Outsourcing Productivity: Are you getting your share?

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There have been numerous articles written over the past couple of years linking productivity gains with the anemic jobs recovery. This spring USA Today ran a story that focused on the US being out of step with the rest of the industrialized nations by having a faster growing economy, but creating fewer jobs. A Forbes article similarly asks: “Are Technology and Productivity Gains Squashing the Jobs Recovery?” There is little argument that workers, in all corners of industry, are getting better. Always have, always will. There has been a particular bump in productivity since the recession late in the decade because businesses were forced to get by with less. Now that the economy has started to recover, many businesses have found this “leaner” way of doing things can be sustainable and leads to improved profits.

Focusing on the technology sector, and outsourcing specifically, these productivity gains can be magnified. In the sector defined by automation, advances in higher degrees of automation should come as no surprise. Last summer HP announced they would reduce their work force by 9,000 over the next three years, “due to productivity gains and automation.” And, this is after they wrung out the efficiencies realized from their merger with EDS.

When you couple automation advances with Moore’s law in the hardware arena, outsourcing suppliers have the opportunity to bring significant productivity gains to their operations, and ultimately their bottom line. And, well they should. If your supplier partner is not doing everything they can to improve their operations and service offerings, they will probably not be the supplier to support your organization in the future. So, you want your supplier to realize these improvements in capability and profitability, but you should also be sharing in those gains. Not just as the recipient of the new or better service next year or the year after, but you should also share in the monetary benefits of these productivity improvements.

The easiest and most objective way for you to determine that you are getting productivity improvements from your ITO supplier is to see year-on-year price improvement at the unit rate level. That Wintel server that costs $275 per month at the outset of your agreement should be around $260 in the second year, $245 in the third year and so on. Of course, inflation (to the extent there is any) will erode some of these gains. You might get a raw 6% productivity gain (unit rate decrease) and incur a 2% inflation increase, but you would still realize a net 4% decrease in your price. That is measurable productivity improvement that you should know you’re going to get (via committed future unit rates) before you sign up with your supplier.

The example above contemplates a services only billing arrangement. If what you’ve outsourced includes some combination of hardware and services in the unit rate, the improvements should be even greater. Given the continued decline in hardware prices and/or exponential increases in capabilities (e.g., storage densities), these monetary improvements hold even greater potential.

Additionally, these examples assume the traditional service model that is labor centric and achieves productivity gains through the application of selective tool and automation applications to make the worker’s labor more productive. There are more exponential gains being realized by some through the implementation of “lights out” data centers and other more substantial shifts to full automation. These kind of moves have the potential to turn the $275 Wintel server referenced above into a $100 per month proposition sooner than you may think.

In summary, productivity improvements are happening in all facets of industry and are especially significant in the world of technology. Your ITO supplier will be realizing these productivity gains (and has been for quite some time). You should ensure that you get your share of these gains by negotiating year-on-year declining prices in your next ITO contract or renewal.