Behind The Outsourcing Movement
Although companies cite lack of internal skills and reduced costs as the two primary reasons for outsourcing, there are other factors driving the adoption:
• Increased management focus – Upper management may determine that running or maintaining IT applications or software falls beyond the core competencies of the firm and they would rather eliminate or reduce such non-core distractions.
• Shorter cycle times – Customers are continuing to demand quicker service, efficiency and e-business capabilities. Many companies are turning to outsourcing to help turn around those projects and with higher quality.
• Outside expertise – Turning over a project, network or ongoing management responsibility to a professional service company can take the heat off understaffed IT shops in several ways. Companies that handle outsourcing can spread the cost of budget-breaking technology or services among multiple customers, add instant expertise to in-house staff and fill other needs that are otherwise beyond the reach of an individual enterprise.
• Changing priorities – Many corporate IT departments remain focused on installing e-business and other new applications, not on keeping the infrastructure running. Moreover, in many businesses IT systems are not seen as critical.
• Market conditions – Often mergers, consolidations and rapid expansion require companies to acquire expertise overnight.
• Antiquated systems – Many business systems are in worse shape than might be expected. IT investments have been put on hold, meaning that companies are running on a patchwork of systems that are inadequate for current needs.
As a result, 54 percent of companies today outsource some projects and 20 percent plan to in the near future, according to a recent Cutter Consortium survey.
According to the Meta Group, an IT research and consulting firm, the overall outsourcing market in 2000 was $100 billion and is growing each year at an impressive 20 percent. At first, infrastructure was the IT function most often outsourced. Today, Web site hosting, network and communication services, help desk support, data center operation, and application development and maintenance are all outsourced.
Other areas that companies are beginning to outsource include the development and support of business processes, PC management, ERP development and maintenance, security, and customer resource management.
The Costs of Outsourcing
Although outsourcing provides solutions for many of a company’s IT challenges, it is not without its costs.
While charges for most outsourcing deals are customized for what is needed, typical charges reflect a “per desktop, per month” basis for local area network (LAN) services and a “per network access device per month” for wide area networks (WANs). Typical figures come in at $80-$100 per desktop per month and $150-$225 per device. At the lower end, clients would get troubleshooting and diagnosis. At the upper end, they would get a fully managed service.
However, off-the-shelf pricing structures are the exception, not the rule. Pricing structures reflect the total engagement – including people, hardware, services and ongoing support – against the client’s business objectives.
Every client’s situation is unique. Effective outsourcing initiatives begin by taking time to understand each client’s specific concerns and objectives. This includes looking at the business to see how it’s using its network currently, what its current and potential growth rate is, what its short-and long-term business goals are, and how it plans to use its network to meet those goals in the future. Only after this analysis can providers design and deliver a suite of services to meet the customer’s distinct needs.
But outsourcing deals are frequently plagued by inadequate information. Too often neither the customer nor the provider has an accurate understanding of how much money is spent annually to implement new IT and what the rationale is for those decisions.
Companies should know where their money is being spent managing an existing IT environment, including service, support, training, upgrades, procurement, policies, or change management.
Outsourcing partnerships should include all of these costs. Indeed, 80 percent of the IT costs represent those incurred after the initial deployment. But many of the agreements don’t incorporate all those elements, concentrating instead on controlling IT capital costs rather than the post-deployment cost. Understanding where IT costs are incurred is the first step in developing the necessary awareness of total cost of ownership (TCO), including its importance and the potential benefits.
A good outsourcing agreement should invest in three complementary disciplines: training people, streamlining processes, and acquiring technologies that are easy to manage, service, and support.
The Pitfalls of Outsourcing
Despite all the hoopla that surrounds it, outsourcing does not always live up to its full potential. Once projects begin, both parties often find themselves spending more time, money and energy than expected. It takes a lot more hand-holding, care, and feeding than people expect.
When a company opts to outsource, it forces an often uncomfortable change on their internal IT management team. Instead of managing projects, these department leaders are instead managing contracts with their suppliers and all of the associated service level agreements. This is a very different form of management, one that many organizations are not adequately prepared for when deciding to outsource projects.
Because of this change in direction, many managers compensate for limited resources and go further than is healthy for their organizations. Project work, which is variable by nature, goes to contractors, while internal people end up doing only support work.
