Adverse Selection problem of SMB Outsourcing

Depending on which analyst’s data you rely on, [tweetherder]50% to 70% of IT Outsourcing projects fail[/tweetherder]. ContractIQ estimates that firms between 10 employees and sub-500 million dollars revenue, spend a little more than 100 billion dollars on IT Outsourcing. So if we assume a direct correlation between absolute failure count and value of the failed initiatives, we are talking about atleast 50 billion dollars wasted every year. What’s not quantifiable is the loss of economic value, success would have generated.

We suspect that a significant part of this failure could be attributed to the information asymmetry, that exists between vendors and their customers, during the pre-sales cycle. In such an environment, [tweetherder]SMBs being less sophisticated than their F500 counterparts on inhouse IT skills & procurement maturity, they are more vulnerable to adverse selection[/tweetherder]. Popular trade press and analyst firms focus their attention on F500 consumption topics and if they do serve SMB it stops at product/market level options and not really services.  This only adds to the adverse selection problem, one where the vendor with the most active SMB focussed sales force gets into the consideration set of the customer.

With the maturity of speciality social networks, entry of millenials into the workforce and demonstrated success of trust driven marketplaces in consumer internet, we believe the situation will only change for the better.

What should you be doing as an SMB, to be sure you are not selecting the wrong vendor?

1. [tweetherder]Actively seek peer advice. They understand your contexts better than vendors[/tweetherder]

2. [tweetherder]Involve them not just to discover vendors but also to evaluate them[/tweetherder]

3.[tweetherder] Good vendors tend to have strong opinions. Read their blogs, contributions to social networks[/tweetherder]

4. [tweetherder]Metric-ize your expectations and use that to ask relevant questions/proof points when evaluating vendors[/tweetherder]

5. [tweetherder]Analysts are out of reach for you. But good practitioners make for great advisors. Find the best in the industry and take advise. Pay if you have to[/tweetherder]

6. [tweetherder]Don’t engage with vendors in sprints. Follow them continuously to build longitudinal data and form perspectives over a period[/tweetherder]. With social tools this is not as much a time sink as you would think

7. [tweetherder]Don’t outsource your thinking process[/tweetherder]. Its not scalable for most SMB vendors to have industry aware business analysts, to think on your behalf

8. [tweetherder]If you have to offshore work, outsource first[/tweetherder]. Turning around initiatives from remote, as a first time outsourcer is not easy

For a free consulting session on the best practices in evaluating vendors, write to us.

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