Sidebar: Managing Relationships and Contracts

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If managed creatively , outsourcing agreements can result in savings above and beyond reduced head count.

For example, Jeffrey McIntyre, assistant vice president of technology services at BNSF, contracted with IBM to feed the railroad granular operational cost information that would allow it to have an internal chargeback system. BNSF didn't implement one but instead uses it as a "showback" system. Now that BNSF developers can see exactly what the IT infrastructure is costing the company, they "have gotten competitive and looked to make applications more efficient by tuning them and saving the company money," McIntyre says.

At Network Services, CIO Michael H. Hugos requires developers to work on a fixed-bid basis. "This separates the wheat from the chaff," he says. "If they're not willing to do it, they either don't understand [the project], which we can discuss, or they're incompetent."

He says the IT industry can learn a lot by examining the practices of the construction industry, which works on a fixed-bid basis and executes change orders as projects evolve.

Hugos says he looks to strike long-term relationships with outsourcing partners in which both partners have made an investment. He advises that "you make sure your outsourcing partner is making money. I've noticed that when people aren't making money, they don't have a lot of incentive to be responsive."

How do on-site IT staffs gain the management expertise needed to manage outsourcing relationships?

Deloitte Consulting partner Peter Lowes advocates a setup similar to what CTO Mark Resmer put in place at eCollege -- having staffers work at the remote outsourcing site, side by side with their outsourcing colleagues, in six-month rotations, and vice versa.

In addition, Lowes notes that management success is related to the amount of savings to be had by the outsourcing deal. When you save a lot, you can afford to reinvest in managing the relationship. For example, the Tier 1 offshore software developer companies are usually at a CMM Level 5, while U.S. companies are more often at CMM Level 1. Lowes says that if companies can reinvest the money they've saved by outsourcing to bring themselves up to a CMM Level 3, this will help greatly in bringing them onto the same page as their outsourcing partners.

-- Joanie Wexler

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Copyright © 2005 IDG Communications, Inc.

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