Outsourcing investigate

Outsourcing's five cast-iron rules: Break them at your peril

How do you get the best from outsourcing contracts without them getting the better of you? One CIO who has worked on both sides of the outsourcing divide offers his key tips.

Saving money should not be your only motivation, just as the outsourcer should not see your business as a potential cash cow. Photo: Shutterstock

CIOs face an expanding list of business objectives, which they have to meet by implementing a cost-effective and efficient tech strategy. Some IT leaders concentrate on inhouse development, but a lot of technology money is still spent outside the organisation.

With the pressure still on costs, analyst firm Gartner expects worldwide spending on IT outsourcing services to reach $251.7bn in 2012, a 2.1 per cent year-on-year increase from 2011.

The fastest-growing area is cloud computing, which the analyst expects to grow by 48.7 per cent in 2012 to $5bn. It's a sign that CIOs are continuing to draw on external services and see going beyond the corporate boundary for IT as essential for ensuring value for the business.

Ian Gausden, chief operating officer at VocaLink, has overall responsibility for technology at the payments specialist. Here he provides his five top tips for CIOs looking to make the most from outsourcing contracts.

1. Work out why you want to go outside

This may sound obvious but each CIO has specific business objectives and, when it comes to outsourcing, precise aims really matter. Gausden's advice to CIOs is clear: ensure you know what you expect to get from the outsourced deal and have clear success criteria.

"You need to be specific so your external partner knows what success looks like," he says. "Make sure your focus is on your business objectives."

CIOs looking to make sure their outsourcer sticks to their objectives should consider shorter contracts. "Your aims might evolve and it becomes harder to monitor your success at meeting objectives over long-term contracts," Gausden says.

Whatever the length of the deal, he believes building change into the contract in some way is absolutely crucial.

"You can agree to vary the thresholds and the parameters on desktop support, such as pricing the deal according to the number of transactions that take place," he says.

"But you must future-proof the contract with the supplier and you must have some idea of your requirement for flexibility."

2. Engage the right partner to help with the process

Aiming for long-term benefits from an external partner is one thing - getting the right kind of deal in the first place is another issue altogether. Outsourcing is a potential minefield, with fine print and small details that confuse even the most switched-on CIO.

"You need an adviser who has your interests at heart," says Gausden, adding that such expertise can come from a number of sources. CIOs who work for a big company might be able to draw on an internal and full-time legal team.

An IT leader without such luxuries will have to look outside the enterprise, says Gausden. "Outsourcing is your external provider's specialist day job, so making sure you have the right contract is crucial because it provides a form of protection," he says.

Gausden advises CIOs without internal legal advice to work alongside specialist advisory firms that look to help businesses trawl through the wrinkles and padding of an outsourcing deal. "You need someone to help you with the finer points of the contract," he says. "Contracts can get very deep."

3. Plan for the preparation

"There is a lot of work involved in planning a decent outsource," says Gausden. From requests for proposals through to contract signing, CIOs must make sure they are fully prepared.

"Get your selection criteria right, it's not just about price," says Gausden, who says CIOs should speak to the senior team to get pointers about their business drivers for external provision.

Saving money should not be your only motivation, just as the outsourcer should not see your business as a potential cash cow.

"Understand the provider's business case. If you know how they're going to make money from the deal, that can help you make sure your objectives and those of the outsourcer are aligned," says Gausden.

"Don't pretend your external partner doesn't want to make money through the deal. Understand the returns and make sure your business is getting value, too."

4. Engage your people

Going to an external provider is not just about technology. People will almost always be affected - and if your firm is outsourcing staff as well as IT, Gausden says your organisation must be understanding, evolving and engaging.

"It's not an easy process for most people to involuntarily change employer," he says. "Give employees time and communicate the amount of change involved in the new way of working. You can't engage your staff too early in the process, but you must be careful not to scare people."

Gausden says it makes sense to work with key people, to create internal communicators and to help show the potential benefits of outsourcing.

One advantage for staff, he says, is that they receive a new skillset and have the opportunity to see how IT is provisioned at a company whose business involves managing technology for other organisations.

Gausden made a similar transition himself earlier in his career, when he moved from Barclaycard to external provider Xansa.

"It can help you develop a knowledge of risk management and contracting, and can provide a sharp focus on the customer. These disciplines are really helpful if you move back inhouse," he says.

