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  1. 1. The Pros and Cons of Outsourcingan IT Management eBook
  2. 2. contents][ The Pros and Cons of Outsourcing This content was adapted from Internet.coms Datamation and CIO Update Web sites. Contributors: Lionel Carrasco, Sashi Reddi, Claudio Muruzabal, Julie Craig, and Larry Marion. 2 How to Get Outsourcing Right 2 Lionel Carrasco 5 Outsourcings Seven-Year Itch Julie Craig 10 The Case for Nearshore Outsourcing Claudio Muruzabal 5 10 12 Five Things Every CIO Should Know About Outsourcing Sashi Reddi 15 Outsourcing: SMBs are Doing It, Too12 15 Larry MarionThe Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.1
  3. 3. [ The Pros and Cons of Outsourcing ] How to Get Outsourcing Right By Lionel Carrasco sourcing IT, why do so many companies tell tales ofO utsourcing is one of those terms inherently tied to globalization. Essentially, companies go the out- partial or complete failure in successfully managing this sourcing route as a way to reduce costs, but often process? Why is it so complex?they spend too little time considering its strategic value,often overstated by many outsourcing providers. Many companies will find that IT outsourcing is com- plex because it can turn into an "operational labyrinth"The truth is one of outsourcings main values is to simply given the nature of the required services to sup-relieve IT staff of time- port complex businessintensive duties and create processes, as well as theopportunities for them to maturity of the IT process-take on truly strategic initia- es.tives. There is a significant differ-Its widely known that com- ence between outsourcingpanies pursue outsourcing low-value services such aswith the cost-reduction fac- help desk, which are highlytor in mind. Some also look stable and standardized,for outsourcing to improve and outsourcing softwareservice levels or to create development or even thebudget flexibility. whole IT operation; keep- Jupiterimages ing hold only of highTo fulfill the cost reduction promise that most business- value-added or strategic value projects.es expect from outsourcing, many outsourcing firmshave responded by becoming more efficient and seek- Of course, there isn’t a universal recipe that applies toing out cost-effective resources in the global market- all companies developing an outsourcing strategy, butplace. a consistent and moderate-risk strategy can get you much closer to "Right Sourcing."Navigating the Maze Consider the following 10 factors to improve the oddsThe question is, despite the cost advantages of out- of success when planning your outsourcing strategy: “ Its widely known that companies pursue outsourcing with the cost-reduction factor in mind.2 ” The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.
  4. 4. [ The Pros and Cons of Outsourcing ]1. Identify your teams ability to do the same job Keep in mind there are a number of markets with com-today in a different way. petitive and skilled labor around the world, includingGet to know the tasks your operation is truly effective often-overlooked places like Eastern Europe and Latinand efficient in performing, including operational sup- America. Most outsourcing firms can service you fromport. multiple locations, which helps reduce the need to work with more than one provider.Tasks should be segmented into different categories,such as client-facing vs. internal activities; sales-related 6. Analyze your business.vs. business-speed related activities; and centralized vs. Only then pre-select the possible geographic locationsgeographically dispersed activities that it would make sense to outsource to, based on the unique criteria of your business.2. Define your processes clearly.Start by describing the way the tasks are accomplished It is very important that you move tasks to locations ortoday, and review the performance indicators and the markets in which your company already does business.policies for each process. By doing so, you have the opportunity to create wel- fare to foster your own operations in those countries,With geographically dispersed processes, its important while also ensuring that your outsourcing partner isto clearly establish the borders between activities aware of your business and concerned about providingdeveloped in a different part of the business, or in good service.other countries. 7. Make the business case for outsourcing.3. Identify your true IT costs. Dont short-change yourself in this process: IncludeYou will have to get into the weeds to calculate the both quantitative and qualitative elements in your strat-price you are paying on each maintenance ticket and egy.development project but it will be worth it because itsvital to compare your current operation with the Its important to quantify the real benefit of going intoexpected financial benefits of outsourcing. outsourcing and to know where the estimated savings come from. For instance, if you discover that an activity4. Take a guess about which processes you may out- will represent less than 30 percent in savings, it is advis-source, and picture an outsourcing partner manag- able to postpone it for a later stage of the outsourcinging them. cycle.This exercise, which you can do with an outside con-sultant or take on internally, requires time to evaluate 8. Make sure to interview your possible outsourcing"What if part of X of process Y is done differently than providers in their own facilities, no matter whereit is today?" they are located. This is not a time to cut corners. Go beyond the mar-Think about the dispersed activities your team carries keting hype, trade-show buzz, and third-party opinions.out today, and if they were handled in a building across Develop your own short list by analyzing each compa-town. Will it work? Look for the most painful processes nys capabilities. You will be amazed at what you find.— the real IT bottlenecks — and the most costly prob-lems. 9. Be up-front about your expectations. Think about your definition of a successful relationshipFinally, imagine these processes upgraded through out- and be open about the critical elements for successsourcing, freeing up time for the IT staff to devote to that both parties will need to keep in mind.other more strategic tasks. Communication is the key. Be sure your potential part-5. Think globally. ner clearly understands the way you want to design theOutsourcing has really grown up and the market is ripe operation and particularly the benefits you seek inwith competent companies — large and small, near moving to an outsourcing model.and far.3 The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.
