Outsourcing, or engaging with third parties by clients, has been around for decades but the model has surged ahead, leapfrogging from its old-style operating model to a new style.
Traditionally, there have been two types of outsourcing.
- IT outsourcing, where service providers take responsibility for managing specific applications and IT infrastructure of clients; this helps institutions save money, introducing flexibility and achieving speed to service.
- BPO outsourcing, where service providers take responsibility for running back office operations with the objective of slashing costs and gaining operational efficiency. This typically covers finance, accounting, HR and similar processes.
Now, however, a new outsourcing trend is emerging, namely that of “Product Outsourcing.” This form of outsourcing is suited for financial institutions and sees them partnering with various third-party companies, like fintech for banks.
Software Product Outsourcing is where the third-party provider takes over the tasks of product development, operations, compliance and its related IT infrastructure and applications support. This represents a major shift, as traditionally such tasks have been managed in-house.
There is a paradigm shift as business are shifting their focus on customer experience by launching new products and alliances in the market. This requires the agility to develop new products and software.
Product outsourcing allows clients to focus on their business as third parties manage the development of products and regulatory and compliance affairs.
Organizations need to adjust their readiness to shift from traditional IT to Product Outsourcing. Is your organization ready to change outsourcing models and thus leverage Agile and DevOps development? This may require different contract structuring. The operating model itself may be different. There are also considerations around location of service, effectiveness, speed of delivery, and many more.
Shifting from traditional IT to Product Outsourcing is not as easy it may sound. Can agile based product development be provided from different locations? And do you have Agile framework contracts?
Software Product Outsourcing is not new. Many major technology companies (e.g., Microsoft, Google) have adopted the model. However, sourcing teams will need to change the way they structure sourcing deals as their business model undergoes fundamental shifts. What used to be a fixed scope-based outsourcing will need to turn into a model that accommodates frequent changes in requirements. The Product Outsourcing model should have the flexibility to adopt sprint-based work packages instead of long-term deals. Perhaps a topic for detailed discussion next time.
In my view, there is no doubt that software Product Development Outsourcing and the ability to manage it effectively will be an important lever for clients in the years to come.