Navigating 101: know why and where you

Most major corporations are considering outsourcing everything from the corporate cafeteria to IT and beyond. Outsourcing is often touted as an easy way to achieve more functionality for less money, with less aggravation.

But how do these deals actually turn out? Customer-satisfaction researchers at a major IT outsourcer report that most outsourcing relationships deliver less-than-expected results, often leaving both sides disillusioned by the end of the first year.

If you want to pull the plug on your outsourcing deal, be aware that doing so is difficult and expensive at best – outsourcing is primarily a one-way street. You can avoid many outsourcing pitfalls by doing your homework before you negotiate a contract:

1. Define explicit outsourcing boundaries. Many outsourcers will try to persuade you to outsource most or all of IT. Most corporations are willing to outsource commodity functions, but not the areas that give the corporation its competitive advantage. Don’t allow yourself to be pushed into outsourcing more than you have determined is appropriate. And never outsource one piece at a time without a master plan.

2. Understand your motives for outsourcing. Before entering into an outsourcing agreement, ruthlessly assess your motives. Are you primarily seeking to cut costs, improve service or allow management to focus on the business? Or has your company simply decided that IT isn’t a core competency and just wants to get rid of the aggravation? Being clear about your reasons will allow a fair evaluation of the outsourcing deal after the first year.

3. Carefully analyze and understand your cost structure. Identify and remove inefficiencies before outsourcing; otherwise, only your outsourcer will benefit. Evaluate your cost structure in sufficient detail to have leverage over your outsourcer. Beware of any outsourcer that offers to cut your costs x per cent without doing any analysis.

And if your outsourcer uses the new “utility” pricing for on-demand computing, make sure you understand all the implications – there’s not a lot of industry experience with it yet.

4. Analyze the total cost of outsourcing. Before you weigh the price of outsourcing against your current costs, start with the outsourcer’s bid, then add the costs of preparing and evaluating a request for proposals, the migration/switching costs and the cost of managing the outsourcer.

5. Assess the hidden effects of outsourcing. Outsourcing imposes discipline on your organization. Shifts in architectural direction can be more difficult. Unplanned changes become expensive and may not occur in the time frame you desire. Adapting to the rigorous processes required by an outsourcer may be difficult in some corporate cultures.

6. Closely examine security and privacy. The new cyber disclosure laws will essentially make security breaches at your outsourcer equivalent to security breaches at your own company. You will be equally responsible whether your customers’ data is compromised, stolen or hacked at your site or the outsourcer’s site. Your exposure and liabilities are significantly multiplied – investigate carefully.

7. Communicate honestly with your staff. Outsourcing generates apprehension, and rumors will fly. Unless you have a compelling message and communicate candidly, your best people may walk out the door.

8. Design a viable exit strategy. Supplier failures are occurring at an alarming rate. Explore options and fallback positions before you need them.

9. Make sure initial stakeholders on both sides remain accountable. Many outsourcing arrangements fail because the original stakeholders disappear and their replacements are often far less committed to the deal.

10. Consider offshore options. Advances in communications technology have made offshore outsourcing increasingly viable. Costs can be significantly lower. But understand the impact of international travel, language difficulties and time-zone differences on your business.

The foundation of successful outsourcing is clearly understanding what you are outsourcing and why. Outsourcing can be an excellent solution, but it’s not a panacea. Don’t follow the outsourcing lemmings blindly over the cliff. Make sure you fully understand what, why, when, where, who – and how much.