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Too many cooks DO NOT always spoil the broth

April 27, 2009

….provided the head cook is good at managing his chefs.

First the good news. A U.K-headquartered business advisory firm, EquaTerra’s study of 400 outsourcing contracts reveals that last year, despite the global slowdown, there has been 9% increase in outsourcing deals, 89 per cent of which have gone to Indian service providers.

Now the spot of bad news. A report by ET Intelligence Group suggests that the top four Indian IT companies – TCS, Infosys, Wipro and HCL – are set to experience the worst-ever growth rates in revenue and profit in the quarter ending March 2009. In fact, it is likely to decrease by 0.5% during this three-month period, due to renegotiation of their service level contracts (SLCs). There is no doubt that the actual ticket size of an average outsourced deals has reduced, even if in volume there number may have increased. The clients are now making it harder for vendors to provide the same, if not more value at less price, so realization per deal has fallen for the vendors.

Another noticeable, although less reported trend is the number of fights and disagreements that are on a rise. There is less tolerance for mistakes these days and tempers run on a short fuse, leading to a quick snap of ties, when things threaten to go out of control.

multiSourcing Too many cooks DO NOT always spoil the broth

In any case, different outsourcing models have different shelf life and success rate, according to a recent study by CIO magazine and MIT’s Center for Information Systems Research. The study indicates that the easiest to execute and the most profitable model are Transactional deals, in which a client outsources just a few, well-defined, discrete processes to the offshore vendor. The success of such ventures is often as high as 90%.

A little less profitable are co-sourcing alliances in which ownership of a project is equally divided between the client and the vendor. The CIO study predicts only 63% success rate for such ventures. Surprisingly, the least bit attractive are the so-called “strategic partnerships” in which a single outsourcer takes responsibility for a big bundle of IT services. In such deals, actual work happens only half the time, warn the study authors. In other words, risks increase as the number of people accountable for a single job decrease. Spreading the risks between various stakeholders, actually improves the profitability of a venture. Collaboration increases chances of success, provided, there is a system of checks and balances in place. Too many cooks DO NOT spoil the broth, provided the head cook is good at managing his team of chefs.

For more tips on how to draw the maximum out of your outsourced deal, check this economic downturn guide.
Best of luck!


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One Response to “Too many cooks DO NOT always spoil the broth”

  1. Philippines Outsourcing on April 28th, 2009 4:27 am

    In the last couple of days, a few disparate news pieces attracted my interest. First, as I mentioned in my last post on industrial policy, an accelerating, worldwide decrease in consumer disposable incomes is beginning to percolate through the manufacturing sector. As a result, Caterpillar, DuPont, and United Technologies posted double-digit declines in sales. Second, reports surfaced that Fiat, Obama’s designated buyer for Chrysler LLC, was looking instead to purchase GM’s Opel division. Third, Sen. Diane Feinstein (D-CA) introduced a “cash-for-clunkers” bill that would provide a credit of up to $4500 toward the price of a fuel-efficient car for individuals or government-owned fleet operators who turn in a low-mpg “clunker.”

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