Outsourcing: Alexei Miller, Executive Vice President Of DataArt (Part 8)

Sramana Mitra: There is another trend I’m tracking that I would like your comments on. There is this notion of multiple supply chains developing in the software outsourcing world among large enterprises, large banks in your case, or large medical insurance companies, and so on. Clients are working with their primary outsourcing partners, wherever they are, like the tier 1 suppliers. Then for specialized expertise these tier 1 suppliers are bringing in the tier 2, tier 3, more mid-market outsourcing vendors for specialized expertise. Is that something that you have seen, or have you been brought into clients by other tier 1 outsourcing vendors?

Alexei Miller: Yes, both. I think this trend is temporary and unfortunate, quite frankly. I think what is happening is those clients who limit their supply group to those tier 1 vendors are essentially trying to outsource solutions to the problem. They essentially trying to push away, push out of the boundaries of their organization solution to managing multi-sourcing, and I am quite skeptical of that. I don’t think it can be done very easily. Because whenever a tier 1 supplier is bringing someone like DataArt to help them in a particular project, we can be pretty much assured that they are being forced to do it. If it was their choice, they would prefer to do it themselves, grow the expertise internally, try to get their hands on that chunk of the money. It is natural. It’s their revenue, their bottom line. So, more often than not, what happens is we are being brought on by the client, who will ask the tier 1 vendor, “Will you please work with this group because they have this unique expertise, but I cannot get them on the vendor list because of this consolidation move.”

That is how it happens. I think that while I can see the benefits of this consolidation and multi-tier sourcing strategy, I think it is a bit misguided. It is, as I said, trying to push away a problem that is not going to go away. The expertise of managing multiple relationships, I strongly believe, must be within the company. It is only when they have that expertise that they will be successful at this whole thing. It is definitely happening, but I am not terribly happy about it.

SM: But you know, the entire supply chain in, for instance, the automotive industry operates like that. They outsource very large portions [of their operations], but then there is subcontracting within those spaces, or there is multi-sourcing within those tier 1 to tier 2 and tier 2 to tier 3 outsourcing because the specialization requirements are significant.

AM: Absolutely. I think the notion of specialization needs to get into the DNA of the firm for it to be able to do that. Unfortunately, many of the outsourcing firms have grown so large, and they have gotten it to their head that they can do almost anything for those large clients. At this point, the incentives, both economic and strategic, are not there for them to want to outsource this. The incentives are for them to try and squeeze it in somehow so that they can do it themselves; it will probably come to that. It will probably come to that, but today, from my point of view, for what it is worth, clients are pushing for tier 1 vendors to do it, but tier 1  vendors psychologically they are not there yet. They have to do it but they are not there yet. Their incentives are not there.

SM: Yes. But as long as the client wants it, they are going to have to fall in line. I think this trend is going to be more significant than we realize just because we are getting to a time when specialization is going to be a premium, and this “I can do everything under the sun and I have a very generic expertise that I to bring to the table, and I have tremendous attrition, and I can’t really promise any kind of stability in the project team that I am going to assign to you in your ODC or whatever” will become less prevalent. All of this is a very commoditized value proposition, and with it you can’t really deliver on the specialized needs for clients.

AM: Absolutely. Specialization is the number one reason why we even exist today, the way we exist, and why we have made a name for ourselves. But still, perhaps the outsourcing industry has grown too big too far, too mature psychologically, to accept this kind of thinking. It will happen. I live this trend right now. We have three clients who are largely investment banks, and two of them are going through exactly that process of consolidating their vendor relationship. I have managing directors in those banks telling me, Look we want to work with you, we need to work with you, but we can’t get you through vendor management, so please go through this pass through vendor because that is how things are now done. When it is forced on the system like that, naturally, something is lost. Either cost efficiency because the client ends up paying a premium throughout this chain, or the two vendors begin to misunderstand each other, whatever. Your automotive example was very important because in that case it is the tier 1 vendors who choose it as their strategy to outsource it to multi-sources, and that is not happening in IT services as of yet.

This segment is part 8 in the series : Outsourcing: Alexei Miller, Executive Vice President Of DataArt
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