Many companies that sign on for outsourcing services file away the contract and pull it out only when the three-, five- or 10-year term comes to an end. But it's important to regularly review not only whether the original contract is still meeting your needs but also whether last year's outsourcing plan is still relevant to this year's business strategy.
"Outsourcing has become an integral part of our IT governance strategy," says Pavan Nigam, CEO of Cendura Corp., a Mountain View, Calif.-based application management firm. "Once you accept that, you realize it needs to be reviewed not on an annual but on a quarterly basis."
"Too often, [an outsourcing contract] becomes shelfware," says Lorrie Scardino, research director at Stamford, Conn.-based Gartner Inc. "I tell clients they should get into the habit of reviewing [their outsourcing strategy] every six months."
Mergers, acquisitions, divestitures, changes in the trading community or governmental regulations -- all of these circumstances should trigger an outsourcing strategy review. With that in mind, here are 10 questions you should ask when updating your company's IT outsourcing strategy.
1. Is the business trying to expand overseas or enhance its global image? If your company has no previous experience overseas, this is a particularly good time to consider partnering with an offshore technology provider. "If you are looking to do business in, say, Asia, you might very well want to outsource to a provider that could help you do business in that part of the world," says Wendell Jones, a senior consultant at Cutter Consortium in Arlington, Mass.
A global company should also consider using a combination of its own staff and offshore resources when trying to polish its global image. But be wary of exceeding a 70-30 ratio of offshore to internal staff for software development projects, he says. Letting more than 75% of the development work go offshore can lead to serious difficulties, since off-site programmers may not be as skilled as on-site staff. Also, off-site workers might not be as sensitive to issues such as integration with existing systems or changing user requirements.
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| Image Credit: Dave Wheeler |
Cost cutting alone is not enough reason to look offshore, warns Nigam, who says Cendura plans to expand into Asia and Europe in the next 12 months. "I've seen so many companies get excited about hiring someone for $25 an hour, but chances are high that they'll need four bodies to complete the work of one of their own workers," he explains. "If you make the investment right, you might get the ratio down to 1.5-to-1, but you'll never get a 1-to-1 ratio."
2. Are new business initiatives likely to overload your IT staff? When new projects threaten to overwhelm the IT staff at J.B. Hunt Transport Inc., a transportation logistics company in Lowell, Ark., CIO Kay Palmer looks for rote work that she can contract to an outsourcing supplier. Typical examples include converting files, expanding fields and translating reports into different languages.
The alternative -- outsourcing new projects -- doesn't work as well, Palmer says. The last time J.B. Hunt tried to do that, the business side was still working on requirements definitions midway through the project, resulting in scope creep that the outsourcer couldn't manage or control. The development work was brought back in-house within a year. "I've learned that unless requirements are very well defined and there's not a lot of tie-in with existing systems, outsourcing is hard to do," Palmer says.
Also look at the maturity of the project when considering outsourcing, says Nigam, who co-founded Healtheon (now WebMD Inc.). "If you're in the early stages of product development, it requires close collaboration with customers as well as domain expertise," he points out. While Nigam was at Healtheon, two-thirds of outsourced work was Release 3.0 or beyond, he says.
3. Is the company preparing to undertake a critical business objective with a tight deadline? It can make sense to outsource a new project when the work is extremely time-sensitive or critical to gaining new business. At St. Luke's Medical Center in Kansas City, Mo., CIO John Wade decided to outsource the IT component of opening a "digital hospital" by the end of next year.
"It's an enormous workload," Wade says. The project includes implementing three new software products, determining the benefits of those systems and then retrofitting them into five other St. Luke's locations, which would also entail standardizing those hospitals' procedures, he says. "There was no way to do it unless we hired 15 people and trained them, and even then, our risk of not being able to make the date was significant," he adds.
A similar situation occurred at Cendura, when a prospective client requested customized features in a software product. "We figured we couldn't win the deal using our highly leveraged resources in the U.S., but taking it offshore gave us extra flexibility," Nigam says. "If we had to apply very expensive resources, it would have made the deal less feasible for us."
4. Is the company planning to engage in new lines of business? Companies that have existing outsourcing relationships need to review these contracts when starting a line of business, says Brad Smith, vice president of research at Kennedy Information Inc., an information source on professional services in Peterborough, N.H. For example, if a retail bank that outsources call center activities was expanding into brokerage, insurance or other financial services, that would require a whole different set of call center training and activities.
