The Right Way to Outsource

So you’ve decided to make the move – give in to the pressure from the CEO to outsource the IT area that you’ve spent a large part of your career building. The boss expects you to realize all those benefits promised by the major outsourcing providers. You know the ones: ability to focus on the core business, improved ROA (Return On Assets) through divestiture of assets, access to better technology and talent, improved time to market, and maybe even reduced operating costs.

Are the benefits real? Is it worth the effort and disruption? Are you giving up control?

Outsourcing can provide organizations with a real competitive advantage when done for the right reasons and implemented correctly. Conversely, outsourcing can be a painful and expensive ordeal, pulling away key resources from critical business priorities, while locking you into a long-term contract. To help you through the maze of alternatives, consider the following set of best practices as you consider your outsource opportunities.

Answering Some Key Questions

First of all, you need to answer some important questions. Why do you want to outsource? What business problems are you trying to solve and what components of the operation do you need to change? How far should you go with the outsource?

To answer these questions you need to go back to the business strategy and revisit the mission-critical initiatives required to provide differentiation, growth and efficiencies. Assuming the IT strategy is already aligned with those priorities, honestly assess the current organization’s ‘ability to deliver’ and create a realistic ‘gap analysis’, which will become the framework for your outsource strategy.

This will call for some organizational soul searching and tough decision-making. Outsourcing problem areas, or commodity functions such as ‘steady-state operations’ may be easy decisions. What about knowledge functions like ‘architecture’, where employees have deep institutional knowledge and an understanding of the business and its priorities? Balance the reality of losing that intellectual capital against the potential benefits of access to a bigger talent pool and better technology.

These are tough business decisions with major impacts on real people. Develop your outsource strategy with a thorough understanding of the business needs, your prospective service provider’s capabilities, and allow your corporate culture to be a gyroscope to maintain balance.

Developing the RFP

Now that you know what to outsource, it’s time to develop an RFP. If you want a competitive deal, it’s mandatory you open it up to competition. Don’t let your current major service provider convince you otherwise. Conducting an RFP is the only way you’ll know you got the best deal available.

If your organization does not have a great deal of experience preparing, evaluating and assessing RFPs, then this is the time to bring in some outside help. There are a number of firms out there that provide a full suite of outsource management services that include planning, RFP management, contract negotiation and transition services. Their knowledge of the market, best practices, pitfalls, and escape clause strategies can save you millions of dollars over the term of your agreement. Their analysis and recommendations will be void of bias, perceived or otherwise, compared to the same work being completed in-house.

Whether you decide to use outside help or go it alone, consider the following points through the RFP and contract negotiation phases:

Balance speed against precision. This will be a high stress and emotional time for staff, and the rumour mill will be working overtime. The sooner you get through the process, the sooner you can give your people the facts, and the less likely you’ll see operational disruptions and staff attrition. People issues represent your greatest exposure and will require the majority of your time and concern. Conduct matters quickly, fairly and with integrity beyond reproach.

Clearly define your service level expectations and the metrics for measuring them. Be careful what you ask for because you might just get it. Choose the metrics carefully, as these will drive the behaviours of your service provider. For example if you define an objective of answering Help Desk calls within 10 seconds, consider that the service provider will probably reorganize the help desk to do exactly that. A likely outcome will be reduced focus and resources on solving the problems after they’re reported.

A better metric might call for a maximum target of calls to the help desk that declines over time. This approach requires that the service provider act proactively to prevent problems from occurring in the first place.

Also remember that the higher you set the bar on service levels, the more it’s going to cost in service fees. Therefore, set the metrics at the level you need to successfully operate the business.

Be aware that your service providers are placed in a competitive position when responding to an RFP, and they will propose the minimum solution required to meet your requirements. Don’t assume that it’s included in the proposal unless you see it in black and white. Be thorough and detailed.

Make sure that the agreement clearly specifies the costs for provision of new services that will be required by your line-of-business clients on an ongoing basis. Include targets to deliver and execute new-service proposals, and understand who absorbs the cost of proposal creation. Don’t underestimate the magnitude and complexity of the new-service process. This is one of the most difficult aspects of the outsource to get right. Problems here have a direct impact on your line-of-business clients, surfacing as either delays in implementation of new services, exorbitant costs, or both. Keep in mind that this is the opportunity for your service provider to increase revenues; you’ll want to ensure the pricing methodology is well understood and agreed to as part of the contract.

We all know Moore’s Law and the inverse relationship to processing power and costs over time. Make sure your service agreement recognizes it as well.

Clearly establish the criteria you’ll be using to evaluate RFP responses. While price is always an important factor you should also place appropriate weight on your service provider’s reputation for quality, and their ability to sustain it. Thoroughly check references, assess corporate stability, compare similar contracts, and review their capacity to handle not only your business, but also any other prospective business they may be bidding on.

