2. The high level benefits of outsourcing IT
services are fairly well-known within the IT
industry. Even so, many clients do not fully
understand “why” and “how” an
outsourcing relationship can provide these
potential benefits. Those who do understand
the benefits may not understand the risks
that must be managed in order to achieve
those benefits. This white paper is intended
to explain the most common outsourcing
risks so that you can understand them and
mitigate them early in the sourcing process.
Understanding these potential risks will
allow you to make a better informed
sourcing decision.
Rewards
Although the benefits of outsourcing are
fairly well-known, it is worth summarizing
them for reference.
Reduced Cost
Companies that provide IT outsourcing
services function in an increasingly
competitive marketplace. This market
pressure, coupled with the scale of
capabilities, abundance of lower-cost (but
highly skilled) labor and investments in
productivity tools and processes, means a
provider can more than likely deliver
services at a much lower price than you can
do on your own. Additionally, you will
improve your ability to achieve year-over-
year savings, as annual reductions are often
documented in an outsourcing agreement.
Improved Quality
Simply stated, outsourcing providers are
motivated to improve the quality of your
operations. Outsourcing providers have
literally invested billions of dollars to build
the tools and processes they use to deliver
IT services to clients, and they use these
investments to differentiate their ability to
deliver high quality services at market-based
costs. The cost models typically used by
providers will assume some annual
reduction in resources (and therefore costs)
based on the quality improvements they
assume they can make. Additionally, a
market-based outsourcing agreement will
drive adherence to well-defined service
levels, some of which are expected to
improve over time. As the old saying goes,
“what gets measured gets managed.” This
level of formality and the existence of
contractual commitments can drive delivery
improvements quicker and farther than
most organizations can do internally.
Ability to Redeploy Resources
Increasingly this is becoming one of the
more important drivers affecting sourcing
decisions. The challenge many IT
departments face is how to free up some of
their most knowledgeable people to work
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
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_________________________________________________________________________________________
3. on initiatives that will truly add value to the
business. Some of these people become
“superstar firefighters” over time, and are
continually pulled into operational issues
which diminish their ability to drive strategic
change. Without a significant event like a
new outsourcing agreement, it can be hard
to overcome the organizational inertia that
keeps these people locked into their current
role. As quality improvements are made and
the provider becomes skilled at addressing
operational issues, these people can be
redeployed into higher value planning,
engineering or development work, and you
get the added benefit that they are still in
the organization “just in case” their skills are
needed. Lastly, using an outsourcing
provider allows you to temporarily procure
specific expertise and apply it where desired
without needing to permanently add staff.
Improved Delivery Capability
Procuring managed services from an
outsourcing provider, if done well and if
structured by a market-based agreement,
encourages a higher level of performance
related to services, service levels, innovation
and process maturity. Creating and
negotiating an outsourcing contract requires
you to spend time articulating the specific
services to be performed and how those
services will be measured. Integrating your
processes with those of another company
requires a higher level of process discipline
and documentation so the overall flow of
work and associated responsibilities are
seamless to the business users and
potentially to end consumers as well.
Innovation comes from explicitly stated
contractual requirements as well as from the
behaviors necessary to continuously
improve the environment so contract
requirements are achieved and the provider
can maintain their profit margin. In fact,
many times the provider wants to move
more quickly than the client, so it
becomes a situation where the client is
throttling the amount of improvement
based on the speed at which the
organization can absorb it.
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
Contact: info@alsbridge.com or (214) 696-6410
_________________________________________________________________________________________
“Many organizations
do not fully understand
“why” and “how”
an outsourcing
relationship can provide
potential benefits.
Those who do
understand the benefits
may not understand the
risks that must be
managed in order to
achieve those benefits.”
4. Risks
The potential risks of outsourcing are not
nearly as well-understood as the potential
rewards. An important observation is that
many times clients develop risk mitigation
strategies that are almost solely based on
technical risk. Understandably, there are
concerns and issues that need to be worked
through in every outsourcing relationship.
Issues such as connectivity, knowledge
transfer, lack of certain skills, migrating
environments, etc… are important and need
to be addressed, but they are very rarely the
cause of significant conflict. No matter your
specific technical requirements, chances are
the provider has the depth and breadth of
technical knowledge to overcome those
types of issues, although there may be some
that do not get resolved as quickly or cleanly
as expected. Sometimes, there are even
certain specific tasks that the client ends up
retaining because they are so unique and
specialized, but that is the exception and not
the rule. Rather, the bulk of substantial
conflict between clients and providers
during and immediately after transition tend
to fall into one of the following categories.
The good news is that these risks can be
mitigated through careful planning and
execution early in the sourcing process.
Lack of Communication
The importance of a detailed and managed
communications plan cannot be
over-emphasized. This is not just a couple of
executive-level communications describing
what is occurring. This is about ensuring
your retained employees, your non-retained
employees, your employees who are
transferring to the provider, your executives,
your stakeholders, your leadership team and
yes even your potential new provider are
being told what they need to know when
they need to know it. Without a structured
communications plan and process that
explains what is happening and why, there
will be voids that will be filled with
misinformation and a reluctance to change.
