Today, the vast majority of business is conducted on a worldwide scale, regardless of customer location. Even for those businesses whose customers are primarily or exclusively located in one country, that business’s suppliers and back-office functions are often located in other countries.
Cloud computing has dramatically expanded the reach and scope of many companies, allowing them to operate globally without the need of having a ubiquitous physical presence. And while that can be very beneficial in a digitized world, the reality is that this exposes companies to a myriad of new risks that can threaten both operations and profitability.
The COVID-19 pandemic is a clear example of how an unpredictable event can completely disrupt this digital-based business landscape. But it’s far from the only one. In fact, there are common threats out there that are often overlooked—threats that can seriously harm any business. From ever-changing tax, financial, and HR regulations to territory-specific or restrictive partnership contracts to geopolitical risks, there are numerous challenges that executives must anticipate and solve.
As a way to kick-start this new series, I’ll dive into one of the most overlooked threats of the tech outsourcing sector: vendor lock-in.
The Latent Possibility of Vendor Lock-in
The notion of vendor lock-in is hardly new, but it has become a greater risk for modern companies over the last decade. The main reason is the increased need to partner with different providers to carry out a successful digital transformation.
Modern companies need cloud computing, AI and machine learning, big data, IoT, 5G, and other cutting-edge technologies to support their operations in the current business climate. And while those companies can certainly work with in-house engineers to develop their own implementations, the reality is that most of them hire external help. Simply put, the challenges of sourcing, hiring and maintaining these types of qualified engineers, in combination with the high expense associated with these skill sets, usually overcome whatever reluctance a CTO or CIO may have for offshoring.
It makes sense. Why build, say, your own cloud computing infrastructure when you can easily hire predesigned solutions to meet your needs? Doing so can accelerate your digital transformation and provide you with value from the first minute (provided, of course, that you adjust those technologies to your particular needs).
While hiring external services and partnering with external tech companies is a modern business imperative, doing so in a nonstrategic manner can end up with you depending on those services almost exclusively. If you rely too heavily on one particular vendor or platform, the result will inevitably be increased risk and fewer options—you’ll be backing yourself into a corner!
You could also fall victim to unclear agreements or contracts, be tempted to sign lengthy subscriptions in exchange for certain financial “benefits,” or be forced to work with a particular vendor that does not have sufficient personnel or is in a niche that they are not qualified to work in. To be clear, the notional benefit of a discount is typically more than offset by increased costs elsewhere: additional offshore personnel, additional managerial overhead on the client side, and costs associated with testing, audits, etc.
The main problems with vendor lock-in include:
- Decreased quality or responsiveness of the vendor’s service
- Security breaches and vulnerabilities in the vendor’s infrastructure
- Lack of updates or upgrades in the vendor’s offerings
- Changes in the vendor’s offerings that make them unfit for your business
- Increased geopolitical and territory-based risk, depending on the location of a vendor’s delivery centers
- Price increases, including potential currency fluctuations
Being trapped with a single vendor generally means that you won’t find relief quickly from these sourcing problems when they happen. And, if you’re sole-sourced, they will happen! Sure, you could always switch vendors, paying a price to do so, but the true price is typically far higher than the literal switching costs.
Leaving one vendor for another doesn’t just mean losing some of the investment you’ve already made on a vendor and adding up the costs of hiring and ramping up the new company. There are operational costs associated with any vendor migration, including managerial and procurement effort, code reviews, potential refactoring, documentation or other rework, training in-house staff to work with the new provider, and of course, getting the new provider up to speed.
The threat of vendor lock-in is greatly downplayed right now—and certainly by larger vendors! There’s the feeling among clients (you!) that one can easily switch from vendor to vendor without paying a hefty price, or that certain vendors should be trusted regardless because they are too big to fail or will always be at the forefront of tech development. The truth is that larger vendors (20,000+ employees) routinely staff engagements with a higher percentage of inexpensive (to them!), less qualified junior resources, thus guaranteeing their profitability.
Exercising caution when hiring new providers, managing existing partners, and ensuring that you’re never locked in to a single provider are the best ways to avoid the negative consequences of vendor lock-in.
- Evaluate all potential vendors carefully and thoroughly to find the ones that best match your needs and have a good reputation.
- Use a multi-provider strategy that brings together different vendors to leverage their best features while reducing the likelihood of vendor lock-in.
- Develop your own customized solutions to limit the reliance on external software packages that may have functional, security, or other risks.
- Avoid storing data with a unique vendor, as this might make it harder to move it around when needed.
These actions can mitigate the risk of vendor lock-in, but they can never eliminate it altogether. That’s because you never know what might happen with your vendor that could end up affecting you and keeping you “prisoner” by a certain provider. For instance, a change in country regulations might impact how you operate with a certain vendor and may complicate your mobility. Keep that in mind when assessing vendor lock-in risk.
Vendor lock-in is a real threat that can completely derail your outsourcing experience. That’s why you should adjust your outsourcing strategy from the get-go to avoid falling prey to it. Following the suggestions I’ve just shared is a great starting point, but the only way to truly prevent vendor lock-in is to be vigilant, flexible, and agile.
This article is part of the Outsourcing Risk Series.