Outsource agreements are always longer-term contracts that require a true partnership to be successful. If the relationship is not built on a strong foundation of trust and a spirit of win-win, then it’s doomed to fail and you can brace yourself for a painful conclusion. If it means spending a little more money to deal with a provider you trust and can work in partnership with, then it’s money well spent.

Make sure you include enough detail in contracts to avoid disagreements and misunderstandings. Outsourcing contracts tend to be very complex and there is always potential for disagreements and misunderstandings. Should they occur, deal with the dispute as quickly as possible. The impact of a disagreement is felt at every level of the organization, ultimately affecting the line staff. If allowed to fester, these issues will begin to undermine the relationship and the foundation of your partnership.

Your contract should define a mechanism for quickly resolving disputes, perhaps through the use of a third-party dispute-resolution process. You also need to protect yourself in the event of a total breakdown in the relationship. Ensure your contract includes appropriate escape clauses.

Penalty clauses are an important tool to influence service-provider behaviours, and while you don’t want the clauses to be punitive, you do want them to be effective. Service providers like to offer credits that accumulate and are reconciled on an annual basis against incentives they’ve earned. It’s important that you understand your organization’s utility for over-performance vs. under-performance. It’s likely that exceeding a 99.9% availability target won’t mean as much to you as when that target is missed. So why overlook the pain suffered as a result of the missed target and trade it off against the marginal benefit of exceeding that target?

If you’ve set the service levels where they need to be to successfully run the business, then forgo the incentives and insist the service provider write you a cheque within 15 days of the missed target. Operational areas typically don’t write cheques to customers, and when they do it’s sure to get the attention of the service provider’s finance area and their executives soon after. This method establishes an increased level of self-governance within the service provider’s organization and makes it less likely that you have to be involved in ongoing escalations.

The Critical Transition Process

Congratulations, you’ve made it through the negotiations. You’ve identified your needs, matched them with a service provider you trust, and struck an agreement in principle to move forward. Assuming you’ve done it right, the due diligence process and more importantly the transition should go smoothly.

Transition is where the rubber meets the road. It takes a significant effort to complete it successfully and it can be very painful for staff, management and your lines of business if it’s underestimated or mismanaged. Pay attention to the following as you proceed:

Most likely large numbers of staff will be transitioning to the outsourcer as part of the agreement. This is a very difficult change for those affected and one that requires speed, complete disclosure, and integrity. During the transition, staff typically feel abandoned, not part of their old company and not part of the new one. Make every effort to ensure they understand the process and ensure the new service provider takes the necessary steps to make them feel welcome. The cultures of the two organizations will no doubt be very different and a great deal of planning, direct management involvement and hand holding will be necessary to make the staff transition go smoothly.

Large service providers use a ‘deal team’ to prepare the RFP response and negotiate the contract. Ensure your agreement requires that key members of this team remain on onboard until the completion of the transition. Expect the contract to be thick and filled with legalese – not the kind of documents easily understood by the line people. You can be assured that many questions will arise throughout the transition and not every circumstance can be captured in the contract. By insisting that ‘deal team’ members stay onboard you’ll ensure that issues are resolved quickly and these senior people will have a vested interest in making sure the transition occurs quickly and smoothly.

Establishing Strong Governance

By now everybody understands that outsourcing IT services does not abdicate the IT organization’s responsibility for the provision of quality services. It would be nice to think that the service provider is going to look after everything, but the reality is that a governance team will be required to manage the service provider as well as the expectations of your business lines.

Governance models vary depending on needs, however it’s important that the following functions are managed/retained within the governance team:

• In-depth knowledge of the contract, service levels and the major priorities and processes of each line of business.

• Relationship management of the line of business on behalf of the IT organization. Your service provider may have direct interactions with the client, however it should be done under the auspices and with the full knowledge of the governance team.

• Line-of-business clients should look to the governance team for support for major failure situations, service level management, new service provisioning, and IT strategic planning services. The client should have a single point of contact for IT services, and depending on the scope of the outsource, the governance team representative will bridge gaps and call on internal and external resources for support as required. The ultimate goal is to provide a ubiquitous IT service to the line-of-business client.

Outsourcing can provide significant benefits provided you follow best practices. Implement it in the areas that are appropriate for your business, choose a trusted partner, negotiate a win-win contract, and establish strong governance processes.

Don’t underestimate the amount and complexity of the work involved. You can be sure to encounter a few surprises along the way. As long as you stick to your game plan, your organization will retain control of its destiny, and the sought after benefits will be realized as an outcome of your efforts.

Bill Mummery is an independent consultant with more than 20 years experience in the IT service business. He can be reached at [email protected]

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