  5. 5. [ The Pros and Cons of Outsourcing ]Take the time to develop a transition plan, assigning Talk about outsourcing usually starts with cost reduc-the tasks to be performed in each geographical loca- tion, which often is the driving force par excellence, buttion by each company, the times of interaction, and the it is very important for you to know that cost reductionmeans of control. has a price in terms of money and time. The true bene- fits of outsourcing will come to fruition only after you10. Consider the benefits of a short-term contract to and the outsourcing provider figure out how to workstart your outsourcing project. together in the best possible way. IYou can always renew it for a longer-term commitment.Though the legal conversations can be uncomfortable,contracts are integral to ensuring an effective transitionand partnership.4 The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.
  6. 6. [ The Pros and Cons of Outsourcing ] Outsourcings Seven-Year Itch By Julie Craig Transfer of Execution,W hile we laugh about the alcohol-based tonics sold from the backs of wagons in the 1800s, who among us has never placed a bet at a blackjack Not Responsibilitytable? And, while we scratch our heads trying to imagine According to Wikipedia, outsourcing is "the transfer ofwhy anyone would send their retirement savings to a the management and/or day-to-day execution of anstranger in Nigeria, most of us have been taken in at some entire business function to an external servicepoint by promises that a stock will rise, a real estate venture provider." Obviously, this definition covers a broadwill succeed, or a tax cut will really put money in our pocket. range of products and services. At one end of the spectrum is software as a service (SaaS), in which anHope springs eternal, and the outside company assumespromise of getting something the execution of a givenfor nothing is almost irre- service, such as ERP or CRM.sistible. At the other is wholesale outsourcing of an entire ITLets be clear here — Im not operation. This is often acalling outsourcing snake oil. case in which an outsourcerWhat I am saying is that, in "hires" a companys ITthe past, it has been employees and, in return, isapproached by some as a contractually obligated tomagic potion that will cure all deliver IT services at a speci-ills. IT executives are as sus- fied cost.ceptible to the quest for amagic bullet as everyone else. There are multiple grada-However, the vision of lower- tions between the two, anding costs, maintaining or Jupiterimages these gradations offer aimproving service quality, and decreasing service man- broad menu of options for IT organizations looking foragement oversight is a myth at best, and one right up ways to optimize service delivery. The important thingthere with the likelihood of consistently beating the to keep in mind when considering outsourced serviceshouse at blackjack. (There is a good reason why Las is that every company is different. There is no "one-Vegas is crammed with billion-dollar casinos.) size-fits-all" outsourcing strategy. Picking and choosing “ The important thing to keep in mind when considering outsourced services is that every company is different. There is no "one-size-fits-all" outsourcing strategy.5 ” The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.
