Outsourcing: Just say no?

Organizations unhappy with outsourcing might be tempted to repatriate the whole operation once their contract term expires. While insourcing can be an enticing option, it’s not as easy at seems, nor should it be a knee-jerk reaction to a bad outsourcing experience. Moreover, a client organization that thinks the outsourcer is solely to blame for a bad situation is probably wrong, and will probably repeat the same mistakes whether they repatriate, renegotiate with the incumbent, or switch to another vendor.

Twelve to eighteen months before the contract renewal date, the client organization should consider its options:

•Renew/renegotiate the contract with the existing service provider

•Exit the contract, go to RFP with multiple vendors

•Bring services back in-house

•A combination of all of the above

No particular strategy is appropriate in all circumstances. Thorough analysis of the existing situation and of the advantages and challenges of each option are key. The following guidelines and principles can help a business define and implement a viable strategy.

Take a broad approach to your outsourcing strategy

Don’t be limited by past experience and don’t make any assumptions about future requirements. Start with a clean slate and an objective mind. Since IT underpins almost all business processes, be careful about committing IT services to one vendor only to outsource the business process to another. The resulting arrangement might be expensive and complicated.

Can you isolate and package individual service offerings?

While “packaging” is difficult, it can help enormously when considering selective outsourcing. Mainframe services lend themselves to this approach, and are traditionally one of the easiest areas to manage in an outsourcing relationship.

Learn from your mistakes—and from your successes

Rarely is the service provider solely to blame for an outsourcing relationship’s problems. Both parties must accept responsibility for disappointment. Be fair to your vendor when you evaluate their successes and failures and recognize that you may have contributed to the problems. Ask yourself these questions:

•Did you have clear goals on what you wanted to achieve through outsourcing and did you articulate these goals to the vendor?

•Were you open and frank with the vendor at the beginning?

•Did your corporate objectives change as the contract matured?

•Did you perform due-diligence on the contract before you signed it?

•Did you staff your retained function appropriately?

•Did you allow the vendor to implement “best practices”?

•Have you attended all of the “committee” meetings described in the contract?

•If you can answer “yes” to all of the above questions, then you are in the minority.

Get an objective appraisal of the relationship

An independent third-party governance review can identify key problems that must be solved whether or not you exit the contract. The review process can help you understand your capabilities to manage an outsourcing relationship, find ways to address your limitations, and ensure that past problems are not rolled over to a new relationship.

How do your prices compare with the market?

An independent evaluation can define a fair price for services in many areas. A “proxy bid”—based on either prices outsourcers charge, or on the vendor’s cost to deliver services—can provide a quick and inexpensive point of reference and a critical reality check. One key benefit of a proxy is to show if a vendor is deliberately underbidding to oust the incumbent.

What are the costs and challenges of bringing services back in house?

Although insourcing can potentially reduce overall IT costs by 20 percent to 30 percent, the transition will involve increasing the headcount and purchasing assets. A viable business case to justify the upheaval must be based on a realistic and thorough appraisal of market costs, including the cost of repatriation as well as the personnel to run the operation.

Options and Risks

Each course of action involves risks that should be evaluated and addressed before a decision is reached. Risks to consider include:

The risk of renewing the contract

A good relationship characterized by trust between the parties makes renewal a low-risk proposition. However, if the relationship is fundamentally troubled, contract renewal will likely result in continued failure. One option to consider is to “cherry pick” retained services where the vendor has proven competent, and either outsource other areas to other vendors, or bring those services back in-house.

The risk of going to RFP

Organizations that take this path are generally:

•Dissatisfied with the performance of the incumbent vendor

•Using the competitive process to drive the incumbent’s price down

•In government or a regulated industry and therefore required to go to tender

•Looking for the lowest cost provider

•Looking for the vendor to provide direction

•Driven by the purchasing, legal and accounting departments

An incumbent vendor participating in the RFP complicates the process:

•Other vendors may assume that their bids will be used only to achieve a lower price with the incumbent

•The incumbent has extensive knowledge of your operation and therefore has a very substantial advantage over the competition

•The competition may deliberately underbid to oust the incumbent

•If the incumbent vendor believes that they might lose the contract, they may be uncooperative in sharing information and allowing access to other vendors

Other vendors must be reassured that the process will be fair and that the competition has as much knowledge about your operation as the incumbent. The incumbent should have the benefit of the doubt if possible when offering new solutions to previously existing problems.

The risk of bringing services back in-house

Organizations that take this path are generally:

•Dissatisfied with the performance of the incumbent vendor

•Disillusioned about outsourcing

•Pursuing aggressive cost savings or control over their IT budget

•Have discovered that outsourcing does not add value to their operation

• Aware that IT is a core competency and instrumental to their overall operation

Although large-scale insourcing has been rare, it will likely become more common over the next few years. Challenges include:

•Finding and retaining staff

•Designing and implementing processes

•Developing reporting and service catalogues

Some issues to consider:

•Realistic, independent market costs, associated with the personnel and the cost of repatriation, are needed to develop a viable business case to justify the upheaval.

•Demonstrate and document how insourcing will reduce costs and increase quality.

•Once the services are repatriated, be prepared to run the service as a business and to quantify the associated costs.

•Executives may find a discount from the incumbent vendor or from the market more appealing than internal cost savings.

–Based in Toronto, Geraldine Fox is Global Practice Leader for Compass’ Sourcing Service Line.

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