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Should Consulting be Outsourced?

Disclaimer: this IS for a school project. This topic is indirectly related to the project, and I'm writing this to get some perspective that I can't seem to find otherwise. This question is NOT what the project is about, but it is a question that the group I'm working in couldn't find a good answer to.

The task we've been assigned is to analyze a tech company from a business standpoint. The company we're about to analyze gets 50% of their profits from consulting (installation, training, maintenance and things like that), but their competitors that manufacture similar systems seem to have outsourced consulting to other companies.

We couldn't think of any advantages of oursourcing the consulting business. Having consultants in the same company that produces a solution must be a advantage. The consultants will get better information about the system and the company will receive feedback from the customers directly from the consultants.

What are the advantages of outsourcing consulting for big systems that require a lot of support for the customers?

Karl
Sunday, September 15, 2002

Well Karl, I think I tend to agree with you. 

Are you sure that the consulting is "outsourced"... meaning that the company that performs the consulting is not actually "related" to the development company? 

Some companies have their consulting or contracting work done by one of their subsidiary companies.  This would be more of a business organization scheme rather than what I would consider to be outsourcing.  I'm assuming that there may be tax or accounting reasons for this.

Joe AA
Sunday, September 15, 2002

The main reason Consulting is outsourced is that the company does not have the expertise in house.

If mean, if you need to setup a web server, or a Oracle database, and you don't have those skills. You going wait 1 year while one on staff gets that skill? The competition will cream you. You need those skills right now, like yesterday man.

The other real point here is are you talking about a company that already has the skills? If you already have the skills..are you talking about dumping them? Hence, we have to be clear on what you mean by outsourcing. If you don’t have the talent right now..then Outsourcing makes sense.

In fact, the very use of the word outsourcing does imply that you were doing it in-house before. If technology changed, and you don’t keep up, then you have to outsource. Of course, this is moot point, since well run companies will not let this happen!

If you don’t need the skills full time, then of course outsourcing makes sense. At the end of the day, it all comes down to the quality of the people. If your company hires super-stars, then you would be crazy to outsource. If the company is full of dead beats, then you will never attract and keep those great people. Hence, the only way get something done of a *EXCELLENT* nature in those crappy companies is to outsource..

In general, , in house makes sense. In house people can absorb the company culture, missions statements,  and In fact will care much more about the company then some outside person. You can also direct the skills, and requirements of these people that will suit the goals of the company much better.

The real key here is quality of people. If you are a manager, and realize that hiring practices are crappy, and you have crappy people, and your company will never hire (or keep) really good people, then you have to outsource. If you don’t outsource in a crappy company, then you will never get that first rate talent that your competition has.

Hence, the key here is not is outsourcing better, but what kind of people the company has, and do they have commitment to those people?

In addition, it really depends on how critical of what it is we are about to outsource. In other words, if you folks need pizza on every Thursday for lunch, it probably makes sense to outsource this, and pick out the phone to get pizza delivered.

On the other hand, if you are a well run food service company, then I would strongly suggest that you make the pizza in house. In fact, the staff would probably be insulted that some fly by night pizza place was called in. What the heck is going on here they would say...we can make this stuff *way* a better. Also, the pizza “Thursday” could be used for staff members to try out different designs. Even the real stinker pizza’s would be laughed about for months to come (again, this assumes that you have a company culture  that encourages mistakes to innovate!). People are generally insulted when their skill and talents are ignored, or not used.

If the pizza is to give the staff a break, then perhaps it would be un-fair to have in-house staff make the pizza (you will have to be at the company to judge the appropriateness of this. Thus, your management experience will determine how appropriate it is to out source. Hence, it will depend on *EACH* situation). Hence, we MUST decide how critical of business part we are about to outsource. If you design complex cpu chips, then you can outsource the need for pizza on Thursdays. However, if you outsource your chip design department, the very thing that gives you an advantages is being thrown out.

Hence, again, it depends on what you want out source.

It turns out that for outsourcing good GUI design, the owner of this side is able to make both bread dough, and good GUI designs. Hence, you could in fact Hire Joel to help your company make pizza dough since he did run dough machines at one time....-;) (this is true!!). You can read about Joel, and dough machines at the following link:

http://www.joelonsoftware.com/uibook/chapters/fog0000000057.html

And just in case you don’t read all the threads here, there is one on this issue of outsourcing going on right now:

http://discuss.fogcreek.com/joelonsoftware/default.asp?cmd=show&ixPost=15101

Albert D. Kallal
Edmonton, Alberta Canada
Kallal@msn.com

Albert D. Kallal
Sunday, September 15, 2002

I wouldn't call it outsourcing unless it was replacing an existing service that was already in an organisation.