This can lead to unplanned employee
turnover, missed transition plans, and a lack
of understanding and buy-in from the
consumers of IT services. Actively pursue
ways to keep your provider informed (even
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
Contact: info@alsbridge.com or (214) 696-6410
_________________________________________________________________________________________
“The potential risks
of outsourcing
not nearly as well-
understood as the
potential rewards.”
5. during the contract negotiation phase), not
just from a transition perspective but also to
keep them fully apprised of the activities
and objectives of the business. This will
allow them to better understand your
requirements and to deliver the best
solution possible.
Your Inability to Change Behavior
The IT leadership team in place today quite
probably became successful through their
ability to manage specific technology and
people. However, a substantially different
set of skills is required to successfully
manage an outsourcing relationship. Leaders
must learn to manage expectations and
outcomes and let the outsourcing provider
manage how that work gets done. This is
done by managing relationships, governance
processes, status reporting, issue tracking,
prioritizing, service level management, and
process discipline. Unfortunately it can be
difficult for some people to move from one
paradigm to another. If these types of
leaders cannot change but remain in a
position to direct the provider, they become
a source of friction in the relationship and
can keep you from receiving the maximum
value from your outsourcing provider. Make
sure your leaders have the right skills to
manage an outsourcing relationship, or
replace them with ones who do.
Loss of Business Knowledge
At the dawn of the millennium, it was
somewhat common for companies to
outsource virtually all of their services to a
provider, often time only leaving a CIO and a
couple of lieutenants in place to manage the
relationship. Unfortunately, companies
discovered that they had outsourced too
much, and by doing so had lost much of
their “tribal knowledge” so they struggled to
stay aligned to the business. The good news
is that arrangement is rarely used anymore,
and companies now realize they must retain
a sufficient level of strategic resources to
manage the outsourcing relationship,
manage the relationships with the business,
maintain overall accountability for delivery,
and to set overall direction and priorities.
A ls o, a s yo u deve l o p your
transition plans you must address how
knowledge will be transferred to the
provider. In some cases it is primarily done
through the transfer of certain subject
matter experts to the provider, while in
many cases it is really dependent on the
system documentation and training sessions
used to share knowledge with the provider.
As you develop transition plans and design
your retained organization, ensure that you
fully comprehend the need to build and
retain key business knowledge.
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
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_________________________________________________________________________________________
6. Unclear Expectations
There are rarely cases where an outsourcing
provider does not and cannot provide the
services they committed to in the
outsourcing agreement. However, there is
always a slight risk that something was not
thoroughly understood and documented
during the negotiation phase, and that for
some reason cannot be adequately
supported in the new contract. What can
you do? As they say, the best
defense is a good offense, and there are
several mechanisms you can design into the
outsourcing agreement to protect yourself in
these cases. For example, make sure to
require a commitment to follow a defined
set of industry standards (e.g., ITIL, CMMi)
so that services are more easily transferrable
to other providers if required. Make sure the
contract is flexible enough to allow for some
change in scope without termination
penalties. Define a strong, market-based
service level agreement that defines
remedies and penalties, and define and
implement a governance process that
ensures delivery and relationship issues are
quickly escalated to the right executive
levels for resolution. From a vendor
management perspective, you may also
want to consider a multi-vendor strategy
that maintains some competitive tension
while also providing you with a “hot backup”
provider in the event that certain services
are not being delivered as expected.
Business Case Not Achieved
Ultimately, the goal of an outsourcing
relationship is to achieve the defined
sourcing objectives while meeting the
business case upon which the decision was
made. Oftentimes, the focus after contract
signature is solely on the technical aspects
of the transition of services, and it becomes
nearly impossible as the months go by to
track performance back to the business
case. Even when the business case is
tracked and managed, it is found that the
original business case was inaccurate or
inadequate, and therefore the actual costs
are higher than expected while the
corresponding overall savings are less than
expected. The best way to mitigate this
situation is to ensure the business case is
thorough, comprehends all expected
investments, savings, and new charges, and
is developed with a level of detail that can
withstand scrutiny from the CFO and board.
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
Contact: info@alsbridge.com or (214) 696-6410
_________________________________________________________________________________________
“Ultimately, the goal of an
outsourcing relationship is
to achieve the defined
sourcing objectives while
meeting the business case
upon which the decision
was made.”
7. World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
Contact: info@alsbridge.com or (214) 696-6410
_________________________________________________________________________________________
It should include assumed ramp up of services, ramp down of retained organization expenses,
one-time costs for transition, legal fees, advisory fees and the like, retaining of certain
resources, appropriate contingencies, expected changes due to growth and scope changes,
COLA impacts, and so on. The business case should be updated periodically and
reported against the baseline business case to identify any significant variances.
Conclusion
While benefits of outsourcing IT services are fairly well-known, many clients do not fully
understand the risks that must be managed in order to achieve these benefits. Prior to
finalizing a decision to outsource, make sure to think about how you will communicate with
key stakeholders, change the behaviors of your leadership team to manage an outsourcing
relationship, retain the required level of business knowledge, clarify and thoroughly
document expectations, and develop and manage a solid business case. By doing so, you will
make a better informed sourcing decision and will be better prepared to realize the benefits
that an outsourcing relationship can provide.