A model that really computes

15 Feb 2005

After years of inertia, a plethora of service provides are now offering a range of IT managed services and outsourcing models in the Irish marketplace. While the model of outsourcing is well established amongst large enterprises, particularly those that are the Irish arm of a multinational operation, Irish SMEs have only begun to embrace the potential of the model.

So when does buying a service become outsourcing and how can the relationship between customer and service provider best be managed so that it benefits everyone? Outsourcing involves a third-party service provider taking over the management and day-to-day operation of a customer’s entire business function. Unlike the simple purchasing of a service on an ongoing basis, outsourcing involves the transfer of management control to the service provider and requires a considerable degree of co-ordination, trust and swapping of information.

There are two main reasons that a company may decide to outsource the management of some or all of their IT function — to cut costs or to avail of skills that the business does not have in-house.

Garett Cronin, senior manager in the finance and performance management group with PricewaterhouseCoopers, believes that businesses first need to be clear how much the existing processes are costing. Such a costing should include elements such as people cost, IT and facilities as well as any savings that can be made through consolidation once the function has been outsourced. As a rule of thumb he suggests typical costs are twice the salary of the people providing the service.

Pat Millar, managing director of Clarion Consulting, believes that particularly for SMEs considering outsourcing purely to reduce costs is not a valid strategy. “SMEs are not spending that much on IT anyway, so that can’t save as much,” says Millar. “But they can improve the service levels. Particularly for SMEs it shouldn’t be hard to get a better service level as they probably have one guy in the corner that’s trying to do everything.” He suggests that SMEs would be best served by outsourcing the “plumbing”, ie the management of their local area network and wide area network, and desktop support, leaving any in-house IT staff to concentrate on higher-value work around the company’s business applications.

Given that successful outsourcing requires a healthy relationship of trust between the two parties, choosing the right service provider is essential. Millar believes that many SMEs make the mistake of not looking for vendors such as themselves. “Many of them go to the big players that are not for them,” says Millar. “They should go the mid-tier vendors who are more atuned to the needs of SMEs.”

Organisations that believe they can rid themselves of a problem by simply dumping the management of a function on a third party are also going to be in for a shock. “Managing it is the key and you need to address that up front,” says Anne-Marie Bohan, head of outsourcing practice with Matheson Ormsby Prentice. “You need to decide who will take responsibility for managing it and ensure he or she builds a relationship with the outsource service provider. You also have to have meaningful service level agreements that specify not just response times but resolution times, and there should be a reduction in costs if they are not met.”

Cronin advises that businesses should always run a competition for their outsourcing contract, even if they already have a preferred supplier. He cites a recent example of a client who held a competition that resulted in their existing supplier cutting the cost in half.

Bohan also cautions that Transfer of Undertakings and Protection of Employment legislation may come into play if it is teemed the business, or part of it, has transferred to the service provider. In this case the employees may have the right to transfer their employment to the service provider with the same rights and conditions. Elements of the Data Protection Acts may also be relevant as the service provider may be considered a data processor on behalf of the client. In that case, the client is obliged to ensure the data processor is meeting all the requirements of the legislation.

Bohan suggests that there should be regular price reviews or the costs could be linked to the Consumer Price Index, so the client company knows that the price will go up, but their exposure will be limited.

Once the deal is in place, don’t expect outsourcing to solve all your problems overnight. “When you sign the deal, it’s not the end of they day but the start of a new day,” says Cronin. “We have a concept of the valley of doom, where the service deteriorates when its first transferred, but that should start improving fairly soon afterwards and eventually will be even better than before.”

And if that doesn’t happen, you better be sure you have a clear legal agreement in place that allows you to exit yourself from the deal in as painless a way as possible.

By John Collins