  7. 7. [ The Pros and Cons of Outsourcing ] Outsourcing ROI Good,from the multiple offerings on the menu requires busi- Satisfaction Lackingness knowledge, understanding of the industry verticalin which the business operates, the kinds of IT services A By CIO Update Staffneeded to stay competitive in that vertical, and theavailability of skills and expertise. study from Deloitte reports that enterprises entering into outsourcing arrangementsThis is where todays CIOs have an opportunity to earn are focusing too heavily on reducing coststheir keep, because this "big picture" perspective is through labor arbitrage alone, resulting in highone that requires significant experience, knowledge, levels of disappointment and conflict even thoughand judgement. Within high-performing IT organiza-tions, strategically selecting outsourcing options, and most companies are realizing significant cost sav-skillfully combining them with in-house expertise and ings.services, is high art. Such organizations understandwhat outsourcing is and what it is not: an opportunity The Deloitte Consulting study, Why Settle forto cede responsibility. Less, found that 83 percent of companies sur- veyed had achieved an ROI of more than 25 per- cent on their outsourcing projects. However, 49 percent of the executives surveyed said theyWhile execution can be outsourced, responsibility can- would have defined service levels that aligned bet-not. And from a management perspective, many can ter with their companies business goals if theytestify that outsourcing creates as many challenges as it could start their outsourcing projects over, andsolves. only 34 percent of respondents reported that theyManaging contracts, service levels, and acting as an had gained important benefits from their serviceintermediary between IT and the business are all activi- providers innovative ideas or transformation ofties that have to be resolved. These activities fall on IT their operations.organizations traditionally focused on technology andgeared towards delivering services rather than manag- In addition, by a three-to-one margin, the out- sourcing service providers polled felt that their client companies did not have a solid outsourcinging them. This can result in both a skills and an expec- plan, lacked the operational data needed to maketation gap. sound decisions, and did not understand how the to-be organization would really work. Such contra-If IT doesnt have the skills it needs to manage this newdelivery model, and, as a result, expectations of the dictory findings could be the result of a failure tooutsourcings benefits go unmet. Once this happens, properly define the goals of the outsourcing proj-the bloom fades from the outsourcing rose, reality sets ects as being more than saving money.in, and the company struggles with a whole new set ofchallenges that bring with them multiple unfamiliar "Outsourcing is working financially for a majorityroles. of companies in this survey, however, executives’ propensity to lead with cost reduction and labor arbitrage without emphasizing the need for over- all optimization stymies their companies chancesWhere Outsourcing is SuccessfulGeneral Motors (GM) is the poster child for outsourc- to realize the full benefits of outsourcing," said Peter Lowes, a principal with Deloitte Consulting LLP and the leader of its Outsourcing Advisorying, and has been since the 1980s. At that time, GM Services group, in a statement. "The themes ofoutsourced virtually its entire IT organization to unrealized potential and lost opportunities to useElectronic Data Systems (EDS). Over time, as GMs out- outsourcing as an opportunity to innovate echosourcing model has evolved and diversified to multipleproviders, one thing has stayed the same, GMs inter- throughout this report."nal IT team. Lowes noted that these lost opportunities mightCurrently consisting of almost 2,000 people, it is also be the result of the companies’ setting theirresponsible for managing outsourced services. Within outsourcing goals too low. He said companiesGM, the role of IT hasnt diminished — IT is still continued6 The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.
  8. 8. [ The Pros and Cons of Outsourcing ] might have initially perceived outsourcing prima-responsible for delivering business services — but ithas changed. rily as a tactic to reduce costs as opposed to a means to fundamentally transform their opera-There are a few areas where such an outsourcing tions and drive dramatic improvements in efficien-model tends to be particularly successful. One is when cy, productivity and reliability. Lowes said thatIT organizations utilize it to address those areas of the while there is no single right way to use outsourc-business that are outside their key competency. For ing for each company, companies should examine the following aspects of an outsourcing deal to see if they need to correct their course even in mid-GM, that core competency is automobile manufactur- stream:ing, not IT. Kudos to GM for realizing this early andmoving towards an outsourcing model ahead of much Did you clearly define the strategy? Companiesof the market. need to ask themselves if they are outsourcing theWhat is appropriate for GM, however, is not necessarily right things for the right reasons. Transferring athe best solution for Google. Googles core competen- dysfunctional operation to a vendor in hopes ofcy is technology, and companies like Google excel at saving costs through economies of scale or arbi-delivering IT services. The likelihood that an outsourcer trage can be a case of "your mess for less." Do we have a solid foundation? Companies need tocan provide the same combination of leading edge ask if they have defined and quantified what theytechnology, expertise, and innovation that Google has expect from outsourcing. The creation of a businessin-house is pretty small. case and the establishment of effective service level agreements (SLAs) should not be given short shrift;Targeted outsourcing — particularly of non-differentiat-ing business services — is another sweet spot. In many but in practice this is too common.cases, it makes sense for commodity functions like e-mail management and the help desk to be outsourced Vendor selection now means something different.to a provider that focuses on that service for their daily Companies need to