Making IT Outsourcing Work for You

Several years ago, during the Internet boom, I did some work with a start-up in online auto insurance sales. It had a lot going for it: a good niche in the auto insurance industry, a seasoned staff of insurance executives and funding from a mature venture-capital firm. My client had a great idea and strategy, but it got lost in the execution. They thought they were just an insurance company and that their IT systems were a commodity. Sales would be their focus, and they'd outsource all their IT.

They failed in three areas: They didn't understand their core competencies and their relationship to their IT system; they didn't map out the scope of the outsourcing, the costs or any metrics; and they chose an outsourcing vendor that was a bad fit and that they ended up not getting along with. Ultimately, the start-up went belly-up.

These are classic mistakes that companies make when they decide to outsource. I've been working on both sides of the outsourcing fence for 16 years in a variety of industries and have seen this happen repeatedly.

It doesn't have to. Outsourcing IT can be a wonderful option. At a time when we're experiencing intense competitive and economic pressures, it can be a way to reduce costs, gain access to technical skills and focus on core competencies. According to research firm Dataquest Inc., worldwide spending on IT services is projected to grow from $539.5 billion in 2002 to $707.3 billion in 2007.

But you have to have a handle on how to create a successful scenario for your particular company. For me, that boils down to three steps that, if done right, should make the relationship work and allow you to achieve your company's goals. These are:

  1. Evaluate your basic corporate goals, core competencies and financial situation.
  2. Conduct due diligence to establish the project's scope.
  3. Make sure there's a good cultural fit with your chosen outsourcer.

Setting the Stage

First, you need to get to know your company intimately.

  • Detail and prioritize your firm's goals and the projected timetable to achieving them.
  • Identify your core competencies and the systems that support them.
  • Based on the results, evaluate whether it makes financial and strategic sense to consider outsourcing these systems (in whole or in part).

Having compiled a list of systems or components that are outsourcing candidates, you can now rank them (say, 1 through 5) by identifying the associated operating costs, the upgrade costs and the people costs. This will provide a good financial understanding of where you're at before you even meet with an outsourcing vendor.

Of the companies I know that have gone through this process, some went in thinking they would outsource a component, and the numbers confirmed their plans as viable. Others found out that it wouldn't work for them. The point is they did their due diligence and, as a result, they understood their company better -- what they had and what they needed. It also created a good framework that drove them to better success in the other two outsourcing steps.

Creating the Plan

You wouldn't build a house without a plan, so why wouldn't you develop one for an outsourcing project? Using your newly developed wish list and budget, use the following questions to outline what specifically you want your outsourcer to do and what your expectations are:

  • What are the goals?
  • What are the limitations to the project?
  • How do you envision the outsourcer's responsibilities melding with your company's?
  • Is there a possibility that the project will change in one or two years as the company grows or technology evolves?
  • Who will be responsible in-house for managing the project?
  • What is the timeline for the project's completion?

Detail in writing your expectations now (zero to six months), in the next one to two years and then years three to five. Make sure you communicate this with vendors.

(Don't fall into the trap of thinking that because you're outsourcing, you no longer need an IT department. It's the rare company that doesn't. Someone's got to manage the relationship, and an IT department also serves as a Plan B if outsourcing doesn't work out. In that case, you won't want to rebuild from the ground up. One company I know eliminated its IT unit, and when the outsourcing relationship failed, it had to re-create everything from the staff on up, which was painful and expensive.)

Now you're ready to start interviewing potential vendor candidates. Develop a wide-ranging list, including both vendors you know about (from their marketing and advertising) and the little guys that may not have huge marketing budgets. There are a lot of good, small outsourcers that would like your business and might even be interested in an equity deal. Be open, look for opportunities and, above all, be creative.

As you talk with vendor candidates, be upfront to get the best results. The approach I've always taken is to say, "Look, this is what we've got, what we need and what we can pay." Don't play games. Go in prepared to talk about the project components and where your costs are going over the next five years. Expect them to talk about how they're going to help you and how they'll help you manage your costs. Make sure you touch on the following in your discussions:

  • Find out what their process is to manage costs and applications.
  • Compare their numbers and your numbers in your format. Don't accept their formats, since they can always make their numbers look good.
  • Get down to the details: What are the metrics for measuring success, and what are the penalty clauses if the metrics aren't met?
  • Be sure to get a vendor's background package, which includes information such as their financial data and communications plans and procedures. If they don't have these outlines, stay away. It's not a good sign.

Can We Be Friends?

Finally, you're ready to evaluate the cultural fit. When I talk about culture, I mean a variety of things. How do you treat your people? Do you have a diverse workplace? Do you have a strict dress code, or do employees wear jeans? Do you watch a time clock? Do people take lunch or work through it? These things may sound trivial, but they give a good indication of what kind of company you have and what kind of company the outsourcer is.

A good cultural match is important because, fundamentally, you're dealing with people and ideas. It's a given that there are going to be stressful situations in an outsourcing relationship. The idea is that you are working together as a team and to some extent blending two companies. You want to make sure that you're on the same wavelength and value the same things. The numbers might be right and the vendor's experience may be just what you need, but before you sign the contracts, make sure you and your new partner will be able to solve problems amicably. Here are some approaches that I recommend:

  • Do a litmus test of the outsourcing vendor's culture. Visit it on-site, and ask about dress code, vacation policies and the like. See firsthand how the vendor operates and treats its employees.
  • If you're dealing with an overseas company, you need to understand the culture of that company and the culture of its home country. Make sure you learn the nuances of spoken language and body language. Shaking your head yes in the U.S. may mean, "Yes, I've got it, I understand it, and I'll do it." In Asian countries, it may just mean, "I hear you." Make sure you understand how business is conducted in that country.

Finally, remember that when it comes to deciding on an outsourcing strategy, you need to use common sense but also be creative. Keep in mind that since this is an opportunity to help your company achieve its goals, including profitability, doing it right the first time will save money in the end. It always costs more in the future to fix mistakes made out of ignorance or expediency.

Jeff Balentine is the global leader of Deloitte & Touche's Technology, Media & Telecommunications Group in San Jose.

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