Enterprise 2.0: Battle of the IT Supply Chains

My dad pointed me to this fascinating article on IT Outsourcing from Information Week: The Second Decade Of Offshore Outsourcing: Where We're Headed by Mary Hayes Weier. It's a long article but well worth reading. The author captures a growing trend in the outsourcing of IT software: as offshore service providers move up the value chain, from tech support and quality assurance, to software design and development, business process re-engineering and eventually to providing direct business value, the relationship between these vendors and their Enterprise clients is changing. Instead of outsourcing specific, contained projects, companies are looking at IT development vendors as strategic partners - essentially, suppliers of IT business value. An example interaction, from the article:

A BT Wholesale executive team recently gave a presentation in Bangalore called "Joining The Dots," intended to help contract workers from Infosys, TCS, and Tech Mahindra understand BT's strategy and the role IT and process engineers play in it. The team explained BT Wholesale's market segments, key competitors, new products, and what it plans to launch over the next few years. "It's about spending time with people and explaining our objectives rather than just describing a piece of software they need to deliver by Friday," Selley says. "We want those employees to bring ideas back to us, too. It's been far too unidirectional between the U.S. and U.K. and suppliers in India."

The focus is no longer primarily on the cost savings obtained through offshoring, but rather on acquiring talent quickly, getting closer to customers - who are increasingly overseas as well - and creating global IT value chains that span people, processes & technology. Outsourcing companies (and in turn, their outsourcing vendors) are now valued partners in the software supply chain, and have a direct impact on the competitiveness of the enterprise.

This reminds me of the changes the automotive industry went through years ago.

Automotive Supply Chains

For example, authors Bill Jackson and Michael Pfitzmann compared different approaches to automotive supplier partnerships in their article Win-Win Sourcing in Strategy+Business magazine (via Evolving Excellence ):

This is one of many ways in which far-reaching manufacturers like Honda and Toyota rewrite the conventional rules of procurement.
...
With this approach, manufacturers and suppliers share a long-term commitment to improving each other’s capabilities, starting by working together to eliminate wasted effort and inefficiencies. The two sides, instead of being at odds, collaborate openly on lowering costs and raising overall performance, with the expectation that this mutuality will continue over many years, benefiting both companies.
...
Contrast this with the alternative ingrained in many companies’ purchasing departments: price-based sourcing. Essentially, this approach pits the interests of the supplier against those of the manufacturer. Each side reveals as little information as possible, for fear of giving the opposing side an edge.

Many others have made this point as well, such as the Economist's View blog: Why Toyota is Better than GM and Ford ; and MRO today: The supply chain is the difference maker .

This enlightened approach is already becoming an accepted view. Toyota sees its suppliers as partners; they, in turn, see their suppliers as partners; and so on. So the competition is not between the Toyota and General Motors; it is really a competition between Toyota's entire supply chain (Toyota, Tier 1 suppliers, Tier 2 suppliers, Tier 3 suppliers ...) and GM's supply chain (GM, GM Tier 1 suppliers, Tier 2 suppliers, Tier 3 suppliers, ...).

IT Supply Chains

Are there close parallels between these two approaches: BT Wholesale's interaction and shared strategy with its IT offshoring vendors - Infosys, TCS, and Tech Mahindra; and Honda and Toyota's closely cooperative relationship with their own vendors?

What are the implications of these changes for the IT outsourcing vendors, and for their Enterprises customers? If the parallel with the automotive industry holds, will we soon see the 1st tier IT software suppliers start to increasingly outsource pieces of their own projects, and so on, until there is a multi-tier supply chain in IT for software projects, business process optimization and quality enhancement? Projecting forward, how much further will offshore IT vendors go in providing value as a part of the business network of the larger enterprise?

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