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If you get someone to run your IT for you, why do things so often go wrong? The relationship between client and supplier is a delicate one with expectations often mismatched on either side. Avoid the pitfalls of outsourcing by talking to the experts. PA Consulting Group is a management, system and technology consulting firm operating worldwide. Its experts Jonathan Cooper-Bagnall, Fons Kuijpers, Scott Hamilton and Richard Harrison answer your questions.
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Consider the following:
A significant contributor to failure of IT programmes is the fact that there are very few people capable of delivering large programmes of work, especially where the utilised technology and business requirements are constantly evolving.
My question: How does outsourcing address this issue as it currently seems that all outsourcing does is provide more opportunities to fail (due to cost-benefit) as oppose to resolving a core failing in the IT industry as a whole.
David Lewis, Hong Kong
PA Consulting: Constantly evolving technology and ever changing business requirements means that organisations must invest on a consistent basis to stay ahead of or at least in line with the curve. In the main (and particularly the top tier) the suppliers of IT outsourcing are able to make much higher levels of investment in this area as it is the focus of their business. As you rightly say, the issue is one of attracting and maintaining people with the right levels of experience to deliver the larger IT programmes. The major suppliers of outsourcing can find it easier to attract top talent - they are able to leverage the skills and experience across a wider portfolio of programmes and can, therefore, justify the expense of bringing that individual on board. Once on board, the variety of different experiences to which the people are exposed, means they can bring significant value to the table, helping to avoid the pitfalls that have caused projects to go astray.
I am in a large corporation in infrastructure services. My specific area of work is around workstation management. I am a highly technical worker who writes scripts for the larger domain, deploys and keeps a large inventory database and writes asp and cold fusion web pages that are integrated with the domain. The goal of my work is to leverage automation in the area of managing workstations, delivering software to workstations and general inventory and cost control.
We were recently ‘outsourced’ to a larger corporation. There is a specific error that you may be interested in addressing when it comes to the practical side of these functions (I am not sure on your focus - it may be just on the contractual side). US management seems to have the idea that you don’t need to have much in the way of technical knowledge in managing IT. So, when this specific agreement was implemented, at least in the area of workstation management, any sort of adequate arrangement to address workstation issues was missing. This is, to say the least, highly inefficient.
Additionally, since our management does not understand what we implemented (this is a long story), they outsourced us to a company whose approach to workstation management is behind the work we have done. About 40% or so of the employees that were outsourced were given termination dates and eventual severance. I was not one of them. However, I have practically no work to do. I can pretty much stay home. I have asked for termination and severance. However, given the bureaucratic nature of the large organizations, management cannot adjust.
Bill Goedecke, San Francisco
PAC: There is a lesson in here for all those engaged in constructing an outsourcing arrangement. To effectively build a statement of work (i.e. the services that the outsourcing supplier will go on to deliver) you need to effectively engage with the people on the ground that are responsible for delivering the service today - they will know far better than the management layer what is really being done. It is not adequate for a few ‘deal makers’ to sit in a darkened room and try to work out the intricacies of the new service arrangements. Discussions need to be held between the people working on the service today and the supplier. Only in that way can we really gain an insight into the services provided and decide how we want to proceed. One other thought and recognising that it may not be the case in this set of circumstances; if companies decide to change the service delivered today (for cost or other reasons) then they need to ensure that this is clearly communicated to all involved - employees need to be informed and will work far more collaboratively with the organisation if you are up front.
Is there any evidence that outsourcing clients vary in their understanding of the issues involved, depending on their country of origin or the sector they are in?