5. Invest to manage the partner and the contract

Signing the deal is just the end of the beginning. Successful outsourcing demands continuous attention, and Gausden says your initial business case for external provision must include money for contract concerns.

"Management won't happen by itself," he says. "Proactively manage your outsourcer. How closely you will have to work with your provider is variable. But taking a proactive stance tends to encourage the outsourcer to work towards producing the best possible value for your business."

Being in contact does not have to be a negative process. Engagement, often through the form of positive criticism, is critical to long-term success. "Make the provider challenge themselves," says Gausden.

"Your outsourcer won't give best value unless you get in their face a little bit. Nothing is finished once the contract is signed. True value comes from constructive engagement. Even if your service-level agreements are met, always look to get more from your provider."

About

Mark Samuels is a business journalist and editor at IT leadership organisation CIO Connect. He has written for various organisations, including the Economist Intelligence Unit, Guardian Government Computing and Times Higher Education.

32 comments
Tony Hopkinson
Tony Hopkinson

Me though I'd be wary. Some bunch of swindling short changing incompetents are going to crawl out from under their stone and undercut you on price. Or may be some bright spark MBA will come up with the idea that they can get telephone support for hardware and software in Asia. Or that you do all this stuff on your IPhone/tablet thingy through the cloud and nor need any of this IT burden on the business. When the demand is for quality you have options, when it's for cheap, you have none....

NickNielsen
NickNielsen

My observations are: 1. My customers have outsourced the hardware support. Net admin, configuration management, and software support functions are still in-house. I work hand-in-hand with customer help desks (some of them out-sourced, as well) whenever necessary to provide effective service. 2. Each customer location receives service as if I worked for that customer; not all field service technicians are so professional. 3. Do I have favorite customers and favorite sites? Yes. Do I try to do better for them whenever I can? Of course. Do I [u]consciously[/u] shortchange other customers or sites to do this? No.

jonrosen
jonrosen

1) Don't do it 2) Don't do it 3) Don't do it 4) Don't do it 5) Refer to above four. I've dealt with companies who have outsourced, I've been in companies who have outsourced, I've spoken with people who are the outsourced employees. 9/10 times of all these experiences, the outsourcing has caused more problems than it has fixed and cost the company more money, due to failed SLA's and other issues than they were saving by going out of country for the 'workers'

PJW9779
PJW9779

"the primary premise behind almost all out-sourcing is a cost reduction for the company" Perhaps, but in my almost 20 years of experience in the field it has also shown to be an almost sure road to failure. Out-sourcing invariably costs more than it cost you in the past. Not only because you usually saw only a part of the total cost. But also because your counterpart knows that. After all he is in it for the profit. Big question : 'What are you going to do if you don't like the service delivery'? Don't out-source if you can't in-source it again!

Deadly Ernest
Deadly Ernest

I was working in the Australian Department of Defence when they went through a major series of outsourcing projects in the 1990s. As someone on the administration / management of that at the time I was heavily involved in working out what could and couldn't work in the units I was financially responsible for. We closely studied a hell of a lot of things and looked at the ramifications of them. At that time ALL support services for the military were delivered by military personnel, and that was expensive as the total cost of maintaining a person in uniform was a lot higher than the total cost of a non uniform person. Leave, clothing, meals, health,housing, combat skill allowances etc add to the usual personnel expenses. Many of those involved in the exercise found that it made a lot of sense to take non-combat and non-combat area tasks off the uniform personnel. But we also found we did have to have some duties that are performed in a combat zone provided by uniform personnel in a non-combat zone so they could maintain their skills for when they needed to perform them in a combat zone. Medical staff are an obvious one for this, and so are air traffic controllers for the operation of forward air bases for helicopters etc. That did mean we could reduce the number of uniform people doing these duties a lot, but not remove them all. Major equipment repairs and services that never happened in the field could be done by civilians, however we did find we needed some to be Defence civilians and many could be private enterprise contractors. Some were needed in-house for responsiveness on urgent work. his same reasoning was applied to all support function. In the end many uniform jobs became civilian staff or contractors. However, no critical tasks or duties were outsourced. The real hard part of this was working out what was and what wasn't a critical task that we could outsource, and once we outsourced it from the military we needed to review to see what could be outsourced out of the department. One simple rule we had was to evaluate the risk and damage if there was a 12 hour delay in getting a response from the service provider. Once something was found to be a major problem if there was a 12 hour delay, it could NOT go outside the department, and often it stayed within the military.

