The politics of outsourcing

Increase performance, decrease funding, let the IT guys handle it.

Does this sound familiar? If it does, the outsource deal you cut a few weeks back on behalf of your company’s IT needs is likely doomed to make the long journey to the graveyard of ill-defined projects.

And you thought only elephants wandered off to die in secrecy.

Many outsourcing relationships begin with optimism and mutual good will. But when impatience coupled with contradictory objectives arise on either side of the handshake, the love-in ceases point-blank.

Geraldine Fox knows first-hand about the potential perils of the outsourcer/client relationship. As the global practice leader for outsourcing with Compass Analysis Canada Ltd. in Mississauga, Ont., she produced a white paper on the very subject following the management consulting group’s annual IT census of CEOs and senior executives in 1999.

Armed with 12 years experience in IT operations, with a particular focus on IT outsourcing, Fox specializes in leading client companies through the outsource/partnership process. Her past clients include the likes of General Motors, the Governments of Ontario and Manitoba, AT&T Canada and Union Gas Limited.

Fox cited several factors that cause the outsourcing experience to go awry. Chief among them: unrealistic goals. Fox said one reason these deals get off kilter is the clients seek to enhance IT performance while diminishing the required investment.

“[The outsourcer needs] the complete understanding of an organization’s situation, an outsourcer can’t commit to targeted savings without knowing the challenges and the budget the client faces,” she said. “The outsourcer wants to understand the economics of the situation before committing. That’s a more sensible approach.”

Other times, Fox wrote, clients can enter an agreement wrongly assuming that the outsourcer will take the lead in understanding and delivering IT value. Another possible scenario: the signed contract dictates a mutual intent to identify and execute IT-enhancing opportunities, with the details to be worked out later. According to Fox, those details quickly reveal themselves to be inordinately complex.

Get the Balance Right

For Don Foreman, founder of Foretronix Computer Consulting in Toronto, the outsourcing world has never been better. It’s been so good, in fact, he’s having trouble finding qualified, trustworthy help. That prevents him from taking on more projects.

Foreman said the secret to his success is simple: communicate effectively. “My communicative techniques and my knowledge of the technology I’m servicing is key,” he said. “People that don’t communicate with their client effectively are going to experience a low-rate of satisfaction with their customers.”

Foretronix provides customized computer support for SMEs, SOHOs and individual users. In essence, no job is too small or too cumbersome for Foreman.

“I find I’m able to capture increased business by keeping this simple, and for SMEs they can justify their bottom line by outsourcing their IT needs.”

While IT outsourcing deals have had a dubious past on the North American landscape, Fox said that situation has changed dramatically in the last few years.

“It’s getting better on the whole, companies and outsourcers are getting more sensible about their overall directives,” she said. “Outsourcers used to pitch that they could save money, improve service quality…faster, cheaper, better.

“That led to general disappointment, even if one of those goals was achieved. Now, there’s more dialogue between both sides on what mutually-achieved goals can be realized, thus it’s a win-win situation for everyone.”

Fox mentioned Europe is a direct beneficiary of North America’s forays into outsourcing by learning from our mistakes. While European companies once lagged in the percentage of those who outsourced IT needs, the gap has lessened significantly. Primarily because there’s a veritable communal nod in business worldwide that acknowledges there’s a serious shortage of skilled techs.

“Some companies are leaning towards lowering their head count, therefore certain core tasks are outsourced,” she continued. “This is happening on a global scale and we see that as a main driver…we’ve already seen evidence of it in the U.K.”

Fox shied away from debating whether or not outsourcing typically proves fiscally sound.

“It’s true stock tends to go up once a deal is announced but I don’t know if that is sustainable or if it could be a blip whenever an organization makes a major announcement,” she remarked. “It’s neither right nor wrong, that’s not what’s important. It’s how you implement (the project) and how a company prepares itself to deliver the value in the long run.”

Fox said Compass recommends companies establish some basic foundations before entering into an outsourcing deal:

– Preparation. Have a thorough understanding of your own internal organization in terms of costs, service quality, and what your customers want.

– Define Goals. Consider what it is the enterprise hopes to achieve through the deal and make as clear as possible what those goals and responsibilities are to the outsourcer.

– CEO Support. Senior IT executives play a prominent role in strategy development, thus the support and commitment of senior management are essential to developing a proactive outsourcing relationship.

“Allow sufficient time for the project to be completed, and don’t rush through the negotiation process before the details are fully understood,” Fox said. “A cultural fit between the client and the outsourcers within the deal is also really important.”

She added establishing a governance structure which will monitor the project and manage the relationship between the IT department and the business unit should be in place before the ink dries on the deal.

Thus, getting the balance right requires one basic human concept: understanding.

A Mutual Interest

According to Compass’ 2000 IT CEO Census, only five per cent of respondents claim they’re uncomfortable with using IT and only four per cent are at all anxious about their understanding of the business potential of IT.

However, when asked to rate their level of comfort while making executive decisions on IT-related issues, 51 per cent of the respondents admitted they were fairly comfortable, 35 per cent said they were very comfortable, and 13 per cent confessed to not being comfortable at all.

“From a project management standpoint, we want the project management responsibility,” said Jonathan Hamilton, director of IT consulting services for Toronto-based United Systems Solutions (USS) Inc. “It gives us more control of the project, and the opportunity to get additional resources if necessary. In some circumstances the client wants full control (of project management), which is fine too.”

Hamilton’s background is in sales and client management, up through IT messaging infrastructure circles, and seven years of service with USS in the IT sector.

“[The industry] has improved as companies look to outsourcing IT consultants or other areas they might not have an expertise in,” he said. “We’ve seen an increase (in projects) in the last six months.”

a selective increase

Moreover, outsourcing is becoming an industry standard. According to a Jan. 4 study released by Dataquest Inc. – a division of The Gartner Group – the worldwide finance and accounting outsourcing market alone is projected to grow from US$12 billion in 1999 to US$37.7 billion by 2004.

“Providers in finance and accounting outsourcing need to develop comprehensive, integrated service offerings, Web-based delivery capabilities, flexibility in pricing models and strategic business partnerships,” said Rebecca Scholl, a senior analyst with Dataquest’s IT services worldwide group in San Jose, Calif. “Vendors should be careful to avoid casting themselves permanently into the role of low-cost, low-value transaction processors – trapping themselves at the lower, more competitive and less stable end of the market.”

Ken Hanley, a principal with KPMG in Calgary, was hesitant to jump on the bandwagon by suggesting IT outsourcing is on the increase in Canada. He acknowledged the market is good, but it’s a selective increase.

“It’s a more selective market…the prevailing wisdom is to refrain from outsourcing your entire IT shop,” he said. “The truth is, the best method is balance, outsource some of your IT needs, but not all.”

Hanley said the client/outsource relationship will come full circle when two feats occur: the IT department is not viewed as a separate entity from the organization, and when companies refrain from outsourcing anything strategic.

“E-commerce is just commerce enabled by something else,” he said. “The IT department’s role should be viewed as a part of an organization, not separate from it.

“Outsourcing non-competitive IT work is fine, but if that work provides some kind of strategic advantage for your organization, why would you put that responsibility in someone else’s hands?

“Like everything else, outsourcing everything is a mistake. So too is outsourcing nothing.”