Mr. Sridhar Ramanathan, Managing Partner of the Pacifica Group, gave an engaging presentation at the October 2004 meeting of the SVPMA on the Outsourcing Business. Although Mr. Ramanathan covered what to look for when outsourcing, his main focus was on the business model and opportunity to offer outsourcing as a capability. This piqued the interest of many in the audience who had never realized their companies were in the business of outsourcing.

Mr. Ramanathan has deep expertise in running an outsourcing business. Before founding the Pacifica Group Management Consultancy three years ago, Mr. Ramanathan spent 12 years helping Hewlett Packard become the #1 ERP outsourcer. He was responsible for worldwide marketing of HP's $1.1B IT Outsourcing business and held profit and loss responsibility for HP's electronic messaging outsourcing and e-services business units. He received his MBA from Wharton and is an adjunct professor of Marketing at Golden Gate University.

The Information Technology Services Marketing Association (ITSMA) defines outsourcing as "a contractual relationship between two or more parties for the ongoing management (and in many cases the improvement) of infrastructure or business processes." Improvement and time to market are the primary reason companies outsource. They want to gain access to expertise, so they can focus on their core competency. Other reasons are to share in the economies of scale of the vendor, move asset purchases off the balance sheet and into predictable expenses, and push change management responsibility to the vendor. Straight cost savings rarely motivate the decision to outsource.

There are different kinds of outsourcing:

• Application Outsourcing- ERP outsourcing (e.g. MySAP), which includes deployment, planning, upgrades
• Business Process Outsourcing - EDS' HR Services (payroll, benefits)
• Infrastructure Outsourcing - HP Desktop Management Services
• Application Service Providers - On demand applications (e.g. Salesforce.com)
• IT Utility Services - Critical Path's Managed Messaging
• Internet Service Providers - Data center, web hosting (e.g Savvis)

For a vendor creating an outsourced service offering, some of the benefits include a predictable and recurring revenue stream, with reduced overall selling costs due to two to 10 year contract terms. Once in an account, it is easier to continue to expand share of a customer's wallet. Further, switching costs are high, which creates a large barrier to entry.

The decision to become an outsourcer needs careful consideration. Most software companies emphasize volume. Outsourcing focuses on optimizing a small number of customer relationships. The company must shift from hunting to a farming mindset. Further, outsourcing is a different business model. Leading IT Outsourcers earn 40% gross margins, much lower than traditional software licensing margins. In addition, you need to be able to have operational efficiencies and scale, continually driving down costs while delivering flawlessly against your service level agreements. This requires maintaining metrics and gauges on the business to track performance and anticipate issues.

Risk management is a key element of the outsourcing relationship. Risk must be quantified and priced into the contract. If your customers require five 9's availability, you need fair compensation. This, along with other new processes, will require a different team that includes sales specialist, operations experts, and pricing analysts. Lastly, exiting a bad business can be very difficult.

• The product management implications are many:
• Software Outsourcing Business
• Product Definition Service Definition
• Development and Launch Process Change Management Process
• Team is PM, Marketing, Engineering and Support Team also includes HR, Legal, Finance, and a Pricing Analyst
• Customer Acquisition Customer Retention/Expansion
• Innovate Copy/leverage

The outsourcing business has many advantages over traditional product business models. Nevertheless, it also comes with risk. It requires a different skill and operational mindset. For the companies that can make the transition, outsourcing is an engine of long term growth and income.