Similarly, if a U.S.-based company was to expand into a new region, such as Asia, calls could begin coming in 24 hours a day as opposed to 12. "Those changes need to be anticipated," Smith says.
5. Are there areas of IT that don't interact with other departments or customers? J.B. Hunt's Palmer says in-house staffers add great value when they regularly interact with customers. For instance, a database administrator who knows the extent to which the business is affected when a table isn't available may create a work-around to make the data available more quickly. Or the help desk staff may regularly inform the quality assurance team about the problems it's addressing, thereby helping to improve system design.
"In that way, they're of much more value than just answering calls and taking care of problems," Palmer says. "If you have that level of integration, you can justify paying for people locally."
On the other hand, she says, if there are areas where you don't have that relationship, it doesn't make sense to pay a premium to keep it in-house.
6. How efficient are your IT operations? Earlier this year, Wade completed the process of determining whether to outsource part or all of his organization's IT function. He bases such decisions on four sets of metrics: the quality of St. Luke's IT operation, quantity of current IT projects, quantity of IT projects over a five-year time frame and price of delivering IT services to core constituents over five years.
Wade would choose to outsource if an outsourcing vendor could hit the same metrics as St. Luke's internal IT department and reduce operational costs by 17% over five years. He sets the bar high because in a long-term relationship such as outsourcing, a forecast 17% savings would likely turn into about 8.5% over a five-year period, he says. "That's not an easy job if, on top of that, [the vendor] also has to make a 20% to 30% profit," Wade says. Three years ago, the best offers were a 4.5% overall cost reduction and a 7% cost reduction in labor only. This year, Wade says, no one even responded to his request for proposals.
Still, Wade faithfully conducts this review every three years. "You have a responsibility as CIO to say you're providing the most cost-effective service you can," he says. "If I could outsource the network at a cost-effective level, I would do it because internally, it's a major strain on the IT group."
7. Have outsourcing trends changed? Palmer keeps her eyes and ears open to what her peers and competitors are doing on the outsourcing front. That includes listening for new trends in outsourcing options. "At times, the options that were available a few years ago may have been replaced by something that's more palatable," she says.
For instance, J.B. Hunt looked into call center outsourcing a few years ago but decided that its customers really needed to feel they were talking with a local company representative, local accent and all. This year, after attending a computer conference, Palmer heard about call center outsourcers in rural Arkansas . After reviewing cost vs. benefits, she determined that it wasn't worth it, but this type of networking may eventually lead to a workable alternative.
8. Have there been changes in the IT talent market? Even in these tough economic times, it's important to keep an eye on IT labor costs and supply. "Before I would look at outsourcing an entire function, I would expect to be faced with issues such as high cost of hire, escalating people costs that are out of control and high turnover," Palmer says. J.B. Hunt's turnover is only 4%, and salary costs are reasonable, so outsourcing isn't tempting now.
9. Is your current outsourcing vendor meeting its benchmarks and offering competitive pricing? It's not easy to determine if the deal you signed on for is still a good one a couple of years into it. Other outsourcers won't rush to provide you with a competitive bid, knowing that you're still tethered to a deal, says Bob Tevelson, a vice president at A.T. Kearney Inc., a management consulting firm in Chicago.
Start by checking whether the contract requires you to buy more service than you need or to spend more on it than you should. Though your contract may not allow you to bring services back in-house, there should be enough flexibility to change service levels, skill sets or the location of workers. For instance, Tevelson says, "you can work with the provider to selectively shift applications offshore to support the objective of cost reduction."
10. Are your strategic objectives still being met through the arrangement? "You thought it was good deal when you got into it, but the deck chairs shifted on the ship, and now what do you do?" Tevelson asks. It's difficult to prematurely terminate an outsourcing contract, so experts recommend building in terms to the deal that accommodate changing business needs. For instance, what if you outsource your call center function and then divest a particular business unit, leading to a drop in call volumes? "In a productive relationship, the parties will try to renegotiate terms and conditions to make up for the lost volume," Scardino says. After all, it's important that the outsourcing relationship remain mutually beneficial.
Brandel is a Computerworld contributing writer in Grand Rapids, Mich. Contact her at mary.brandel@comcast.net.