And on the whole if it already existed I think it (in general terms) would be a false economy to hive it off and outsource it thereafter.  External consultants are always more expensive if nothing else.

Those large corporations that did this in the 80's and 90's tended to find that they were using the same people at a higher cost, the putative savings of 'they aren't on the payroll and we need only pay them when we need them'  turned into; 'we need to provide on site resources for them and there's always something they can do and we've paid already so lets keep going otherwise I'm going to lose my budget next year...'

Simon Lucy
Sunday, September 15, 2002

You share a piece of your small pie with the ISV's to get a piece of a much larger pie.

Just me (Sir to you)
Monday, September 16, 2002

> What are the advantages of outsourcing consulting for big systems that require a lot of support for the customers?

Big systems that require a lot of support for the customers could be not your core competence, or less profitable than your favourite market. By outsourcing you avoid owning the expense and structure associated with big systems. You might prefer to charge $500 for 5 hours than $2500 for 50 hours.

The consultants benefit too, being now able to recommend from any of a variety of competing products according to the specific customer.

Christopher Wells
Monday, September 16, 2002

First I'd like to apologize for not responding sooner, but I've been away from the computer for a couple of days. Thanks for the help guys!

Joe AA: The way I understood it, yes, the competitors actually outsourced the consulting. In other words, they started off with consulting in-house and then moved away from that to employ external consulting firms. But I need to check this out in order to be 100% sure that those firms aren't subsidiaries.

It seems strange to do this, because obviously the consulting is profitable and also necessary for the customers.

Albert: Godd points. Yes, I assume that the expertise actually existed in the companies before outsourcing, but I don't really know why they began outsourcing the consulting. They might have lost the expertise or maybe their consulting actually lost money in which case they must have been doing something terribly wrong compared to "our" company. The company we're going to investigate produces complex business solutions that may require customization to work for the customer (I don't know this for a fact but I'm guessing). For the customers, consulting isn't really an option but a requirement, since the software is so complex and require so much configuration. If the company lacks the knowledge to provide this consulting, yes, it makes sense to outsource. But then they're obviously doing something very wrong (as you say).

However, the companies that outsource are also doing very well as far as I know. I just can't figure out why in the world they started outsourcing their consulting.

Thanks for the links, I've totally missed the one about outsourcing!

Simon: So what you're saying is that it's generally a bad business decision?

Sir: I'm not sure what you mean. How does the pie become larger because consulting is outsourced?

Christopher: The production of the systems is the core product of the company we're investigating and, as far as I know, their competitors as well. But you're saying that those companies want to focus on the actual development of the system rather than become distracted with other activies? But if those activies are very profitable and can also help you develop your product by providing you with more direct feedback, wouldn't that be a good thing?

Karl
Wednesday, September 18, 2002

Karl,

the outside consultants now might consider your solution platform each time they are "in" with a customer. So the pie (potential customer base to which you have access) is larger.
Say you are providing a core business support platform for Fortune 1000 companies. If you are JrSoft, a 10 guys and a girl outfit from Silicon Whatever, your not on the radar. If you can get your product in with the big tech. consultancies, you're in with a chance.

Just me (Sir to you)
Wednesday, September 18, 2002

>What are the advantages of outsourcing
>consulting for big systems that require a
>lot of support for the customers?


I wouldn't think of it as outsourcing, I'd think of it as branding.

Let's say you develop "mattPache", a super-popular web server.  It's so popular, you can't scale up to support it.  What's more, you're not sure you want to be in the business.

1) Develop a book and written test about mattPache
2) Charge $$ to people to take the test and become "MattSoft Certified Professionals."

That's a pretty simple way to make money.

However, some companies are going to want support contracts for mattPache, and aren't going to want to just hire MCPs.

Your solution would be to then create a new program where "partner" companies pay you upfront $$, then you come visit them and put them through an interview and test.  If they pass, they pay you more $$ and give you a tithe on every piece of work - in turn, you refer to them as "MattSoft Certificed Solution Providers" and send customers to them.

It's an everybody wins kind of deal - they get a pretty much guarenteed revenue stream and a reputable partner ("Nobody every got fired for buying MattSoft ..."), you get cash in your pocket with no risk.  If you hired a staff to manage this, and demand went down, you'd have to face layoffs.

That's the kind of outsourcing I'm talking about  - you don't pay folks to do service work ... they pay you!!


I think that's a more sane business model,

Matt H.
Wednesday, September 18, 2002

> That's the kind of outsourcing I'm talking about - you don't pay folks to do service work ... they pay you!!

That's why owners want to assert their 'intellectual property' rights.

Christopher Wells
Wednesday, September 18, 2002

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