Does Virtual Outsourcing Mean the End of ‘Labor Lift and Shift’?

Once upon a time, an IT service provider could feel confident marketing itself based on two strengths—process expertise and scale. But in an age of cloud computing, virtualization and automation, staff size may no longer matter.

Even asHP’s fate once it sheds 27,000 employees is still up in the air, the headcount required to staff a successful outsourcing engagement is most certainly decreasing. And the days of outsourcing-related layoffs and the “lift and shift” of the remaining labor force to a third-party provider aren’t likely to return.

“The number of resources that a provider has on staff used to mean a lot more than it does today,” says Brian Robinson, research director for business and IT services strategies at outsourcing analyst firm HfS Research. “The average outsourcing deal size is decreasing, while the number of deals continues to increase. The market is starting to realize that it is about engaging the provider with the best overall value proposition, as opposed to the biggest—or cheapest—provider.”

In today’s buyers outsourcing market, it’s outsourcing customers that may be driving this change. “Buyers are two steps beyond reducing headcount,” says Todd Hintze, partner with outsourcing consultancy Everest Group. “While interested in a more efficient and effective service delivery, [they] are now seeking transformation.”

Someday “your mess for less” may be supplanted by “our processes, your people,” as customers seek out providers who can transfer their expertise and methodologies to the client’s existing IT staff. Where outsourcing providers used to say, “tell me what you do and I’ll do it (for you), or, better yet, give me your people so we can limit operational risk,” says Marc Tanowitz, principal at outsourcing consultancy Pace Harmon. “The new approach is, ‘I’ll tell you what is best and you tell me [whether or not it will] work.’ This new dynamic brings outsourcing relationships to a more advanced state.”

“The most mature providers are already pushing the ‘virtual outsourcing’ value proposition to their clients,” Robinson says. “Staff transfer is not a differentiating capability for the IT majors.'”

Indeed, most providers will resist taking on client staff today. “Providers now have plenty of people and equipment so they are usually not interested in a transfer,” says Jason D. Krieser, partner in the outsourcing and commercial transactions practice of law firm K&L Gates. “When we see that these days (particularly in it deals), it is more of an accommodation than something that the provider needs in order to perform.” And it’s one that comes at a premium.

Buyers, meanwhile, want to immediately take advantage of providers’ investments in scale, advance technologies and highly leveraged offshored resources, says Hintze of the Everest Group.

The real question is whether outsourcing clients are mature enough to embrace this model. It’s most conceivable in the infrastructure space, where experienced customers are tapping into service provider expertise only.

“Today, buyers are certainly leveraging a broad range of provider’s to stand up private clouds,” says Robinson. “They own the assets and are leveraging provider’s knowledge and capabilities to stand up, manage, and train their own staff on how to best operate the environment.” In the area of IT help desks, automation could overtake labor arbitrage as the main driver of outsourcing-related efficiency and savings, but many providers still keep boots on the ground (whether rebadged or internal).

In the application development and maintenance space-where labor arbitrage had been the big driver behind outsourcing-price is becoming less of a differentiating factor. And “with the advent of platform-as-a-service (offerings), buyers can now manage their own code-and staff-to build customer solutions,” says Robinson of HfS Research. “Providers are simply passing on the capability.”

In the end, Robinson says, “the extent to which a provider offers or simply transfers knowledge, service, and value to a client is highly dependent on the buyer’s IT and IT services maturity.”

“Provider’s are pushing [virtual outsourcing] as one possible strategy, but we don’t see [many] customers ready to move forward with it,” says Krieser of K&L Gates. That could change in the future, but widespread acceptance of that model would take several years, he says. “These things aren’t yet happening in practice even if this is where we want to go.”

Stephanie Overby is regular contributor to CIO.com’s IT Outsourcing section.

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