Deadly Ernest
Deadly Ernest

suggest they outsource the accounting activities or the sales services? I know of one small company that saved a fortune by outsourcing their accounts work, it turned out they only needed two bookkeepers and a person to prepare the annual report, but the original accountant had blown the accounts unit out to ten people to justify being a CFO and get a higher wage. Amazing what saving came about by letting him and his staff go. BTW, the outsourced service was supplied by three of the junior staff that got together and put a bid in.

TheLip95032
TheLip95032

I didn't see any reference to offshore outsourcing, offshore has a lot of other issues you need to consider. I have seen onshore work but most offshore projects end up costing more money than they save. Offshore has to be managed as a project so additional people will be required, make sure to do "total cost".

dba88
dba88

Several things I've learned being in the SAP space: 1. Development is generally outsourced on most projects, and the majority of the time, the effort is mismanaged, unclear, unorganized and steeped in errors. 2. Service level agreements are not designed or defined in clear and concise manner over 50% of the time. 3. The major emphasis is on cost savings. Companies delude themselves constantly by thinking they'll see cost savings, but this is too frequently not the case. Companies refuse to do any homework on this by researching companies that chose to outsource to save, but instead backfired and resulted in wasted time and having to constantly tune and fine tune their offshoring effort. The saying, you get what you pay for, holds true here. 4. India is enjoying a renaissance and major boom to their economy brought on by IT and I think this is wonderful. India has a huge over population and massive poverty and broken infrastructure, but it also has a massively huge braintrust. Tons of educated people to supply to willing companies in the US. The impact to US IT professionals is, to a very, very large extent, at our expense. 5. We have already given away our technological edge. US companies are the ones doing it though the "IT Giveaway Program," with the H1-B visa allotments, but that's small taters. The real abuse is through the intracompany L1 visas that large US companies use to the hilt! There are no limits to those numbers, whilst there are caps placed on H1-B visas. They're not abusing it, because it's perfectly legal. It should be cut while our economy is sluggish though. 6. Politicians turn a deaf ear to us (complainers) while immigration law and business lobbies in Washington, DC exchange dollars by filling coffers for political campaigns. An immigration attorney asked me one time, "What's the matter with you? Do you have something against a person coming here to the US to make life better for themselves and their families? My response was, "Well, yes, I suppose I do. If it's at the expense of taking jobs away from Americans at a time when the economy is way, way down, making them train their offshore replacements (or no severance), company leaders in the US telling congress that there are not enough educated IT workers (which is bull crap), well, yes, I think American workers should get the benefit of the doubt, don't you?" I'll discuss his response another time. There should be a rule/law that says, ok, if you want to displace US IT workers for offshore workers because it's cheaper, then all the folks in the corporate suite will be required to give up their incomes by 90%. Why 90%? I think it's a fair trade for taking away a bunch of family incomes completely, don't you?

Trentski
Trentski

Paying a managed service provider in Australia with Australian workers is still cheaper than having an internal IT department. I haven't had to deal with a third world country helpdesk in years, I think HP warranty support was the last time I dealt with one of them, that was a headache

flybum
flybum

Companies who profit from being in this country need to hire American workers to do the work. Going overseas for cheap labor is like trying to play a ball game in two different ball parks. Outsourcing of jobs and factories has virtually ruined this country, turning it into a service economy. Wars have been one and lost based on the factories and technical knowledge of a countries citizens. The practice of outsourcing has weakened us to the point that we depend on China and other countries for strategic goods and knowledge, meanwhile giving away our technologies. Is that smart considering the condition of the world right now? I don't think so. These CEOs that outsource out of greed and desire for a bigger bonus need to be deported to a third world country.

reisen55
reisen55

WAS the exact opposite. Management did it for pure cost and savings. CIO decided to outsource everything and day after the contract was signed she, and the CTO, both quit within 24 hours, sold their stock and moved to other companies. All IT staff were engaged for about a year then after their knowledge was sucked out, we were fired. Why? Cost, kids were brought in and India took the Helpdesk. So I have zero respect for outsourcing

TsarNikky
TsarNikky

So often ignored is the ability of the outsourced location to understand and speak US idiomatic English. Ever try to speak to a support person in a third-world country (not mentioning any by name, but we all know the main one)? Rarely a pleasant experience--their thought process is quite different.