As a result, many companies find it difficult to retain existing talent or attract future talent. Once a company starts to outsource core competencies, IT talent starts to vote with its feet. These people naturally migrate to companies that retain core projects in house.
Beyond these cost and staffing issues, outsourcing poses some unique challenges:
• Protecting the turf – Many IT departments, not strategically infused into the corporate hierarchy or decision-making process, resent outsourcing overtures.
• Champions leave – Often the principals that strike the deal on both sides are lured to other assignments. This can leave new day-to-day managers to handle often prickly issues of cost, service levels, and implementation.
• Undue diligence – When either party fails to do their homework in understanding current and projected IT assets, resources and demands, outsourcing projects can spin out of control. To complicate matters, all work must continue to be accomplished while maintaining high levels of service.
• Unrealistic expectations – Many companies expect outsourcing to do everything at once. Biting off too much too soon can undermine even the most thoughtfully orchestrated projects. It is better to implement it gradually.
• Lack of management oversight – Customers tend to rely on outsourcing providers to have all the expertise in a given technology and, as a result, wash their hands of any responsibility to manage the relationship.
When outsourcing arrangements fail, everybody loses. The company loses control of the resource and it alienates personnel who have been trained in the organization’s particular business practices and have become a part of the organizational family. Most of all, the company risks losing its integrity in the eyes of its customer base.
The outsourcing issue should be part of a larger one regarding how the function, or functions, being evaluated fit into the organization. As part of the outsourcing evaluation, companies should ask themselves the following questions:
• What are our core competencies?
• Which services or corporate support functions are not integral to or close to our core competencies?
• What barriers are raised by the corporate culture?
• What is the cross-functional impact?
• Can we fix ourselves internally before we consider outsourcing?
• What might be better accomplished by an outside vendor?
• What are the goals we want to achieve?
• What kind of vendor relationship is most appropriate?
• How do we deal with the people issues?
Navigating The Terrain
Companies get into trouble when they fail to draw firm lines around work that should not be outsourced. When the interests of the company and service providers diverge, companies often pay the price. Here are some warning signs:
• Most of the company’s employees are performing maintenance and support work.
• Strategic, risky, and large projects are consultant-led.
• Company employees are being managed by consultants.
• Consultants are driving one or more of the critical governance processes-strategy, architecture planning, and investments.
• Customers are interacting with consultants more often than with employees.
For an organization to benefit from outsourcing, the initiative should come with the commitment from top executives. After securing management support, the next step is to build a team that ideally includes, or reports to, the chief information officer.
These people should be part of the team that crafts the contract. Their inclusion is critical for several reasons. First, there is no better way to understand the issues involved in outsourcing than to be involved in all aspects leading up to the deal. Second, relationships with vendors start at the moment discussions begin.
Being on the ground floor and having continuity in the relationships with people in the vendor organization contributes to success. Companies should count on spending 3 to 12 percent of what they spend on the service provider to manage the outsourcing relationship.
Next, an objective evaluation of the current operation should be conducted, including an accurate accounting of current and projected IT resources. All affected costs-personnel, facilities, equipment, parts, service, support, and overhead-need to be included.
The challenge is to determine the measures that are important to the operation and concentrate on them. Every company has its own internal hot buttons.
After the data is organized, it helps to provide a lens through which companies can accurately assess their in-house IT system. As part of that assessment, companies should consider the costs and paybacks of improving their in-house operation before deciding to outsource.
Without such information, it is tough to manage the existing program, let alone evaluate outside bids or monitor the effectiveness of outside services to ensure they are doing what is expected.
Once companies know what needs to be done, they can write a request for proposal (RFP) that accomplishes the following objectives:
• Provides structure in a way that allows assessments and comparisons to be done in a meaningful way
• Defines requirements in complete and measurable terms
• Describes the type of relationship being sought
• Explains the problems that need to be solved
• Poses specific questions about corporate culture
• Presents the current costs to the organization
• Specifies a service level
When putting out an RFP, companies need to be honest. A proposal is a valuable opportunity for a vendor to grapple with very real costs and issues, and to prove that they can do the job. Just as companies will use the proposals to assess vendors, vendors use the RFP to assess companies. A well-written, clearly defined RFP tells vendors a company is serious about the project. The outsourced providers then will work hard to solve the problems and get the business.
On the other hand, a vague or unrealistic RFP will make the most qualified and experienced vendor think twice before spending any time going after business that may be unprofitable and unmanageable.
