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The Seven Deadly Sins of Outsourcing

These are the transgressions that can doom you to outsourcing hell. Here's how to avoid them.

By Judy Artunian
May 8, 2006 12:00 PM ET

Computerworld - Outsourcing is a source of stress, struggle and angst for many IT managers, and no wonder: More than half of outsourcing agreements end up prematurely terminated, according to a study released last year by DiamondCluster International Inc., a Chicago-based consulting firm. That leaves a lot of companies far from outsourcing nirvana, but it doesn't have to be that way. We asked IT experts and veterans to talk about the bad decisions and faulty assumptions that can cause your outsourcing project to fall from grace. They came up with seven deadly sins.

1. Feeble governance

Vice: You assume that your organization will auto-matically fall into a smooth working relationship with your outsourcing vendor. Three months later, you encounter management snafus that seem to have come out of nowhere. One large retailer outsourced a project that was supposed to take six months, but 18 months later, the CIO was still waiting for results. Why? "There was no governance plan other than a target for the end date," says Atul Vashistha, chairman and CEO of neoIT Inc., a consulting firm in San Ramon, Calif. "If they'd had a governance plan with milestones in place, they would have realized early on that targets weren't being met."

Virtue: Before you sign with an outsourcer, nail down an organizational structure, establish methods for keeping tabs on the work being done, and spell out how you will manage the outsourced project on a day-to-day basis. "Your governance system should provide continual feedback to the organization regarding how the relationship is working, what value you are getting, how you are solving problems that have cropped up," says Michael F. Corbett, executive director of the International Association of Outsourcing Professionals in LaGrangeville, N.Y.

Build the management costs into your budget. The average cost to manage an outsourcing contract is 3% to 6% of the size of the contract, according to Julie Giera, an analyst at Forrester Research Inc. in Cambridge, Mass.

2. Overblown expectations

Vice: You choose an outsourcing company for its ability to meet your primary goal, but later the company falls short in other areas. For example, one of Europe's largest manufacturers was so eager to trim expenses that it negotiated an outsourcing contract purely on cost. As the project progressed, the manufacturer complained that the outsourcer wasn't innovative enough. How bad was it? Less than two years after signing the contract, the manufacturer terminated the agreement -- a move that carried a steep price tag in penalties and legal fees.



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