “monthly server capacity”, etc.

At a recent sales event I learned a company is selling “onsite managed services” to potential customers, which is a kind of “hybrid” of traditional software sell and “outsourcing”.  This is crazy!  It combines the disadvantages to two otherwise balanced business models (in-house and outsourcing).  The company sells you the software (so you have a license fee), which is run on your hardware (so you get to buy gear, which they may or may not be familiar with…goodbye economies of skill and scale) and as load increases you get to buy more of all of it, while paying monthly fees.

I think organizations go for this for “risk management”, thinking that if they want to “go in-house” they will be ready — but this is kind of misleading….they already are in-house.  And if they decide to change, they are stuck with the software licenses, even if the software’s capability is what made them decide to change.

Don’t get me wrong, any outsourcing deal must anticipate the need to either “in-source” or transition to another vendor, but the solution is not to incur all those costs immediately.  Managed services contracts should address the process for changing the model, and especially the professional services required to do the project.  Although uncommon, we have had customers move from outsourcing to inhouse, and the obstacle was never installing the software in their data center. 

My real problem with this “marketing strategy” is that it misses the real advantages.  We are not dramatically smarter at running software than the companies who outsource B2B to us, but we operate a large platform that provides economies of scale.  Because we have a standard hardware platform (blade servers), and a common storage infrastructure (SAN), and a suite of services designed expressly to do B2B on that platform and infrastructure — we can be more efficient.  If we tried to manage 18 different pieces of software on 27 different server models with an array (pun intended) of different storage — well, we’d probably think about outsourcing that…