IT outsourcing celebrates its 21st birthday in 2011. From its birth in 1989 as a result of a pioneering deal between the Kodak Eastman company and IBM, the model has grown much like a child, from the formative years to the rebellious teenage phase towards maturity, and is now a common method of obtaining IT services in the modern world.
This is according to Allan Dickson, consultant at Compass Management Consulting.
When the then CIO of Kodak Eastman, Katherine Hudson, made her decision to outsource part of the company's IT, her path was heavily criticised as it was feared than by outsourcing these services the CIOs would be giving up their power, and many felt that they could provide better and cheaper services by keeping them in house.
Twenty-one years later, the journey towards maturity has not been all smooth sailing, and as a result the debate around the wisdom of outsourcing IT services still rages.
Experience over the last 21 years has proven that globally, more than 50% of IT outsourcing contracts either fail to deliver on expected benefits, are renegotiated during the contract term, are terminated early,
or are significantly de-scoped during the term. This all goes to prove that outsourcing does not automatically reduce costs or deliver on any of the expected benefits.
The churn experienced in outsourcing contracts all tend to stem from four overarching factors: unmet expectations; disagreements with vendors; mergers and acquisitions; and changes in strategy. As a result of this churn, IT outsourcing contracts are often cancelled and the services repatriated back in-house.
However, IT outsourcing has proven itself to be successful in many instances, beginning with that landmark deal between Kodak Eastman and IBM, and organisations continue to sign large IT outsourcing contracts to this day.
The fact is that the fundamental drivers that led Hudson to examine outsourcing as an option, namely capability, capacity and cost, have changed little over the last 21 years.
What has changed is the balance of these three factors, which has shifted away from purely being a cost exercise towards a more strategic objective that places more weight on capacity and capability than before, due to increasing pressure on the CIO to provide results based IT services.
The need for IT outsourcing still exists, but taking the wrong approach can be fatal to any outsourcing initiative.
An example of the wrong approach is where a company is pressured to reduce costs and improve service quality through outsourcing as soon as possible, using brief descriptions of the services to be delivered by vendors, an unconfirmed view of what exactly the business needs from outsourcing, and indefinite or vague views of the volumes and service levels required.
This will almost guarantee that the outcome will be in the 50% that has serious problems, but it is not uncommon, especially in older contracts that are up for imminent renewal.
Preparation is one of the key contributors towards success. Proper and detailed preparation at the start of the outsourcing process will deliver a faster, more cost effective and better quality outsourcing relationship,
whether an organisation is outsourcing for the first time, renewing an existing contract with the same vendor or going to market with existing outsourced services.
There are a number of components and activities that must be completed before a company starts negotiating with the vendors in order to maximise the probability of a successful outcome.
Firstly, users need to know why they are outsourcing and what they want to achieve. This first aspect requires a clear and documented agreement from the business.
Secondly, in parallel with building a detailed service catalogue, it is necessary to build service level agreements and operating level agreements wherever there are third party relationships.
Both current and future state service level agreements should be established; OLAs need to reflect the requirements of the SLAs and the overall service level for delivery of the service to the end-user, and SLAs
need to be aligned with the needs of the business as well as being agreed with the business.
Thirdly, it is vital to have a clear understanding of the current cost base and service levels. Finally, expectations need to be realistic – a business cannot expect a vendor to significantly reduce their costs and significantly improve their service levels.
Before engaging with outsourcers, there are several things that need to be in place in the business, including:
* A clear statement, agreed with the business, on what they want to achieve from outsourcing.
* Detailed service catalogues defining exactly who will be responsible for delivering what.
* Service level agreements and operating level agreements agreed with the business.
* Asset lists of hardware, software, third party contracts and so on.
* A clear understanding of the level of cost reduction and service improvement that can be expected from the vendors.
* A template contract.
* Evaluation criteria agreed with the business.
* Any specific transformational requirements.
On top of this, it is advisable to obtain specialist resources to work with the business on the outsourcing contract. They will ultimately save time and money through a tighter and more focused agreement and the templates and experience they bring with them.
In 21 years, IT outsourcing has not changed dramatically; the key drivers remain the same, as do the reasons for the failure of so many contracts. With the right tools and considerations and an experienced partner to help along the way however, IT outsourcing can prove to be a beneficial and cost effective exercise that will provide value to the organisation throughout the duration of the contract.