In today’s changing IT landscape, CIOs are under increased financial pressure to spend less money and demonstrate how IT can yield business benefits.
Often, companies do this by outsourcing parts of their business, such as human resources or IT. However, outsourcing isn’t the automatic money-saver it’s often touted be. That’s why one industry analyst is pushing what he calls, “business-outcome based outsourcing.”
In recent years CIOs have experienced poor return on investment with IT projects, so now businesspeople are looking for ROI measured in months not years, said Doron Cohen, vice-president and research director, financial services at Gartner|G2 in Toronto, speaking at CIO Canada’s Outsourcing Summit in Toronto last month. CIO Canada is published by IT World Canada Inc., which also publishes ComputerWorld Canada.
He said IT infrastructures are at the point where companies are looking for an improvement of processes over an improvement of products. Now C-level executives loathe doling out money for technology unless it yields specific business benefits.
Enter outsourcing.
The main reason companies outsource is to gain a competitive advantage because they can spend more time focusing on their core competencies instead of IT.
But it’s actually a myth that outsourcing will always save you money, Cohen said, since 20 to 25 per cent of outsourcing relationships fail within two years and 50 per cent will fail within five years, he said.
Cohen said the two main causes were vendors not understanding the services they were supposed to provide, and unexpectedly high costs. Additionally, outsourcing agreements are frequently inflexible. Since business requirements change faster than IT changes, outsourcing relationships negotiated years earlier become outdated.
In another presentation, Barry Sookman, a partner with law firm McCarthy Tetrault and head of its Internet and Electronic Commerce Group in Toronto, said he’s seen a number of outsourcing relationships turn out to be “absolutely terrible.” He emphasized that the process of selecting the vendor needs to be done right so that both parties share the same expectations.
Sookman’s co-presenter Bruce Laco, senior manager, outsourcing with consulting firm Deloitte in Toronto, said pricing can be deceiving. “When it is less specific, pricing can be an open book, and assumptions will be made; down the road that could mean significant add-on costs.”
Cohen said companies shouldn’t pay too much attention to the offers they receive after putting out an RFP, because RFPs are subject to different interpretations between the client and the vendor. For example, in an RFP for help desk services the company offering the RFP might interpret that as 9 to 5, and the customer might interpret it as 24x7 — and the next thing the client knows, it’s paying extra for a 24x7 call centre.
Sookman added that if the contract is too ambiguous, the vendor could add a risk premium to the total cost of the contract to cover off things that might go wrong.
Cohen suggested companies take two vendors to the contract process. It may cost more in legal fees, but it’s worth it in the long run simply to ensure the client get the best deal possible, he said.