kirk_augustin
kirk_augustin

Outsourcing is always incredibly stupid because you are paying to train the people who will be working for the competition a year or two later. When you outsource, you get product but no ownership of the expertise or training you just paid for. So when your contract is over, they are not going to suddenly forget what you taught them how to do. They will do it for someone else. And that will be your competition. And they will bury you because they won't have to pay off the learning curve you already paid for.

wizard_of_oz
wizard_of_oz

I have seen outsourcing work well for small, well-defined projects that are outside the core of the business and need talent that is not available in the business. For example, customization of CRM or ERP software, where there is a really specific skillset to do the customization, and the skillset won't be needed on an ongoing basis. I was only indirectly involved in a larger outsourcing effort that had all the problems of a troubled software project. IMHO, never outsource anything core in your business, like product development. You are likely giving your IP crown jewels to someone who isn't worthy to hold them. Outsourcing manufacturing is an unfortunate necessity for most small businesses, but you might find that NDA's with foreign manufacturers mean less than you think they do. Almost every case of operational (open-ended, ongoing work like system administration or customer support) outsourcing I have any experience with ended up either costing more than the previous in-house operation or providing lower quality than the previous in-house op -- or both. The exception was a small company that needed to add a call center quickly and hired an external one; in that case there was nothing prior to compare against and the ramp-up time was worth the cost.

RudHud
RudHud

Seven of the ten richest counties in America are in the Washington, DC area. Hint: they didn't get this way off civil service salaries. I commute daily down VA 28, by Dulles. Buildiings proclaim Northrupt Grumman, HP, CACI, Airbus, all along the drive. Do the Feds who hire these folk follow any of the five cast iron rules? I doubt it. I sub for a sub for a biggie on a federal contract. My salary is dam' good, even with three different organizations taking a cut as it trickles down. I definitely would make a lot less if my client hired me directly. (And I wouldn't inflict federal office politics on a dog.) Of course a private firm can hire these folk too -- and do. Hopefully, they hire smart and supervise smart.

wizard57m-cnet
wizard57m-cnet

OK, the primary premise behind almost all out-sourcing, regardless of the field of endeavor, is a cost reduction for the company. A lot of data indicates that top level executives remunerations have increased something like 5000 percent since about 1980. Here's my proposal...why not outsource upper level management? Think about the savings a company could realize! Instead of a multi-million dollar per year salary, plus millions of dollars in bonuses, perks, paid time off for golf, etc. the company could outsource these excessive expenditures to, oh, maybe India, at generally around 10 percent of the cost of "in-house" management. Yeah, I know...a pipe dream.

stnwall
stnwall

I was 100% against the outsourcing model and agree with above comment that the quality is far below what you get with internal dedicated resources. That being said, you can still get "good enough" service/quality if you have somebody focused on the engagement on a daily basis. Somebody internal MUST remain part of the daily process. Good article overall.

mdbizzarri
mdbizzarri

I can certainly see the temptations of outsourcing for management, but once you sign that contract and engage, you will have to work twice as hard to bring the service back in house if the company you outsourced to does not meet the seen and unseen objectives. I have worked in the IT field since this started, and it seems from my point of view that management seems to buy into the idea, and then everyone laments their decision as the quality of the outsourcing is FAR inferior to what was done before. People will compare what they had with what they have, and the past will always be better. Whether that is true or not is irrelavant, but the damage to the company and management is done, according to those that will, or do work for them. I worked for a rather large bank at one time, and was in the first round of layoffs. They went from 2000 IT folks to 90 in a couple of years, and outsourced the rest to Unisys and IBM. Some people who lost their jobs got rehired to do the same job for less money and benefits. Sounds great so far? Well, after a year, they noticed the response times to high severity incidents were a lot lower, and there was nothing that could be done. It took them several years to bring the departments back in house. Several people that I talked to avoided said company like the plague because the company was lay off happy. My wife was lucky enough to stay and witness the whole transformation from an entraprinurial bank with the best and brightest to a bank that has average workers. I have seen very few outsourcing contracts that work well, because once you outsource, you loose control and the time it takes to get things done gets a lot longer and far more complicated. Sure, you save money for the immediate satisfaction, but do you save money in the long run? I suspect not.

