How companies court disaster in outsourcing deals

The days are long gone when top executives were so computer-illiterate that they refused to have a computer on their desks. But there's still an impressive amount of executive stupidity floating around. That's particularly true when it comes to outsourcing, especially when such deals go sour.

Problems in outsourcing deals are far from unusual. According to a recent Dataquest study, more than half (53%) of all outsourcing customers report having renegotiated a contract, and in nearly one-quarter of these renegotiations, the vendor lost the account.

As a result, litigation and arbitration over failed outsourcing agreements is now a big growth area in computer law, says attorney Tobey Marzouk, a partner at Marzouk & Parry, a Washington law firm that specializes in such cases.

A big source of outsourcing failures is the way that outsourcing vendors tend to "sell high," pitching their projects to the CEO rather than to the IT staff and managers. One of the perversities of corporate culture is that outside experts are often more respected than inside talent, and thus many projects get sold to top management, which then pushes the IT group to go along even when IT knows that the project is impractical.

Another common piece of stupidity is top management's refusal to hire a lawyer who specializes in outsourcing litigation during contract negotiations. While it's true that many companies have legal staffs, software litigation is a relatively new field, and few lawyers have either the legal or the technical training to understand the issues involved. Outsourcing contracts must be written carefully so that they identify exactly how performance will be measured, with clear acceptance standards and testing procedures. "That way, you can hold the vendor's feet to the fire to make sure problems are fixed," says Marzouk.

When failed outsourcing projects end up in court, the knee-jerk reaction of top management is sometimes to fire the IT manager who was the project liaison. That's monumentally stupid, according to James Johnson, CEO of The Standish Group International Inc., a research organization in West Yarmouth, Mass. He tells the story of one small company that "paid the vendor $20 million and found out that the resulting system not only wouldn't work, but that it would cost $20 million a year to keep running." The IT director - a former employee of the vendor - was subsequently fired. But when the case went to court, the former director appeared as a hostile witness, causing the company to lose its lawsuit.

Another common error is shutting down the flawed system before the case goes to court. While that can save a few dollars in maintenance costs, the IT group may need to have the system available in order to identify the problem and articulate it clearly to the court. "The best way to prove that the software doesn't work is by showing that it doesn't work," points out Marzouk.

This isn't to say that outsourcing is always a bad idea, only that top management needs to listen more closely to its own technical staff before making outsourcing decisions. Now isn't that a radical idea?

Geoffrey James is the author of numerous books and articles on high-tech business. Contact him at www.geoffreyjames.com.

Copyright © 2000 IDG Communications, Inc.

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