A. Loughlin, Warwick
PAC: Yes, there is evidence that the understanding varies by country and sector. The findings suggest that the understanding is highly dependent on the maturity of the outsourcing industry in the country or sector. For example, the UK is well ahead on issues such as the transfer of staff and how to ensure that you are effectively communicating with employees - when this is compared to some of the other European countries, there is a level of innocence about the likely reaction (and how to cope with it) from employees. In contracting, the countries and sectors that are starting and picking up the pace in outsourcing, can often be found working with contracts reminiscent of transactions being done five-years ago in the mature areas. On the upside, for those organisations that look beyond their country or sector boundaries, there is a wealth of experience on which to draw - the key to learning is to focus on best practice in outsourcing rather than best practice for your region or sector.
Should clients spend more time talking to other clients which have successfully outsourced, to ensure they avoid any pitfalls?
J. Gabriel, Cambridge, Mass
PAC: There is definitely value in talking to others who have been through this process before. However, this should not be limited to the success stories. There will always be examples of failure in outsourcing - the challenge is to understand why things went wrong and the reaction of the organisation and the outsourcing supplier to the failure. One of PA’s clients successfully outsourced their infrastructure and the relationship with the outsourcing supplier is going well - however, some five-years before they had brought everything back in house due to a failed outsourcing arrangement. In the previous transaction, there were a series of errors from which they learned valuable lessons, and while they perceived the new outsourcing arrangement as high risk because of the prior experience, they developed avoidance and mitigation strategies to ensure success this time. It is good to ask your outsourcing supplier to provide names of clients where projects did not go so well as well as getting the references for the successes.
Does the dilemma over whether to outsource offshore or onshore take precedence for some companies over the more general question of whether to outsource at all?
P. Whitehead, Northampton
PAC: The survey found that a significant percentage of organisations do not make the right level of investment in this whole strategy area (offshore, onshore, outsource, insource etc.) - it contributes, in part, to the challenge in benefits realisation. If the strategy is flawed the benefits will not flow readily. Offshore has been around for a long time, however, the recent swell of focus on offshore as a strategic option and the sheer excitement at the labour arbitrage has blinded many organisations from following their usually solid business disciplines - meaning that they can focus on the questions in the wrong order. If you are failing to deliver a service inhouse and onshore, outsourcing the same service to a remote location is not going to fix the problem. You need to understand the service that is being delivered today and what transformation is necessary to make it deliver effectively. Only then can you embark on the analysis of whether it should remain inhouse or be outsourced, and regardless of the style of delivery, whether that is better enabled locally or offshore. The cliché ‘you should not outsource a problem’ is not, in my opinion, a true statement. It would be better worded ‘you should not outsource a problem you do not understand’ - if you have done your homework and really know what it will take to transform, then you may choose to manage an outsourcing supplier to do the work on your behalf... and the answer maybe to fix it in an offshore location.
What sort of profits should outsourcing clients accept that service providers should be making on outsourcing contracts?
B. Andrew, London
PAC: The profit that an outsourcing supplier should be making will vary by geography, by sector, and by the scope and scale of the services they are asked to provide. Unfortunately there is no ‘one size fits all’ reply. It’s also important to establish whether we are talking about gross or net. As a rule of thumb, for the more competitive and standard types of outsourcing (for example desktop outsourcing) it is reasonable to expect that net profits will be below the 10 per cent mark. The more complex or transformational the work, the fewer providers there are that can truly meet the requirements and the more scope there is for margins to climb. Also, don’t forget, if there is an element of consulting as part of the outsourcing arrangement, the margins in this space will be considerably higher, pulling the overall transaction profit up. The key message to take away when facing this question is that organisations have to know that suppliers are making a profit in each aspect of the outsourcing arrangement (by the way that means not guessing or not caring but asking if the deal is profitable for the supplier). Cross subsidies or loss leading transactions, result in failure on an increasingly frequent basis. There will be a cost in the long run, so better to build a viable business case that has the supplier profitable from the outset.
If you look ahead five years will the misunderstandings identified in the PA study have been reduced, or will the spread of outsourcing to countries beyond the US and the UK only exacerbate the problem?
