Outsourcing While Holding on to Knowledge and Insight

As IT outsourcing of all types and across all industries and geographies becomes pervasive, operational complexity and risk increase accordingly. Some types of risks are extremely familiar to CIOs. Securing a more extended enterprise, for example, is always front of mind. Meeting a business case, achieving a return on investment — these and other financial and economic risks are also major preoccupations. Some other risks are less understood and, thus, more potentially damaging because traditional risk mitigation in these areas may not be in place.

One of the lesser-known risks in a complex outsourcing environment is the potential loss of institutional knowledge and insight. With an outsourcing model, companies often lose ready access to the individuals most knowledgeable about the business; some are lost to the new outsourcing units, others to turnover. Companies also risk losing opportunities for insights and innovations born of collaboration, because fragmentation of a strategic and unified view across the organization inevitably occurs in a multiple-provider model.

Lost Knowledge

Consider the parable of the fire station that caught on fire. Its crews were all out fighting blazes elsewhere; no one with firefighting expertise or tools was back at the station, so the firehouse burned down.

By analogy, think about what often happens when a company outsources several IT functions — say, telecom to a niche provider, data center to a multinational and applications to an offshore provider — while keeping the remaining infrastructure in-house.

With a blended sourcing model, a CIO overseeing a staff of 500 might keep 20 to 30 people and transition the other 470 or 480 staffers to the various outsourced entities. Such a ratio might work if one could be assured that those retained were the right ones, or if those kept on were sure to stay with the company through the life of the outsourcing arrangement. Both presumptions are extremely tenuous.

As roles and responsibilities shift, the teams most knowledgeable about processes, outsourcing contracts, and the terms and intent of the various deals often end up in different roles in the company or elsewhere. Executives managing the outsourcing relationship risk losing negotiating leverage with their providers as their outsourcing teams transition to other roles. When these people disperse, their vital knowledge and skills disperse as well. The considerable turnover that typically occurs when a company outsources complicates matters further. What remains, ultimately, is an in-house team without the skills and capabilities to protect the firehouse.

To combat the risks of lost knowledge, a CIO must carefully consider existing staff and retain highly skilled individuals to serve on the two remaining teams — the retained operating staff and the outsourcing governance team. The retained operations staff will own the strategy, control policy-setting and retain expertise in every area being outsourced: the data center, infrastructure, telecom and so forth. Ideally, the retained governance team would be in place during the service provider evaluation and negotiation process, and would continue in this role after the transaction is executed and complete. The professionals on this team should include a combination of excellent project and program managers, strong financial analysts and strategists, and individuals capable of handling the complex environment of managing multiple suppliers to keep each one focused on common goals.

Lost Collaboration

The importance of growth and innovation has not diminished for organizations in either the public or private sector. What the best innovators know is that breakthrough insights are most likely to arise out of the interaction among people and groups collaborating on a day-to-day basis. When IT processes are segmented and assigned to multiple providers through outsourcing, companies face the risk of lost information and insight across the organization.

As more organizations migrate to a multiprovider model, they find it increasingly difficult to establish an organizational view of performance, produce detailed cost and budget analyses, evaluate service levels and effectively resolve performance problems. The risk of not having the information necessary to do this inhibits an organization’s ability to appropriately develop plans and budgets. Creating an enterprisewide view can be labor-intensive and costly.

Too many organizations realize too late that the fragmented governance teams they have established to oversee multiple providers of IT services have yielded siloed views of those functions. Performance and service-level agreements have been defined within each of the particular IT worlds, and no incentives exist for working closely with the other functions.

To combat the risk of lost institutional insight, most companies that outsource successfully work to ensure collaborative operational excellence across the various entities and service-level agreements. Companies in such multiprovider environments should create a centralized governance team or a center of excellence for the IT organization, and implement governance best practices that will provide frameworks for the management of operations, finance (including contracts) and the overall relationships among the providers. Ideally, these teams would be in place during the service provider evaluation and negotiation process to ensure continuity of the team and to help mitigate the risk of lost knowledge and insight.

Mitigating Risks

New technology-based tools can help manage performance in a multiprovider environment and protect against lost knowledge and insight. Integrated governance and communications tools can help CIOs manage and view a portfolio of shared services and outsourcing relationships across the organization. More to the point, these tools can also provide ongoing and rapid insights into the health of the key management areas of all outsourcing relationships in a collaborative environment across multiple service towers. These tools can provide a cross-enterprise view of performance, budget, business case and cost tracking and planning. They can also provide a near-real-time view of service levels and critical outsourcing contract terms.

Especially important to mitigating the risks of lost knowledge and insight is the ability of governance tools to capture institutional knowledge over the life of the outsourcing contracts, and then to serve as a learning resource for onboarding and transitioning governance staff. Governance tools can support effective two-way communication among business users about requirements, successes, value, performance reporting, chargebacks, demand forecasts and issues relating to the various service providers.

Many companies have cobbled together a set of tools and governance teams in an attempt to address and mitigate their risks. A fragmented governance approach often leads to a failure to realize the full value of the outsourcing business case, because the hidden costs of lost knowledge and insight have not been adequately addressed. If governance teams and tools are implemented properly as part of an outsourcing strategy, companies should no longer have to worry about becoming an "outsourcing failure" statistic because they will have effectively managed a large share of their risks.

Peter Iannone is executive director of the Global IT Practice at outsourcing consultancy EquaTerra.

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Copyright © 2007 IDG Communications, Inc.

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