Opinion: The five pitfalls of outsourcing

IT outsourcing is now well into its third decade, having passed through generations of technology and platforms: mainframe, client/server, and now into the cloud.

An extraordinary amount of experience has created substantial documented learning that should benefit any company considering outsourcing some or all of its IT and network infrastructure, technology helpdesk or application development and maintenance.

Yet companies frequently ignore the lessons of the past, and routinely duplicate the mistakes of our “outsourcing forefathers”.

What is it about outsourcing that encourages such odd, self-defeating behaviour?

And why is it that people in this field often first need to be burned before they become willing to invest the time and energy required to get it right?

Here, in ascending order of magnitude, are the reasons why new outsourcing customers get burned.

Pitfall Number 5: How hard could it be?

Outsourcing is not something that requires an advanced degree. We have been executing the IT function for years now, and it’s time to have another company do it for us. We know what we need. We have hardware, network, software (home-grown and licensed) and some knowledge as to how it all fits together for our enterprise. The likely providers – IBM, HP, Accenture, CSC, Infosys, TCS, and so on – generally have more competence in the area than we have. We have procured services many times before – this is just another service. And this time it involves our no longer doing something we were historically doing (and probably badly at that). What’s the big deal?

Those of us who have spent 20 or so years in the field know that this approach guarantees problems. Outsourcing is harder than you think. You can’t just lop off a process or function and expect it to run any better than it did. First, you must decide why you are going to outsource. If it is because you are not good at IT yourself, or you think someone can do it cheaper, please see the other pitfalls!

Then, even if outsourcing is right for you, there is a great deal of knowledge that your own staff has about the function, how it relates to your business, and how to manage it as your business needs change.

This knowledge has to get to the outsourcing provider. It must be maintained and nurtured during the multiple years of the term. It must be available to you if you ever want to bring the function back inside. And, speaking of that, do you think it would be easy to bring the function back inside? What about new staff? What about technology refreshment? What about software licences? And how do you handle risks associated with data security and privacy compliance, once the IT function has been shifted to another company?

There is a reason that successful deals take a substantial amount of time to negotiate and transition. Nothing about this business is easy.

Pitfall Number 4: The outsourcing provider will fix everything

In outsourcing, we get to transfer our IT problem to a provider who has expertise in the area. They will fix the problem and save us a ton of money. And the best thing is: we won’t have to change the way we do things.

This concept is so familiar to outsourcing professionals that it has a name, “Your mess for less”. And outsourcing professionals know that it is not the way to get the deal done. IT outsourcing providers cannot resolve your problems without your involvement and willingness to change the way you do business. And although they are generally better at the given function than you are, the way they solve your particular problem, the solution they bring to the table, will by its very nature change the way you do business. Better than doing a “mess for less” is to put in some time and energy up front to understand the reasons for the mess, and to begin a process of remediation before you outsource. Most firms that have migrated their IT platform to a shared services model before outsourcing any function to a third party have found that the likelihood of a successful IT outsourcing relationship is substantially increased.

Pitfall Number 3: What do you mean “the baseline?”

We are not sure what we spend on this function to be outsourced, our metrics on transaction volumes are not that great, and we don’t really collect performance data about how well we do it ourselves (or, we do collect performance data and there are about 150 things we measure). We know that we want improvement and cost saving, and the provider will agree to do just that.

The smart provider will do nothing of the kind. The failure to provide a legitimate baseline from which to judge improvements in cost and performance during the deal’s term is one of the main reasons why outsourcing relationships break down. Efforts to pin down this information are usually short-circuited and made hostage to the need to get a deal done quickly.

Development of an accurate baseline for defining and pricing the so-called “in-scope” functions or people is not as easy as it sounds. Often, people function in several roles – sometimes in scope and sometimes out of scope. Some underlying costs are contained in budgets other than the IT one, and may continue despite the effort to realise cost savings. Much may be left for post-contractual analysis and adjustment in pricing, scope or service levels. By then, unless the contract has been carefully negotiated, it may be too late.

Both sides may realise that the customer’s objectives just cannot be met at the proposed pricing. This leads to bad behaviour by both the parties as they try to jockey around a deal that should not have been made in the first place.

Pitfall Number 2: It’s only about money

We need to get cost savings next year. We understand that outsourcing is a way to get cost savings because the provider has a competency that we don’t have. If we get the savings, we will be satisfied.

Cost saving is important – it is still the number one reason that companies engage in outsourcing. But money isn’t everything. Deals that are struck purely for cost savings run into problems midway – even if the savings are achieved. That’s because savings calculated against a baseline are really static. Outsourcing deals need to deliver dynamic benefits to stay relevant to changing organisations.

For example, consider an application development and maintenance outsourcing based on the premise that the work will be done in India and will result in substantial savings due to labour arbitrage. The savings should materialise if the transition is done correctly, if the work is done with the same level of competence, and if overhead is not created by doing things half a world away. But, over three to five years, increases in rates and personnel turnover can more than offset some of these early benefits. And the flexibility to shift some of these workers to new applications may not be as great as it was when they were your employees.

Pitfall Number 1: We can easily manage this relationship

Once the outsourcing contract is signed and the responsibility and risk are shifted to the provider, we have very little to do. A person can manage this relationship, meet with the provider occasionally, and review performance, cost and other information as required. One of the benefits of outsourcing is that we no longer need be involved in this function.

This is the biggest reason why first-time outsourcers go wrong. Outsourcing does eliminate work. But it also creates work. And, just as importantly, the management of an outsourcing relationship requires different skills than the management of the individuals that had been performing the function. The people in your IT department may not have the skill sets to do the job. A “retained” organisation must be created to focus on relationship management, change control, and contract management in connection with the outsourcing. This may actually add personnel to the deal, and experts have estimated that six to 10 per cent of the cost of an outsourcing deal should be allocated for this purpose.

If you are not going to pay attention to managing the deal and constantly assuring it makes sense for your company, you will get burned. And should your most experienced and knowledgeable people stay with your company or should they move to the outsourcer? Which of you has more need to tap that intimate knowledge of your business developed over many years?

These are the top five, and as with any list of this type, there are plenty more where they came from. If you or your company is new to outsourcing, contact those advisers who can lead you through the process, and join and participate in industry groups dedicated to advancing the understanding of outsourcing, such as the International Association of Outsourcing Professionals, the Outsourcing Institute and the Sourcing Interests Group. Instead of putting yourself through the wringer, learn from your peers who have themselves suffered such indignities, and improve your chances of a successful first-time IT outsourcing deal.

Julian S Millstein is a senior counsellor at Morrison & Foerster in New York