Why outsourcing succeeds or fails

Almost everyone in the IT industry has been touched by outsourcing in one way or another. Unfortunately, most have had bad experiences with outsourcing, situations where they have gone off the rails or failed completely. There are many reasons that outsourcings fail but only one reason for success: the company knows how to manage the process properly.

By “process” I don’t just mean getting to a contract signing with the successful bidder, I mean the full outsourcing lifecycle. The lifecycle starts with “I’m thinking about outsourcing.” and ends with a successfully completed contract term (be that five, seven or even ten years), where all major objectives have been met.

Surveys vary, but generally show that between 50% and 70% of all companies that outsource an IT function are “less than satisfied” with the outcome.

This is a sad statistic for an activity that affects critical IT and corporate operations, as well as the thousands of personal lives touched by the vagaries and disruption of outsourcing.

In my experience, I’ve seen outsourcings for virtually identical functions, let’s say IT infrastructure, either go very well from start to finish, or go off track at various points in the process. The principal difference between success and failure is that the buyer understands and manages a solid process from start to finish.

Similarly, the outsourcing vendor needs to be and act in an ethical way that truly delivers service value to the customer and promotes a long term, mutually respectful, beneficial relationship.

However, as always, the onus is fully on the buyer to get it right. It’s up to the buyer to discriminate between a vendor that really will be ethical and deliver a high value service as opposed to one that low-balls the initial bid price expecting to make it up with “Change Orders” over the multi-year term of the contract.

After all, it’s the buyer that has to suffer with or prosper from the outcome of the deal.

Getting it right

So what’s the process and how does a company “get it right”. The first step is recognizing the true scope of the process and assessing whether the critical skills/resources exist in house to do it right.

The “process” part is relatively straightforward. The steps are: Identify an IT function(s) that has outsourcing potential, assess the type and magnitude of value that could be derived from the outsourcing, assemble critical baseline data that defines the function to be outsourced (budgets & financials, savings targets, technology/staff/facilities inventory, KPIs/SLAs, etc.), assemble a tendering and evaluation team, construct/issue the RFP, short list and select a successful vendor, then negotiate and sign a final contract. But that’s just the beginning.

The buyer/supplier have to construct a governance/management model for the deal, transition to the outsourced environment, then measure, monitor, diagnose, report and correct the outsourcing parameters on a continuous basis for the full contract duration.

The most essential and surprisingly most ignored aspect is actually tracking and measuring the benefits realized from the outsourcing, compared to those expected at the outset.

People just don’t seem to ask the question, “Did we get what we wanted from this deal?” Did we save the money? Did we improve IT/business processes? Are service levels better than before?

One might ask why this isn’t done as a matter of course – by everyone. Some can’t because they didn’t get their baseline data in order prior to doing the deal, so there’s nothing to compare “success” to. Some don’t have a post-outsourcing governance model (and the staff/skill/tools) to enable them to measure “success” with any degree of accuracy. And for some, the scope of the outsourcing is so soft that the entire process is a moving target and measurement becomes impossible. None of these are good.

If a CIO or other responsible executive can’t go back to the CEO and board with a clear “We achieved our 15% savings target, and here’s where”, the outsourcing is a failure.

CIOs often ask if they can manage an outsourcing event with existing in-house resources. The litmus test for “can we do it on our own” is having people in-house that have successfully completed a comparable outsourcing to the full satisfaction of all stakeholders – period. Reading about it or knowing someone else who’s done it – or worst of all, relying on the sourcing group to do it – is a recipe for failure.

Points of failure

In case you’re wondering about specific points of failure, here are a few big ones. They’re not in any particular order, and each could lead to disaster. ? Poor definition of “success criteria”. ? Poor definition of scope – what are we actually outsourcing, precisely? ? Having no or poor KPIs (Key Performance Indicators) or SLAs (Service Level Agreements). ? Signing a poor contract. ? Having an inappropriate (or no) governance structure. ? Going through the process with key people missing from the engagement team. ? Not involving all internal stakeholders in the process. ? Poor transition planning. ? Relying on the vendor to be “the expert”. ? Negating competition by sole-sourcing to a single vendor. And the list goes on.

The bottom line is that there are many more reasons for failure than success, and the poor results of most outsourcings bear this out. How do you measure success?

It’s easy to measure failure – cost overruns, service and business-process disruption, user dissatisfaction, and constant friction with the vendor. However, most companies are seriously challenged to measure “success” after an outsourcing engagement is underway and the vendor is looking after the IT/business process.

Unfortunately, at this point it’s too late. This isn’t a problem that can be resolved after the transition to outsourcing. It must be addressed before the RFP was issued. It starts with the CIO/CEO/CFO – before outsourcing leaves the “I think we should” stage.

It’s critical to ask important questions very early in the process. How much money do we want to save – precisely. What are we actually outsourcing (the scope)? Which IT or business processes will improve – by how much and in what way – and do we have baseline metrics today to compare to? Do all the stakeholders agree with outsourcing?

If there aren’t crisp, positive answers to these questions, stop before you start! If you can’t define “success” up front (at the CEO level, and among stakeholders), it’s impossible to measure it at the back-end of the process. The bottom line is that outsourcing is not for the faint of heart or ill equipped. To get it right, many things have to go right. But mainly, it’s understanding the process and having the skill, experience and street savvy to execute with excellence.

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Jim Love, Chief Content Officer, IT World Canada

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