RFPs must be extremely well detailed to allow for parallel comparison. This is a challenge in today’s environment marked by an aggressive movement to “auctioning.” These auctioning tools are designed for products, not service-based agreements.
The RFP must carefully define the scope of the work to be performed and the type of environment in which it will be performed. It should also define the level of performance expected, including communications and reporting responsibilities. Possible measurements of vendor performance include:
• Pricing strategy and methodology
• Resources available
• Quality control programs
• Technology commitment
• Reputation and references
• Flexibility in terms of staffing and equipment
• Financial resources and stability
• Who will be handling the work
• Types of service
• Hours of service availability
• How do the corporate cultures mesh
The next step is to identify potential outsourced providers. Then, companies can make initial contact with each potential source by distributing a form letter with a general description of the needs. The letter should express the degree of confidentiality required, who the corporate contact is, and the method of contact.
The next step involves evaluating the bids using the evaluation criteria outlined earlier. Finalists can be invited back to the company for another interview that includes more in-depth information about expectations and requirements.
Companies should check a vendor’s reputation as well as its total plan and capabilities, not just their price or a single aspect of what they do.
Once a final determination has been made, it’s time to negotiate the deal. This is when many companies make the mistake of approaching it from a purely pricing perspective. An “us vs. them” mentality can destroy the partnership. Instead, it is better to structure an agreement in which all profits, or savings, will be shared. All services, compensation, termination clauses, and allocation of business risks should be clearly identified in the contract.
A sound contract must include service level agreements (SLAs). Without them, there are no objective criteria for managing the outsourcing relationship. It helps considerably to develop such measures long before the contract, so a history of effective measures can be used in negotiations.
Use objective performance criteria. Successful outsourcing relationships focus on results. To be meaningful, these results must be objective, measurable, quantifiable and comparable against pre-established criteria.
Performance incentives can encourage the vendor to meet and exceed the contracted SLAs. Conversely, when a vendor’s performance falls below expectations, penalties should be assessed.
Good contracts provide for a formal relationship management structure linking the customer and vendor. This structure typically takes the form of joint management teams that have responsibility for day-to-day tactical and strategic aspects of the relationship. Each team has a clearly defined responsibility, agenda, frequency of meetings, and relationship to the other teams.
Business strategy can change dramatically in a five-year period, expanding globally or cutting time to market in half. But the outsourcing agreements can take this into consideration. Companies should develop agreements that can change over the life of the contract and with the business. For example, the price for services should be subject to benchmark clauses and should allow for adjustments. Outsourcing contracts should also allow for reviews of SLAs to meet new expectations.
Emphasis should be placed on the development of the people responsible for relationship management. The individuals managing the outsourcing relationship for the customer should receive specific training on how to do the job. This includes a complete understanding of the business goals of the contract, the specific performance criteria agreed to, and individual roles, responsibilities, authority, and reporting structure.
The same information should be communicated to the larger end user community. In this way, the entire organization understands what is intended and why, how problems will be identified and resolved, communication channels, what is expected, and the like. This training and communication can also help reduce resentment or resistance. Companies also should encourage training for the vendor personnel on the customer business environment and goals. In this way, they develop the needed sensitivity to the issues driving the client’s needs.
Correctly applied, outsourcing is an option to help companies navigate the changing seas of business and technology. There seems to be an endless supply of contractors and consultants.
But caveat emptor-or buyer beware. There is not an endless supply of contractors and consultants-only an endless supply of companies claiming to have the capabilities required. In the lean times we have been through, many IT services firms have dramatically reduced their “bench,” which has raised the question of their ability to ramp up for the projects they are trying to sell.
In order for outsourcing to work, companies need to make sure they know what they don’t want to give away. In other words, companies would do well to define an “insourcing” plan that identifies the work critical to the company’s strategic intent. For instance, companies should think twice before turning over the following roles and capabilities:
• Strategic applications and technology planning;
• Investment, financial, and human relations;
• People with in-depth knowledge about existing business, applications and technology infrastructure;
• Senior, customer-facing relationship managers.
Andrew Trestrail is vice president of Kelly IT Resources, a business unit of global staffing provider Kelly Services. Kelly IT Resources provides employees skilled in computer applications, programming, operations and hardware to companies worldwide. For more information visit www.kellyIT.com.