Outsourcing, SOA, and the Industrialization of IT

Long-time ZapThink readers know that we favor tying technology concepts to business issues. After all, the greatest benefit of Service-Oriented Architecture (SOA) is the business value it offers via increased business agility. Our readers might expect, then, that when we get around to the high-profile business topic of outsourcing, we will build the argument that SOA helps companies outsource, because SOA provides an abstraction layer on top of existing technology resources, allowing third parties to provide those resources more easily, with business users ideally being none the wiser.

Well, that argument is part of the story, but in this ZapFlash, we’re going one big step further. SOA and outsourcing are actually both key aspects of the movement of IT towards an industrialized model. Industrialization embodies a number of major concepts: the mechanization of production so that the mass assembly of components provide significant improvements in efficiency and cost, the improvement of the infrastructure around such products to simplify how people build and sell them, and a fundamental change in the way that people buy and consume them. For example, it wasn’t the invention of the mechanical loom that caused the Industrial Revolution, but rather the development of efficient sources of power, effective means of transportation of goods, and the evolution of an economy where people sought to buy the shirts they wear rather than have their family knit them on an as-needed basis. Such industrialization caused broad, significant changes to the structure of the family, the city, and the economy as a whole.

Outsourcing and the industrialization of IT
A close look at the concept of outsourcing reveals that it has a variety of related, but sometimes different, meanings. One definition of outsourcing is the purchasing of a service from an outside vendor to replace the performance of the task within the organization’s internal operations. In this regard, outsourcing is not simply subcontracting, nor the normal business relationship of a vendor and a supplier. Rather, the outsourced task is one of critical importance to the business that it would otherwise have implemented in-house, but instead the business chose to outsource to a third-party for reasons of economic, liability, or strategic reasons. With Business Process Outsourcing (BPO), for example, a third-party firm manages an entire business process, such as accounting, procurement, or human resources.

Outsourcing part or all of a business process makes the most economic sense when the company can achieve quantifiable business results from taking a core, critical business process and putting it into the hands of a third party. As such, outsourcing also represents significant risks to businesses, in particular, the risks that outsourcing will introduce quality problems, increase customer and partner dissatisfaction, and create new business and legal liabilities. Nevertheless, companies have long seen the benefits in outsourcing various parts of their business. As companies grow and specialize, they no longer wish to maintain staff for many parts of their organization, such as accounting, product assembly and fulfillment, logistics, and sometimes even product design and development. Now there is also increased pressure to outsource various parts of the IT department as well, ranging from the data center to the application developer.

Such outsourcing, of course, is not without its detractors. They say that outsourcing is harmful to American jobs since it replaces high-cost IT developers with lower-cost counterparts overseas. While this argument might apply to manufacturing jobs, it does not follow in the case of IT. First, outsourcing erroneously equated with “off-shoring”, whose value proposition is specifically tied to the notion that labor is cheaper outside one’s country. This is not necessarily the case with outsourcing, which may simply be the selection of a third-party from the same country as a business to perform a task. Second, the outsourcing movement in IT is really an aspect of the maturation of the industry away from custom, one-off development, rather than simply a reassignment of responsibilities from one company to another.

SOA and outsourcing
At the same time, companies are also looking to gain the benefits of SOA. Companies desire the business agility that SOAs provide, especially in the face of IT heterogeneity. Specifically, the movement to SOA is actually a movement to create IT business process components that people can efficiently assemble to meet the specific requirements of a business. What gives SOA those capabilities are its loose coupling, coarse granularity, and a high degree of reusability in an environment of heterogeneity. No other technology approach has previously provided those same benefits.

At the same time, the movement towards outsourcing offers the growing realization that while IT is a core necessity to the well-being of any company, it’s not necessary that companies should build their own IT business processes from scratch. Increasingly, companies desire the ability to source components from third-party suppliers that they can readily assemble into business processes themselves, or have third-parties assemble and deliver to them on a custom basis. So, while SOA provides the technological underpinnings to make the IT industrialization a possibility, it’s the economic movement to outsourcing that makes IT industrialization a reality.

It’s becoming clear that the economic value that companies seek from outsourcing closely matches, and reinforces, the economic benefits they see from implementing SOA. And more so, in order to do outsourcing of IT resources right, companies must approach their IT assets from a Service perspective — applying the right level of abstraction and architectural principles to make sure their outsourcing dreams don’t turn into nightmares.
Effective outsourcing requires effective requirements definition, communication, and abstraction of the implementation. At the same time, building an effective SOA mandates the development of a the abstraction of IT capabilities into Services that people can compose into the various processes a business requires. By the virtue of their abstraction, these Services must have implementation, location, and presentation-independent definitions. As such, a well-designed SOA assumes nothing about where or how the Services are implemented — they might as well be outsourced.

So, if companies can define abstracted Service interfaces, the details of who implements those Services and where those Services reside are basically irrelevant. In fact, ZapThink believes that as companies move to increasingly represent assets as Services, they will be less concerned with the implementation details of those Services and instead will seek to outsource them. So, SOA not only makes outsourcing simpler, but it in fact motivates companies to consider outsourcing as a viable alternative when it might not have even been possible in the past.

One can take the SOA/outsourcing combination to a logical extreme and assume that companies will eventually outsource most or all of their critical business processes in the form of Services that they can purchase on a licensed, subscription, or transaction basis from third-party vendors. Today, only a small subset of the Services a company might be interested in purchasing, such as customer relationship management, finance, and supply chain management solutions, are available as Services. As such, in order for companies to third-party Services as an alternative to outsourcing, a market must first emerge for a wide range of available Services a business would be interested in — and such a market is still quite nascent.

However, custom-built outsourcing and ready-built Services aren’t the only two options for companies looking to leverage the possibilities offered by the combination of SOA and outsourcing today. Rather, the movement to SOA offers a company the opportunity to outsource functionality to a group of companies, industry-run consortia, or marketplaces that can provide access to a wide range of capabilities critical to a business. For example, companies might be able to pool a set of shared Services into a community that provides access to core supply chain or purchasing capabilities.

The ZapThink take
The combination of the SOA and outsourcing trends reflects the maturation of the IT industry. Before the industrial age, companies built products and tools on a one-off, customized basis, but with the emergence of powered machinery, improved technologies, and new methodologies, companies were now able to mass produce all manner of goods for the first time. The convergence of the outsourcing and SOA movements illustrate that IT is becoming industrialized as well. In many ways, SOA represents the technology required to “mass produce” highly reusable IT components. Outsourcing reflects the increased desire of companies to stop custom producing their own IT components. In this regard, SOA and outsourcing really are two aspects of the same macroeconomic trend towards the industrialization of IT.

The combination of SOA and outsourcing will only get more established as the value proposition and technologies required to make SOA implementable continue to mature. As companies seek to gain the benefits of business agility, they will realize that the SOA/outsourcing combination provides options they may never have had before. For example, outsourcing business processes today means cutting off big, inflexible chunks of the business and simply handing them to third parties, but with SOA, businesses take a much more agile approach, outsourcing the components of greatest strategic value and slowly migrating over time to meet their ongoing business needs.