select the right servicebread. Does this mean these services are unimportant? provider, one that is capable of delivering strate-Not by any stretch of the imagination. They are critical, gic process improvements as well as cost reduc- tions. When things do not go well in outsourcing, most companies automatically scrutinize the serv-but, as long as e-mail is available, it provides little or ice provider, but do not recognize that their deci-no strategic advantage over business competitors. sion to select a vendor on cost alone may be theCompanies are starting to look at utility services in the actual root cause of their problems.same way as they see electricity. Just as most of us relyon the electric company to generate our power andthe Post Office to deliver our mail, relying on an out- Before striking the deal companies need to ask ifside vendor to deliver utility services makes good their contracting process is mutual and flexible.sense, especially if the vendor can do it cost-effectively. Contract negotiation is a pivotal point in the out- sourcing process. After the deal is signed, are youSaaS getting what you paid for? It can be tempting to think the signing of the outsourcing contract isSaaS is another option that can become a valuable the culmination of the outsourcing process. But inpiece of the service delivery mix. SaaS is a subset of reality, effective performance management, espe-outsourcing in which one or more services described in cially the insistence that service providers actively search for, develop, and implement strategic improvements, is the crowning component of anan IT organizations service catalog are delivered and effective outsourcing initiative.supported by an outside provider. SaaS has some realadvantages, especially for organizations with limited Methodologyresources and expertise supporting multiple depart-ments and a variety of applications. For a small to The survey included more than 300 senior execu-medium sized company, for example, the cost of sup- tives at mid-size and large companies. The execu-porting the customer relationship management (CRM) tives came from the United States (42 percent), thesystems used by the sales team, the enterprise United Kingdom (25 percent), Germany (25 per-resource planning (ERP) software utilized by finance, cent), and Canada (8 percent). I7 The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.
  9. 9. [ The Pros and Cons of Outsourcing ]and the computer aided design (CAD) systems used by required multiple plane changes and executives lost aengineering can be exorbitant. Delivering ERP and full business day to travel. This particular company wasCRM via SaaS could be a viable option, and one that happy with software quality, but multiple companiesreduces the services supported by internal staff from have reported quality problems that had to be fixedthree to one. down the line.Not to Be Confused A Scientific ApproachIn addition to underestimating the management Vital Roy and Benoit Aubert wrote an excellent analysisrequirements of outsourcing, there are other "gotchas" of the pros and cons of outsourcing in their paperas well. One is when outsourcing is combined with off- titled, A Resource-Based Analysis of IT Sourcing. In theshoring. There is a difference between the two. paper, they cited some of the less tangible outsourcing costs that, nevertheless, impact a companys short- andSoftware companies of all sizes are offshoring program- long-term revenues.ming to geographically distributed teams, with varyingresults. For example, IBM has opened dozens of devel- One is loss of competitive advantage. Especially inopment and competency todays very competitivecenters across the globe.By and large, the peopleat these locations are IBMemployees who just hap- “ In addition to underestimating business climate, IT is increasingly a business dif- ferentiator. Far from Nicholas Carrs "IT ispen to work outside the the management requirements dead" philosophy, thereU.S., offshore employees of outsourcing, there are other are multiple companies inrather than outsourced which IT is breathing lifeservices. "gotchas" as well. back into the business. We are especially seeing thisIn contrast, outsourcedprogrammers arentemployees, they are contracted providers. On the sur-face, it looks like outsourcing work to such program- ” in companies that have leveraged service-oriented architecture (SOA) to enable a level of flexibility previ- ously unknown in the business world.mers is cost-effective — wages can be as much as 80percent less than those of their U.S. counterparts. SOA has helped banks respond more flexibly to everHowever, multiple companies are reporting that, in fact, changing regulatory and customer demands. It hasthe "real" cost of offshore outsourcing approximates helped telecommunications companies to dramaticallythat of using in-country resources in the first place. cut the effort required to bring new customers online. And it has enabled healthcare companies to developRecently, I spoke with an executive from a software new products, such as medical portals that connectcompany best known for its database management pharmacies, medical records, and doctors offices.products. His company has been outsourcing program- The competitive advantage SOA brings with it is soming work to Eastern Europe, but he indicated that, if marked that the world of business is increasingly beinghe had it to do over, he would have kept the work with- divided into technology "haves" and "have nots." Thein the Western Hemisphere. "haves" are well-positioned as industry leaders with a solid foundation for future growth. The "have nots"He cited multiple problems. The time difference made find themselves left behind and facing a gap that growsit difficult for U.S. staff to collaborate with offshore wider with time.resources. They ended up putting in long hours duringthe day, then putting in additional hours at night to Loss of the ability to innovate, loss of confidence bymeet with Eastern European personnel. Travel was a high quality employees who have their choice of jobsproblem, both in terms of time and expenses, since elsewhere, and loss of brand equity can all be falloutthere was typically a U.S. manager on-site. The trip from outsourcing critical business services. CIOs consid-8 The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.
