Easing the Pain of Outsourcing

By Anne Zink

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On paper, outsourcing almost always makes sense. The cost savings are eye catching, double digit percentages. Productivity and efficiency improvement benefits are touted as soft benefits that make the project even more appealing. Add the “motherhood and apple pie” rationalization of, “We’ll be able to focus on more strategic initiatives,” and only Scrooge would argue against the idea.

Too bad the adage “The best laid plans of mice and men often go awry,” applies. It is why 74% of the CIO’s we interviewed recently confessed to wondering what exactly they had committed to upon finalizing an outsourcing contract. The mere thought of executing the transition from in-house to outsourcing can be migraine inducing.

Can CIO’s do anything, short of buying Advil by the case, to ease their pain? Our research reveals it is possible, but it may require a mind set change. For the purposes of this column, we’ll assume the due-diligence is complete. The decision is final. Outsourcing is the right thing to do for the business and vendor selection is narrowed to a short list, if not a final one.

We asked 50 Fortune 500 CIOs, given the opportunity to “do it all again” what would they do differently? Upon first review, their answers may appear bland. But closer inspection reveals that while most outsourcing projects start out on the right track, final scope and costs negotiations typically result in short changing the activities most critical to a less painful project.

An astounding 84% of CIOs indicated they would invest more in developing the scope-of-work and transition plan. Outsourcing vendors have long complained about customer’s unwillingness to pay for pre-project consulting. The consistent push back from CIOs has been that pre-project work should be part of the vendor’s cost of sale.

CIO’s told us it took several “nightmarish” transitions for them to fully appreciate the importance of mutual investment in pre-project work. When they did invest in this work, CIOs stated there were two important findings.

The first was a realization of the cascading effect of the various decisions that accompany an outsourcing project. While this particular discovery had little impact on the actual project, it had tremendous impact on corporate-wide satisfaction with the project. It also provided CIOs with visibility into opportunity for other costs savings and streamlined processes.

The second was understanding the cultural fit. Often the team engaged in initial selling and scoping is not the team (or at least not the full team) responsible for execution. Investing in getting to know each other better via more intensive transition planning helped CIOs refine both their team and that of the outsourcers. It also revealed potential disconnects in cultural priorities. This allowed the transition teams to create operating principles to guide level decision making.

Here’s a few of things these CIOs would do differently if they could do it all over again:

Build in Flexibility

Outsourcing projects are long-term contracts. Over the course of three-to-seven years, businesses often undergo dramatic changes. Over 70% of CIOs stated they overlooked flexibility. Their focused tended to be on reliability and responsiveness. Now they focus on developing projects as partnerships, with joint-working agreements that support change while delivering value. Share Risk and Reward

Another mind set change is related to creating an environment of balanced risk for all parties. As the competitive environment becomes more heated between outsourcers and pressure increases on IT departments to cut costs, both parties’ pricing pressure becomes intense.

Just over 60% of the CIOs we spoke to are asking outsourcers to develop a pricing structure that allows for mutual rewards. More than gain sharing, the model CIOs are increasingly looking for is based on their own currency (e.g. passenger seats, desktops, etc). This has the dual benefit of supporting flexibility and delivering rewards.

Actively Govern

One of the key lessons learned by the CIOs we surveyed was as a business, they cannot, nor should they even want to, outsource control or liability. They now insist on mutually developed governance approaches tailored to the needs of each project.

They state there is nothing uncertain about governance. It must be formalized and in writing with clear roles and responsibilities. Appropriate resources from both parties must be assigned to ensure success. Too often, CIOs we spoke to stated they paid attention to governance for the first 90 days or so and then handed it off to line managers who often handed it off to their subordinates.

Get Meaningful, Measurable Results

This last lesson is the one most easily brushed off. After all, performance metrics are standard in outsourcing contracts. The key word is meaningful. IT-centric metrics have little value outside of IT. The CIO’s we interviewed learned through experience IT performance metrics must translate. They now look to create metric models by leveraging COBIT, user/customer experience and KPIs.

Outsourcing, by nature, will always be fraught with challenges, particularly during the transition phases. Although outsourcing receives more than its share of bad press, the reality is there are far more successful engagements than failures. Outsourcing projects properly crafted deliver against all their promises, but even more importantly, can drive your business forward.

Anne Zink is founder of AZtech Strategies and go-to-market strategy consultant for the high tech industry. AZtech is dedicated to developing multi-channel strategies based on customer expectations, channel input, and industry expertise. AZtech specializes in bringing emerging technologies and services to market.