Outsourcing Part 3: Work at your relationships

16 Mar 2004

Outsourcing is like a marriage — you’ve got to work at it if both sides are to get something out of the relationship. Unfortunately, like marriage, the rate of divorce is on the rise. Last November, at its first summit in Ireland analyst group Gartner suggested that more than 50pc of IT outsourcing agreements fail. Though the statistics don’t look good, there are ways to make sure your organisation doesn’t become the Liz Taylor of outsourcing.

Stuart McLaughlin, a director at Accenture, points out that the Gartner figure includes deals that fail to meet expectations rather than break down entirely. “You might say you want to achieve cost savings of 30pc and the deal only delivers 15pc,” he says.

And it’s not just the hard figures that matter; how people feel about the way the deal is going is also critical. “The numbers may say you are hitting the targets but clients may not feel they are getting a good service,” says McLaughlin. “We talk to clients and ask them to compare the service to a traffic light — are we at green, amber or red?”

To stretch the marriage simile a little further, the key to ensuring a smooth relationship is to get the prenuptial agreement in place — that means you’ll need the in-house expertise to be able to negotiate the contracts and associated service level agreement (SLA) effectively.

“As a rule of thumb you need to be more competent than the company you are outsourcing to,” says Colm Reilly of PA Consulting. “You need to understand smart procurement as well. You need to strategically decide what goes and what stays. It is a complex model that has to link into your business strategy.” You should also carefully check the credentials of the company providing the managed service — ensure its staff members are all certified in the areas that they will need. It’s not unheard of for a client company to be unwittingly financing an outsourcing firm to get certified.

Which is why firms such as PA and PricewaterhouseCoopers (PwC) have a healthy business on advising businesses on how to go about outsourcing. Paul Halpin, lead partner for outsourcing advisory services at PwC, says it is essential that the entire management team buys into the business case before announcing the decision to outsource. “In my experience no company will outsource unless it has a burning platform underneath it, for example pressure on profits and competitiveness,” says Halpin. “It is often helpful, in discussions with affected employees, to explain such pressures and to point to the burning platform. That can help to explain the outsourcing decision in a reasonable, well-constructed manner that links back to the business case.”

Halpin also advises against “going for the last cent” during the commercial contract negotiations. “If you do so, service may suffer,” he adds.

McLaughlin says it is essential that deals are flexible due to the changing nature of technology. He suggests contracts should be reviewed by management every quarter and at board level every six months.

Brian Hurley of HP Services points out that the day-to-day running of outsourcing is also key. “You need to put resources into it,” he says. “Management is important but you also need an interface for a lot of the day-to-day operational issues. If you go into it with the attitude: “I’m going to get rid of that thing in the corner that’s been causing me hassle and forget about it” that’s a recipe for disaster.” He also cautions against investing time only in the early stages of the deal and says it is key to assign someone to “own” the relationship.

The experts all agree that if you think you no longer need any expertise in the area of your business you outsource, then you are just kidding yourself. You need to understand those technologies or processes intimately if you are going to effectively manage them.

Pat Moran, director of technology risk services at Ernst & Young, believes it is critical that the company providing the managed service makes an effort to quickly understand the culture of the organisation it is working for. “That’s the biggest fear factor for a lot of people,” he explains. “If I outsource a function and I need something done urgently, perhaps because it’s coming up to the end of our financial year, they may not be able to deliver. The in-house staff appreciates the urgency of such a request.” One way to tackle this problem is to get the third party providing the service to work onsite rather than at its own remote location.

Finally, no matter how much people in the industry try to gloss over it, outsourcing is a dirty word in many circles and is immediately associated with job losses. Hurley suggests that outsourcing can be a positive move for impacted staff. “In an IT department you are likely to hit a career ceiling fairly quickly but in an IT provider there are lots of other opportunities for staff,” he says.

By John Collins