  10. 10. [ The Pros and Cons of Outsourcing ]ering outsourcing would benefit from reading Roy and offerings that can be leveraged to provide high qualityAuberts paper, as it is well thought out and features a IT services to the business.matrix that is useful for determining appropriate sourc-ing strategies for specific IT services. Developing a strategic mix of internally and externally supported business services is as much an art as a sci-Conclusion ence. In the end, there is no substitute for good man- agement, business-focused technology expertise, andLike any development in the IT industry, outsourcing keeping high-quality personnel and strategic assets in-has evolved to the point where, in many cases, it can house. Iprovide significant business value. Like in any relation-ship, it appears the early excitement is giving way andIT is developing a more realistic perspective. They areseeing outsourcing as what it is: one of a variety of9 The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.
  11. 11. [ The Pros and Cons of Outsourcing ] The Case for Nearshore Outsourcing By Claudio Muruzabal they essentially made the same promises as earlierT here is a common belief that businesses are better off if they turn over all of their non-core competency work domestic outsourcers, but delivered services from thou- to third parties. This idea has driven the growth of the sands of miles away.multi-billion dollar IT outsourcing business. An alarmingnumber of failed attempts at a "one-size-fits-all" approach, Sourcing — With a Twisthowever, have shaken corporate faith in the traditional out- The new trend has returned control of core processessourcing model. to IT leadership. This has result- ed in the abolishment of theThe initial concept of outsourc- monolithic, one-vendor-fits-alling proved no panacea. As it outsourcing model of theturned out, well-negotiated 1990s and has contributed todeals didnt generate the the emergence of a multi-expected 25 to 30 percent cost sourcing strategy where thesavings. Unexpected situations enterprise contracts with multi-drove additional cost; many of ple outsourcing vendors forthem coming from geography, their respective expertise in atime zone, and cultural issues. given space.The next wave of outsourcing The industry has now realized itrose in the Far East, driven by is unrealistic to think one can Jupiterimagesthe race to comply with Y2K hand over all of one’s challenges to a third party andadjustments. This then drove the emergence of soft- expect that automatically all of the problems will goware development and application maintenance com- away.panies. These new companies, based primarily in India,also promised large cost savings and resulted in the As such, over the last 18 to 24 months we have seen acreation of a new industry segment. new and refreshing trend in the marketplace where IT leadership is taking ownership of the delivery process;Once again, these companies provided nothing new as “ The initial concept of outsourcing proved no panacea. As it turned out, well-negotiated deals didnt generate the expected 25 to 30 percent cost savings.10 ” The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.
  12. 12. [ The Pros and Cons of Outsourcing ]contracting out only those pieces that lend themselves Immigration Advantages: Of course, travel works bothbetter to third-party services while retaining control of ways. A CIO who oversees a project that requires a mixthe strategy and overall execution plan. of onshore-nearshore combination and rotational assignments will play host to visiting workers and needAs the industry moves towards a multi-sourcing model, to understand the rules governing visas and any tradethe bid process has opened up to specialized out- agreements.sourcers with a focus on infrastructure, telecommunica-tions, business process, call center, and software devel- The good news is, under NAFTA (North American Freeopment and maintenance. Trade Agreement), flexible visa arrangements allow nearshore professionals to travel to the U.S. from CanadaIT execs also started to look for development and sup- or Mexico to work for extended periods of time.port capabilities close to their business centers, creat-ing a network of suppliers in different geographies and Intellectual Property Protection: NAFTA also provideswith different technical expertise. This approach, now for increased protection of intellectual property rights.widely known as the global delivery model, opened the This is a critical component when sensitive proprietarydoor to competition with the established Indian and information needs to cross borders as a result of thetraditional onshore providers. nearshore engagement.Providers in Latin America and Eastern Europe are Cultural Affinity: There is more to affinity in a workingproving to be as well trained and cost effective as the relationship than