When it comes to that all-important IT outsourcing decision, make sure it’s a matter of fact, not fiction, writes Leslie P. Willcocks.

Outsourcing contracts are agreed in concept but delivered in detail – and that’s why they can break down. A review of research into more than 500 outsourcing contracts suggests that, for the customer, scepticism and data-driven evidence must inform any search methodology. The message is: don’t discount the promises but analyse the seeming truisms by which outsourcing is frequently oversold. Outsourcing is best handled on a case-by-case basis, but there are eight assumptions you should probably try and discard.

Myth 1 – Outsourcing IT is much like outsourcing anything else (security, catering, rubbish disposal). In fact, IT is not a homogeneous function but comprises a wide variety of IT activities. IT capabilities evolve at a dizzying pace – there have been two generations of technology in the past five years, thus predicting IT needs beyond a three-year horizon is wrought with uncertainty. There is no simple basis for gauging the economics or managing of IT activity. Most importantly, large switching costs are associated with IT outsourcing decisions.

Myth 2 – Vendors have inherent advantages in superior management practices and economies of scale. Thus they will achieve lower IT costs while improving service. Suppliers frequently overplay the economies of scale argument, especially to large organisations. Superior management practices are usually the main benefit of IT outsourcing. Yet practices such as reorganising work, automating tasks and employing fewer, more able staff have no magic about them, and can be replicated in-house, provided there is the will and leadership to implement them.

Myth 3 – Long-term, single-supplier deals secure partnering relationships, lower transaction costs and greater business advantage. A recent study looked at 29 such deals and found 38 per cent met expectations, 35 per cent were unsuccessful and 27 per cent had mixed results. Risky business indeed. Early-1990s deals like this tended to be struck for financial reasons, including restructuring the balance sheet of organisations in financial trouble. Even the better set-up, long-term, single-supplier deals rarely report innovation, significant risk-sharing and real business advantage flowing from their IT deal. Such deals should only be undertaken by an organisation that has matured its ability to manage outsourcing over several years, perhaps through a series of smaller two- to four-year deals first. In the United States and British markets, the dominant practice is selective IT outsourcing – typically, 20 per cent to 38 per cent of the IT budget is outsourced to multiple suppliers on shorter-term contracts.

Myth 4 – Outsourcing IT is about spending as little as possible and monitoring outcomes, not managing. That can be left to the supplier. Organisations usually outsource IT for a mix of strategic, financial, political, technical and tactical reasons. There are limits to suppliers working smarter to achieve the ‘holy IT outsourcing trinity’ of dramatic cost savings, plus a decent profit margin as well as higher service levels for the client. In practice, there will be trade-offs between these three outcomes.

Myth 5 – Drive the hardest commercial bargain possible. The supplier will look after its own profit margin. The contract is everything. From 2002 to 2004, some advisors and commercial research organisations were pointing out that IT suppliers were having a rough time, and now was the time to get the best deal possible. All this is fine as long as you ensure the vendor makes a reasonable profit. Slim or no-profit margins drive a supplier to opportunistic behaviour, and can harm the relationship and, ultimately, the business value of your IT performance.

Myth 6 – Outsource your IT problems. The market is now mature enough to provide superior capability to handle them. Try a different, lower-risk rule of thumb – don’t outsource problems. Only outsource tasks that you can write a detailed specification for, and can effectively monitor performance on. You may think that it is when you lack capability that the market most comes into its own. But problems occur when there is low technology maturity. In these cases, throwing the task over the wall to specialists needs to be replaced by a multi-functional team approach that embraces relevant business users, managers, internal IT specialists, project managers and the buying in of external resources where necessary to work under internal management direction. The closer IT comes to the business and to strategy, the less advisable it is to outsource these tasks.

Myth 7 – Client and supplier buying shares in each other’s business secures superior partnering, technical innovation, risk-sharing and greater business leverage. This approach was popular in the 1990s. In practice, the touted advantages rarely came through in any sustainable way. More frequently, taking equity shares in a supplier or in each other led to complacency that could also translate into indifferent service at the operational level.

Myth 8 – Anything will be better than our present IT department. IT outsourcing can be successfully used as a catalyst for improving IT performance and galvanising an otherwise complacent in-house IT department. But too many times we have seen ‘the grass is greener elsewhere’ syndrome operating in favour of IT outsourcing. Added to this is the fact IT functions have rarely been good at internal marketing. All this plays into the hands of suppliers with superior marketing who come with no perceived bad track record to the potential client’s site. Interestingly, sometimes due to the outsourcing threat, in-house functions have been putting their houses in order more readily over the past seven years. Indeed, a bid by a supplier can be used to indicate areas where the in-house IT group should focus on improving.

Hit and Myth

Don’t let the myths dictate. Put yourself in pole position to do your own analysis based on your own rationale for outsourcing. Before outsourcing an IT function, make sure you:

• are able to articulate, negotiate and contract effectively to get what is required;
• understand the IT services market, the strategies and capabilities of individual suppliers, and what a good and bad deal looks like with a specific vendor;
• are able to make IT sourcing decisions and formulate sourcing strategy that secures the ability of IT to leverage business performance; and
• have in place post-contract skills and competencies that mitigate risk, elicit and deliver on business IT requirements, develop the blueprint and plans for delivery of the technology platform, and manage external supply to the organisation’s advantage.

Reprinted with permission from ABIE publication