The what, how and why of IT outsourcing

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The move towards outsourcing amongst small/medium-sized companies is firmly underway. IT services has been one of the first business functions to undergo outsourcing. Establishing a proper framework to manage the entire outsourcing process is critical to its long-term success. However, many companies fall at the first hurdle. They fail to ask themselves the following key questions:

What is our motivation for outsourcing? (The Why). What should we outsource? How should we go about outsourcing?

What is our motivation?

Generally organisations outsource in order to cut costs, boost efficiency and improve service levels to customers. However, some organisations try to use outsourcing as a means to address business problems they have been unable to resolve themselves.

When you look at your IT department or other business functions, do you see poorly defined processes, lack of documentation, creaking systems due to years of under investment and low customer satisfaction? If you do then you are not alone. You have internal business problems but remember, they are your responsibility and yours to resolve.

Unfortunately, examples of companies using outsourcing to export business problems to a third party are not uncommon. The result is this: business issues you have allowed to build up over time cannot be solved overnight and costs increase rather than decrease, immediately defeating one of the key objectives of your outsourcing strategy. Trying to ‘pull the wool over your partner’s eyes’ will not help to develop the kind of long term, trusting relationship which successful outsourcing requires.

A competent and experienced partner familiar with your industry will insist on addressing business processes or IT issues upfront. But beware — they will also charge accordingly. You are much better off agreeing a process with them from the outset where issues can be immediately addressed, ensuring that you get a good share of any future gains.

It’s also worth remembering that you will rely on these people to support your business going forward. Although you are likely to have a clear SLA spelling out roles and responsibilities, there will be times when you need them to go the ‘extra mile’ for you. If vendors believe that the circumstances under which they have agreed a contract are proving to be ambiguous, they are unlikely to show that extra commitment. If you think you can then force them to solve issues that are not theirs, the road ahead may be very rocky indeed.

What should I outsource?

Deciding on what you can outsource is perhaps the most critical part of the whole process. Again the temptation is to outsource everything, but you need to look at what makes practical sense. In some cases outsourcing the entire function may be advisable, however in our experience selective outsourcing is the best approach. This involves outsourcing individual areas or functions of your business. For example, you might outsource the support of your desktops, servers, LAN and/or WAN but keep the support of your business-critical applications in house.

So how do you decide what to outsource? Look at each area/service and ask the following questions:-

• Is this area/service strategic to the business?
• Do we have the right skills to manage this going forward?
• Is this the best use of our people?
• Could a vendor get economies of scale in this area?

How should I go about outsourcing?

The answers to the questions above will help you to identify which areas are candidates for outsourcing and determine what the likely benefits and risks are.

You now need to establish a framework to implement the process. Again companies can create problems because they do not follow a structured approach. In some cases, they fail to properly evaluate vendors and in others, they simply select the vendor with the lowest price ignoring the fact that they may find this vendor extremely difficult to work with.

If you encounter significant relationship difficulties during the selection process when a vendor wants your business, it’s very unlikely that they will be easy to work with afterwards, when they have your business. This should be common sense, but in my experience, many companies overlook the basics and create serious difficulties because they take shortcuts and ignore warning signs. Blaming the vendor or the IT industry might make you feel a little better but it won’t solve your problem.

You need to follow a formal and structured approach. The following are the key steps: –

• Decide on what to outsource
• Prepare an RFP document
• Issue the RFP to relevant vendors
• Evaluate the responses & shortlist vendors
• Carry out reference checks & pick a preferred vendor
• Define the service level agreement (SLA) and the transition process
• Negotiate the price and conclude the deal
• Manage the transition

You should be honest about your own capabilities here. Do you have the right mix of skills to follow the above process? If not, then engage an external consultant. You can learn from their experience and they can guide you through the process. Their help can be particularly useful in vendor evaluation, SLA definition and transition management. Remember you need to take a partnership approach throughout the process. You need to be involved in the transition and this will take time. You also need to build a good relationship with the vendor, as you will be relying on them going forward.

Finally, outsourcing offers the opportunity to reduce costs, improve efficiency and service, but you need to work at it. If you are prepared to put in the effort, you can achieve real benefits. If you are not, do yourself a favour and don’t start the process in the first place.

The author is managing director of Clarion Consulting, a company that provides management consultancy on IT-related issues.

10/10/2003

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