language. When a country shares anIndian, Filipino, and Chinese providers but offer a clos- extensive border with another and has a common his-er-to-home delivery mechanism. tory spanning more than 300 years, like the U.S. and Mexico, there are culture affinities that are strong.The Case for Nearshore When it comes to building the necessary empathy to collaborate in a complex project, this affinity plays aIT services provided from locations in Latin America critical role.and Eastern Europe are generally known as"nearshoring" services. A number of providers build Cost Advantage: All of the previous advantages men-software development, maintenance and support capa- tioned lead to an ultimate cost advantage for nearshorebilities from these locations. services. Proximity leads to more interaction at a lower cost allowing for project management to be more pres-Although it is difficult to argue against the massive ent in the project, and cultural affinity reduces the needavailability of talent and low labor costs in India and to spend many cycles to reach a conclusion.other locations in the Far East, there are a number ofreasons that make nearshoring a more attractive alter- Time zone proximity eliminates the need to work extranative for many large organizations: hours. As a result of all this, the apparent hourly rate differential between nearshore service and traditionalTime Zone: Nearshoring offers the alternative of having Far East-based service is eliminated and true cost con-the developer, support organization, and user commu- verges.nity working in similar time zones. This is a critical ele-ment in most engagements and could be a defining It is cost advantages that are the ultimate proof-pointcomponent in those cases where online interaction is a for any outsourcing program. Nearshore services pro-must. vide similar cost advantages to those in more far-flung areas of the globe. However, only those organizationsGeographic Proximity: For most outsourcing deals to that have experienced traditional Far East-based out-function properly, you need some measure of face-to- sourcing know the impact of some of the issues out-face interaction. This is as true at the project manager lined above. In fact, it is actual veterans of these warslevel as it is at the power-user level. Being close to your that coined the concept of nearshoring being "Indiavendor gives your teams a chance to build chemistry, without the pain." Itoo.11 The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.
  13. 13. [ The Pros and Cons of Outsourcing ] Five Things Every CIO Should Know About Outsourcing By Sashi Reddi While these setbacks can be overcome by choosingI f you go by Gartner, many U.S. companies need to seri- ously rethink their outsourcing strategies. Outsourcing has one geographic target over another, it is fundamentally become so faddish there is a danger that companies may the operational problems that make or break the suc-do so compulsively, with little planning or consideration of cess of an outsourcing engagement.what it takes to successfully manage contracts, processesand goals. Mismanagement on the opera- tions front can make even theWhile the initial driver for out- most carefully thought-out out-sourcing is cost savings, theres sourcing plans go awry.a lot more success criteria that Whether you are re-evaluatingcompanies should be looking your outsourcing strategy,at. With outsourcing expected expanding it or considering itto continue growing, effectively for the first time, here are fivemanaging these relationships things every CIO should knowhas never been more important. about outsourcing.Generally speaking, the pitfallsassociated with outsourcing fall Evaluate the vendorsinto three categories: geo- processes. Operational prob-graphical, infrastructural, and lems start with processes.operational. Consequently, you need to ask Jupiterimages a lot of questions about theIn terms of the geographic location of the outsourcing vendors processes, best practices, and the levels offirm, companies can run into language problems, quality control in place.accent problems, political instability, changes in lawsand regulations, labor laws, and cultural issues. Being SEI or ISO rated is often used as a selection cri-Geography is also a root cause of infrastructural prob- terion. However, these measures of quality are evolv-lems that can occur in the form of poor communication ing. The SEI capability maturity models (CMM), forinfrastructure, disaster recovery capacity, power genera- example, have been upgraded in the last few years.tion capacity, and non-renewable resources availability. While these ratings are important, its more critical that “ Generally speaking, the pitfalls associated with outsourcing fall into three categories: geographical, infrastructural, and operational.12 ” The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.