Marie Walch, London
PAC: The misunderstandings that occur in outsourcing arrangements will continue unless organisations and suppliers embrace, and act on, the learnings. The issue is less one of scale or spread of outsourcing as a strategic option and more about the willingness of the teams engaged in outsourcing to take the time to do things properly and treat outsourcing with the respect it deserves. That means in five-years time we may still be talking about the issues facing the industry. There has to be a mindset switch - say the words “£50m and M&A” in the same breath and senior executives are keen to be involved and want to understand the opportunities and risks in real detail. Say “£50m and IT infrastructure outsourcing” and it can be tough to get it on the board’s agenda. Outsourcing is a critical decision that can have a fundamental impact on the ability of a business to deliver to customers - it needs to be taken seriously.
How can companies measure the success of an outsourcing contract once it has reached the operating phase?
Frank Peters, Hertfordshire
PAC: Effectively measuring an outsourcing contract once it is in the operating phase really needs to be split into a number of disciplines. At the most basic level, reporting on the performance against the agreed service level metrics and conducting a customer satisfaction survey, are valuable tools to gauge overall success. However, they only speak to the surface level success - they do not effectively address whether the financial and other benefits were truly delivered or whether the relationship is supporting the business in the right way. Conducting structured relationship reviews is one way to examine the success of the outsourcing arrangement, it can also identify how organisations and their suppliers are working together to drive innovation and plan for the future requirements of the business. Also, having an active benefits delivery program against which the supplier, in collaboration with the organisation they are supporting, can be measured on an ongoing basis, is also an essential way to track progress and success.
How closely should clients monitor suppliers’ performance? How can avoid the two extremes of interfering micro-management and an excessively laissez-faire approach?
M. Rogers, Kent
PAC: Organisations need to monitor supplier performance with a considerable amount of diligence. There is a difference between monitoring performance and managing delivery, which is where the confusion usually arises. Suppliers need time to learn about an organisation and then to bring to bear their standard processes or to agree with the organisation that they must create custom processes in order to able to deliver effectively. Once the delivery processes are agreed (albeit they may need to change over time) the supplier should have the freedom to manage the delivery. This means working as a team through transition. However, once this early stage is complete, that does not remove the need for a close review of ongoing performance - weekly operational meetings that examine delivery issues should be part of the organisation’s service management responsibilities. Part of the challenge is that organisations have a tendency to build their service management organisations by drawing an organisation chart. Instead, they need to build their service management organisation by undertaking a functional analysis looking carefully at the roles that need to be performed. From there, developing a skill/competency matrix that will allow them to find the right people to be part of the organisation. There is a major difference in skills between people who deliver the service and people who will manage an outsourcer to deliver the service. Recognising the change and providing the right training to the people, is an essential step to ensure the right balance between monitoring performance and managing delivery.
To what extent do you think the UK government will outsource existing IT functions (rather than new IT contracts) to the private sector in the short to medium term? Can the UK government learn anything from the private sector’s approach to outsourcing?
PAC: Outsourcing remains a solid strategic option for the public and private sector, and therefore, something the UK government should continue to take advantage of where it makes sense. The public sector is ahead in some aspects of outsourcing, for example the focus on best value and not always cheapest price, and recognition that they may get easier access to the best IT skills. In contrast, the public sector procurement process can encourage arms length solution development and contract negotiation - a problem not suffered so clearly in the private sector. The public sector approach can restrict the ability of the supplier and their customer to build a solid relationship from the outset, and mean that transition is more challenging. This lesson is starting to be understood and change is happening to allow more collaborative contracting rather than a stifling process. As a final lesson, although not exclusive to the public sector, the amount of investment that must be made on designing, populating, training and supporting the retained organisation or intelligent customer function, should be clearly thought through well in advance of signing a contract. The survey revealed that over half our respondents had seriously underestimated the amount of effort required to manage the relationship with their supplier. In the end the message is - you can outsource IT but you can’t outsource benefits delivery - you have to work hard with the outsourcer to make this happen.