Knowledge Management

Once the contract is negotiated and the SLA’s are agreed to, one of the most confounding problems in the management of IT outsourcing is preventing the loss of knowledge from an organization when services are performed by a vendor whose interest is ultimately in delivering on a contract. The service delivery vendor must assimilate enough of the business processes of the contracting company to successfully perform the agreed-to services. However, the vendor frequently can and does acquire information in the course of delivering services that is valuable to the organization in the long term. This requires managers who engage in an outsource arrangement to develop systems or processes for knowledge management.

Knowledge management involves the development of corporate controls and governance standards that form and guide companies through many business relationships and establish a means for protecting the intangible assets that companies generate. This usually takes the form of call center scripts, ticketing systems, and knowledge-base repositories. Some standards are stipulated through legal channels to protect intellectual properties or patents companies hold. Other forms of controls address maintenance of processes that generate and warehouse ideas and establish a basis for consistency among the forms of controls. 

When outsourcing one also has to be concerned about service quality control and process monitoring. In order to guarantee that service quality is consistent from one customer to the next a form of knowledge management is critical. Take a call center for example. When a customer dials the number for technical support management wants that customer to receive a consistent level of service. That service begins with a pre-determined set of questions structured to ensure that all bases are covered. Additionally, management wants all employees at the call center to have the same basic set of “tools” or knowledge of the product, current issues, and methods of resolving customer complaints. How companies equip their employees with the necessary skills and training is directly related to their value of knowledge management. 

Protection of intellectual property is a critical piece of knowledge management. If companies do not structure their employee expectations or business models to prevent their employees from leaving with all of their assets (knowledge) then they are setting themselves up for failure. How companies ensure dissemination of information through redundancy or storage of ideas and progress is critical to long term success.

Knowledge management also enables decision support systems. For example, companies that perform data mining or analysis provide information to the end user in order to make better informed decisions. 

Key Trends

As IT outsourcing continues to gain momentum the manner in which outsourcing is structured and the rate at which it happens will shape the landscape of the business environment for years to come. As we face the reality that outsourcing and off-shoring of IT responsibilities will continue to happen, companies will examine their core competencies and determine that somebody else can perform those functions cheaper and better. Outsourcing service providers will need to find new ways to differentiate their products as outsourcing continues to become a commodity.

One advantage to outsourcing is the ability for management to change the cost structure. By moving responsibility of IT services to a third party the cost shifts from being a fixed cost to variable cost. Having a pay-as-you-go structure or a more generic variable cost structure is appealing when managers are considering new projects that might require large investments in capital for IT support. As hardware performance increases and costs drop companies find themselves constantly replacing the old generation of technology just to keep up. By having another company house the information the need for constant hardware upgrade can be mitigated. The overhead of personnel support for the IT service also provides incentive for reducing the fixed cost associated with compensation for employees that aren’t always productive. In the future companies are expected to continue to move in the direction of a variable cost structure for IT services.

As outsourcing continues to increase more companies will enter the market seeking a moment in the sun. With so many competitors already in the market outsourcing of IT functions has become a commodity. The question is whether a leader will emerge that will be able to sufficiently distinguish itself from its competitors. And if so, how long will they be able to maintain their edge before others copy their format and the new form of service is commoditized? In the end, the competition will be good for industry as better services are offered for less.

At the present time the industry is still fairly fragmented. While some large firms exist, there are many smaller firms that are working vigorously to innovate in order to compete. As the efficient firms succeed and grow the industry will become more homogeneous as fragmentation disappears and commoditization takes over. The increase in communication and processing capabilities will bridge gaps that exist which provide insulation to some of the fragments of the outsourcing community.

As the barriers come down a new form of outsourcing is expected to emerge. Through improvements in networking technology and the internet better, faster communication will allow new innovative methods for structuring business relationships. One new form will be “originator-syndicate-distributor”. As a result the company holding the contract for the outsourcing functions may in fact outsource all of the work further to more specialized firms. Eventually this trend could lead to the creating a Li & Fung of the outsourcing world.

Finally, as outsourcing continues, and the technology becomes more commoditized companies that rely on information will eventually lose their edge. Take for example the acquisition and processing of market trend data for a marketing department. If competing companies have access to the same set of information and have outsourced all of their IT functions then the only difference they have is in their abilities to interpret the data. As a result they both lose a potential edge. 

Conclusion

Information Technology outsourcing has decades of history, most of which has been relatively ignored by most of the world outside of interested businesses. Today’s marketplace is one in which the practical value of outsourcing has to be considered in light of a harsh political spotlight. Nevertheless, the trend to outsource non-value-add functions will continue into the foreseeable future. Proper execution and management of these initiatives requires a rigorous process for selecting and contracting with external vendors, along with strong service level agreements and knowledge management. These practices will strengthen a manager’s hand when dealing with a marketplace in which more and more vendors offer commoditized skills to a very global customer base.