  14. 14. [ The Pros and Cons of Outsourcing ] Overseas IT Outsourcingyou ask when and how the company was assessed and Rates Remain Lowby whom. DInterview the relationship manager. Too often, com- By CIO Update Staffpanies enter an engagement without fully understand-ing the processes that will drive the relationship. espite the attention focused on the out- sourcing of technology jobs overseas, a sur-It is critically important that you find out in detail how vey by Robert Half Technology shows thatyour organizations will engage with each other, what the majority of U.S. companies are not engaged inworkflow entails, the points of contact and communica- the practice.tion and reporting processes. Interviewing key project Ninety-four percent of chief information officers (CIOs) surveyed said their company does not out-personnel eliminates unwanted expectations and sur- source information technology (IT) jobs outsideprises. Moreover, it clarifies the overall business goals. the United States. Among companies that once sent IT jobs overseas but discontinued the prac-Insist on a risk mitigation plan. Any outsourced servic-es firm that takes its reputation and client satisfaction tice, nearly six-in-10 (59 percent) respondentsseriously will not balk at putting a risk mitigation plan in cited management challenges as the top reason.place. In fact, this should be a standard practice but its These percentages appear unlikely to change sig-simply not quite the reality today. nificantly in the near future, as most survey respondents expected a continuation of the statusSuch a plan should address issues from risk identifica- quo. "Challenges such as language, culture, and time-tion, risk analysis, risk management, risk resolution, and zone barriers can sometimes outweigh the poten-monitoring. The plan should assign tasks and responsi- tial benefits of outsourcing," said Katherinebilities to the people involved in the project. Spencer Lee, executive director of Robert HalfYou should also be aware of the techniques that will be Technology, in a statement. "Smaller companies,used to identify risk factors at the beginning of the in particular, may lack the resources to commit toproject and on an ongoing basis. Techniques may an effective long-term offshoring strategy."involve risk assessment workshops, brainstorming ses-sions, and interviews at the beginning of each lifecycle The survey shows that large companies (thosephase. with 500 or more employees) are much more likely to engage in overseas technology outsourcing than small ones (those with fewer than 500 employees). In companies with more than 500Factor in the costs of internal management. There is employees, 11 percent of CIOs reported that theya tremendous amount of project overhead that is currently engage in outsourcing, compared torequired to manage just one outsourcing relationship. five-percent overall.You have to travel, deal with conference calls outside ofthe usual business hours, and doublecheck the workthree or four times over. "Researching viable vendors, and teaching them about the company and its products, managementEvery deliverable needs to be reviewed and cross- style, and quality control require a substantialchecked to make sure the vendor is telling the truth. investment," continued Lee. "Large companies may be better positioned to absorb the costs of both initial setup and ongoing oversight, and toBecause vendors want to get their payments, they benefit from economies of scale."often try to deliver as fast as they can and invariably,quality will sometimes suffer. In the near future, growth in offshore outsourcing is likely to come primarily from companies alreadyThe time difference can significantly change the rhythmof your business, or at the very least, the team or outsourcing, not from those that are new to thedepartment responsible for an outsourcing project. This practice. Forty-three percent of respondents frombecomes an overhead because people get burned out. companies that currently engage in offshore outCompanies need to understand this cost and sufficient- continued13 The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.
  15. 15. [ The Pros and Cons of Outsourcing ] sourcing said they plan to increase their level ofly communicate this internally. offshore outsourcing in the next two years, ver-Remember, this is a partnership, not a customer-suppli- sus 13 percent who said they expect levels toer relationship. The most successful outsourcing rela- decrease.tionships are those built on a partnership. According to the survey, management challengesTalk to the firms other clients to find out how aggres- are a common obstacle to successful offshoring. More than half (59 percent) of CIOs whose compa- nies had stopped offshore outsourcing cited man-sively they have to renegotiate contracts. Companies agement and oversight requirements among theshould look for a partner that meets their needs with- reasons they had done so. Unrealized cost savingsout looking for excuses to re-price services at every and quality control also were factors, cited by 30opportunity. Since partnerships foster a sense of percent and 23 percent of respondents, respec-respect, trust and responsibility, it is important for youto select companies that have satisfied a similar-sized tively.organization. For firms contemplating offshore outsourcing,Whether outsourcing is done offshore or domestically, Lee pointed out some strategies to consider:it is all about efficiency. That is, creating leaner compa- • Look for stability. Choose a vendor that has a track record of measuring staff turnover andnies that can focus on their core competency or, as retaining employees. Seek a company that has aJack Welch explains it, "Move up the food chain," and succession plan in place, as well as defined careerthereby be more competitive in the market. paths for their IT professionals.Taking these five basic things into consideration willhelp companies get off on the right track with their out-sourcing strategy and maintain successful, long-term • Setup time and costs. New jobs or even depart-relationships. I ments may need to be created to handle vendor selection, manage contracts, train workers, and oversee remote work teams. • Management challenges. Dispersed IT work teams may require a different level and type of oversight from management. Consider offering training for managers who will lead overseas teams and will likely be managing individuals who may be very different from them, in terms of culture, background and experience. Some com- panies may find that they need a full-time project manager to oversee the offshore vendor. • Security and privacy concerns. Intellectual property risks such as the enforcement of patents, copyrights and trade secrets may require addition- al oversight and resources. Benchmark best prac- tices in the areas of security and proprietary tech- nology, for example, from similar companies that have done it successfully. I14 The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.