NickNielsen
NickNielsen

At some point the demand for cheap leads to a reduction in quality of service. My corporate has, I think, learned that lesson. Others haven't. I've heard stories that some of the Dell warranty contractors here in the states are paying their techs less than $10/hour. Nobody is going to get quality tech support for that kind of money. And as they have yet to invent the remote screwdriver, and most retail workers are not known for their technical ability, I'm not too worried on that account. Even if (when?) robots become cheap enough they can assign one to each store, it's still no problem. Somebody will need to repair the robots.

NickNielsen
NickNielsen

recently outsourced their hardware support to my employer. To cover the additional workload, we hired a significant number (I think about 60-75%) of those customers' support techs. Their systems knowledge and technical expertise is now available to all of our customers, not just to their previous employer. Plus, several of those technicians were used to train the rest of us in those customers' systems and configuration. From the comments I've heard and satisfaction survey results I've seen, the individual customer sites are [b]more[/b] satisfied with the current service levels than they were before store support was outsourced.

Tony Hopkinson
Tony Hopkinson

You could replace your IT department with some low paid buffoons, that would be cheaper as well. Why is it cheaper? It's very simple, because you get less. So the question is, is less enough, and that's the question that isn't being asked, no matter the nationality of the replacements. It gets even worse, when in order to sell yourself to people looking for cheaper, there's only one way to stay in business, and that's to be cheap....

RudHud
RudHud

Calm down. Most outsourcing is onshore. It is ordinary in this business to outsource small projects, non-core activities, and temporary hiring to specialty US-based companies. In the Federal arena, onshore outsourcing seems to vastly outnumber in-house.

Reality Bites
Reality Bites

Anyone saying otherwise is on the payroll of the outsourcing company.

Reality Bites
Reality Bites

Only having one braincell accountants cant use logic nor common sense like even a small child could, their primal focus is where to extract the most money by doing the least work and causing the most damage.

foreigner
foreigner

You want upper management to outsource itself? I think that the premises are not what you think. Self interest trumps the company's interest. The premise is that the rich and powerful remain so, which requires that the poor remain poor and powerless. This is the social order. Members change but the order remains. And law serves to maintain this order. Insertion of the adverb "relatively" would not change this reality. Imagine what the order would be if this were not the case! Imagine that, in an interview, I were to offer to do the hiring manager's job for half of his salary or less (because I could). Furthermore, that I were to propose that if he were truly loyal to the company's interest (cost reduction), he would recommend that I replace him, then resign. Imagine the outcome!

Imprecator
Imprecator

What did India ever do to you?, outsource them to Mars.

Deadly Ernest
Deadly Ernest

Is the lower service and response level enough of a service and response level that you can operate efficiently with it? If the answer is yes, then look closer, if the answer is no, then stop considering outsourcing. You can safely outsource activities or sub-activities outside of critical operational areas where you have a system in place to make a bad response irrelevant to daily operations.

Deadly Ernest
Deadly Ernest

is a disaster. Also, hiring a contractor or a specialist for a task is the same result as outsourcing that work as it's not done in-house. However, the main IT support is a critical activity in my mind. On a medium to large organisation you need to have the in-house capability to keep your IT systems operational on a day to day basis. That does NOT mean you have to have every possible type of IT person as an in-house employee, but it does mean you have to have the ones needed to keep the place going and something in place for those services you do not have in-house. On example I've seen in real life is where the repair of any significant hardware issue is outsourced. The company concerned had 30 employees, two of whom administered, controlled, and managed the secure gateway and all the corporate servers; including the off-site storage of the twice a day file server back-ups and all system updates / upgrades. They have three spare PCs used to swap out any faults beyond their basic level of knowledge on hardware faults. Once a system is deemed to be beyond them it's swapped out and sent off to a shop down the street for more exhaustive checking and repair. They usually send out two a year for repairs costing a few hundred dollars, thus showing it's a lot cheaper than having an extra person on hand as an in-house service. It works because the service provided is local and their demand is low while a failure of response by the service is not a critical problem for them. The same could not be said if the gateway or the file server or the network had issues - they require immediate attention by the in-house staff. The above example is why outsourcing HAS to be examined with a very critical eye and all aspects taken into consideration.

Tony Hopkinson
Tony Hopkinson

Somewhere someone was talking about non-core business operations, e.g. IT. That one really purses me off. As you say the key is, can you manage without it, or more correctly how long can you manage without it. If the answer is no or not very long, then outsourcing is the act of a buffoon.