Outsourcing: First Ask Why

Most companies initially consider outsourcing in order to reduce costs. While saving money is a valid reason for making that choice, it's usually not the only factor. Many organizations find that their outsourcing decisions are shaped by a variety of motivations, but identifying and prioritizing them early can help you make better decisions later. Here are some possible motives for outsourcing.

To acquire specialized skills. Many projects require technical skills that the company doesn't employ, either because it doesn't need them on a full-time basis or because it has been unable to hire people with the desired skills.

To meet uneven staffing demands. Some companies facing large development projects expect that when those projects are completed, the need for development staff will decrease significantly. They don't want to add new employees, only to lay them off in a year or two. Migration to a new technology base also creates uneven staffing demands, resulting in an increased demand for new skills and a decreased demand for old.

To mitigate risk. Organizations embarking on high-risk projects generally look for outsourcing partners with deep domain expertise. While the buyer should never outsource total responsibility for the project, hiring additional staffers with relevant experience reduces risk.

To change fixed costs to variable. Employees are generally considered a fixed cost. Outsourcing provides the flexibility to increase or decrease staff size easily and quickly as business conditions dictate.

To improve service. Many companies outsource to increase the level or the consistency of their service. For example, it's not uncommon to find that every major location within a large corporation has its own help desk, each with its own service levels. Outsourcing all of the help desks to a single provider will standardize service and guarantee appropriate service levels.

To impose process controls. Outsourcers make money by standardizing processes. Organizations with weak development practices may use the discipline of a Capability Maturity Model Level 5 outsourcer to force their own people to adopt consistent processes. Similarly, some organizations use outsourcing to impose financial discipline across the company.

To focus management time. Outsourcing noncritical items enables management to focus on core competencies and critical projects.

To maintain objectivity. Technical staffers often become loyal to the technology base they support and may not make the best decision if they're lacking an impartial tiebreaker.

For example, a recent merger resulted in equal numbers of Notes and Exchange users. The CIO used an outside technical expert to get the warring parties to make the best architectural decision based on the needs of the business.

Your company should identify and prioritize its motivations, and there needs to be a clear consensus among the management team. While this sounds straightforward, it's not necessarily easy to achieve.

Recently, the chief financial officer of a Fortune 500 client stated that cost cutting was the only important motivation and that all other considerations were "noise-level."

The CIO agreed that cost was important but felt that access to specialized technical skills and the ability to meet demand spikes were equally important. These differences could have turned their outsourcing decisions into a full-scale battle.

Moreover, valuable time and resources would have been wasted in selecting an outsourcer whose performance would have eventually proved unacceptable to one of the executives.

In contrast, clearly defined motivations help you optimize crucial areas of your outsourcing:

Partner selection. Different outsourcers bring different advantages and disadvantages. Well-defined motivations make it much easier to match their strengths to your needs and help eliminate unacceptable candidates.
Contract terms.
Motivations are the foundation for successful contract negotiations. They drive your negotiation strategy and help you determine which points to concede and which to insist upon.
Cost/service-level trade-offs. Motivations help you determine the right balance between how much you pay and the level of service you receive. Most outsourcers can provide significantly improved service -- for significantly increased fees.
Metrics development and management. Your motivations should drive the metrics against which you and your outsourcer manage your project, since what you measure is ultimately what you get .
Clearly define and prioritize the motivations that drive your outsourcing decisions before you select your outsourcer and begin to negotiate. You'll find that motivations drive many aspects of the outsourcing process, and understanding them will help your outsourcing efforts succeed.
Bart Perkins is managing partner at Leverage Partners Inc. in Louisville, Ky., which helps CIOs manage their IT suppliers. He was previously CIO at Tricon Global Restaurants Inc. and Dole Food Co. Contact him at BartPerkins@LeveragePartners.com.

Copyright © 2004 IDG Communications, Inc.

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