  16. 16. [ The Pros and Cons of Outsourcing ] Outsourcing: SMBs are Doing It, Too By Larry Marion vation goes beyond the labor cost arbitrage. Access toF orget for a moment the tainted pet food, contaminated seafood, poison paint on kids toys, irate customers additional skill sets and ideas is a prime motivator, and frustrated by unintelligible customer service reps, and access to new markets is increasingly seen as a key rea-other problems associated with outsourcing functions across son to seek out overseas partners.borders. The reality is that most companies – especially smalland medium sized organizations – are becoming increasingly Interestingly, many C-level officials say overseas suppli-reliant on collaboration with third parties around the world. ers enable them to provide higher quality products andThis rise of globalization demands that IT managers and services to their customers, though they rated quality asprofessionals rethink how they are the highest risk of collaboration.going to service their users. Another key aspect of the rise ofAn e-mail survey and in-depth collaboration is the broad-basedtelephone interviews of more than nature of the efforts in the future.350 CEOs, CFOs, CIOs, COOs, Organizations are not just lookingand other senior executives of for low cost manufacturing help.North American companies found As the table below shows, smalla striking change in the extent of and medium-sized companies arecollaboration with third parties in going to increasingly rely on off-Brazil, China, India, Russia, Taiwan, shore collaboration for R&D, mar-Vietnam, and elsewhere. While the keting, sales, customer service,percentage of operations out- Jupiterimages and human resources support assourced by companies with less well (figure 2).than 1,000 employees is relatively low right now, it isslated to roughly triple by 2011 (see figure 1 next page: Outsourcing More Than Just ITblue bar is today; yellow bar is 2011). Organizations with less than 2,500 employees are already collaborating with external partners for most cor-The January 2008 survey, sponsored by business soft- porate functions to a modest extent, but more will beware vendor SAP, found a variety of reasons for the relying on others for a substantial extent in the future.increased reliance on overseas collaboration. The moti- “ The reality is that most companies – especially small and medium sized organizations – are becoming increasingly reliant on collaboration with third parties around the world.15 ” The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.
  17. 17. [ The Pros and Cons of Outsourcing ] Figure 1 Figure 2 and too many processes is the bane of any collaborationWhile the C-level execs are intent on increasing the effort, especially if they’re not based on industry stan-number and extent of their collaborations with other dards and best practices. Time to clean the IT house.companies, theyre not exactly sanguine about the levelof support they’re getting from IT. Indeed, the survey If your organization has too many databases, too manyindicates that only half of the respondents are satisfied ERP platforms, an applications portfolio census thatthat their IT infrastructure can support the extent of col- goes beyond 100 and other examples of excessivelaboration incorporated into their strategic goals for the technology overlaps, now you have another argumentnext three years. to begin the consolidation.IT Doesn’t Satisfy Most And while youre thinking about simplifying your IT architecture, collaboration is a great door-opener for aCollaboration Needs services oriented architecture discussion with yourMore than one-third of C-level managers say theyre CFO. Depending on the size of your organization, SOAdissatisfied with the level of collaboration support from provides an ideal platform for providing secure accesstheir IT infrastructure expected in three years: to information, systems and processes that should be • Very satisfied: 13 percent shared with external organizations. • Moderately satisfied: 39 percent • Neither satisfied or dissatisfied: 18 percent Simultaneously, you need to provide a pallet of Web- • Moderately dissatisfied: 21 percent based collaboration tools and choices. Relying on a vir- • Very dissatisfied: 8 percent tual private network (VPN) as a gateway for external • Dont know: 1 percent individuals to gain the appropriate access to key sys- tems takes too long and costs too much. You need toHow to Get Ahead of the move quickly and inexpensively.Collaboration Demand Think corporate use of wikis, social networking tools,IT managers should view the growing need to support blogs, and other Web 2.0 tools as key building blockscollaboration as a multifaceted opportunity. The C-level of a collaboration tool set. The criteria include easy tointerest in improving the ability of IT to enable collabo- use, easy to manage, easy to deploy and low cost,ration gives you a chance to clean up some long stand- since there are a wide variety of individuals nowing architecture issues. In addition, collaboration is the involved in collaboration with third parties. Iexcuse you’ve been looking for to get involved in thenew generation of Web 2.0 technologies. This content was adapted from Internet.coms Datamation and CIO Update Web sites. Contributors:Understand that one of the biggest barriers to successful Lionel Carrasco, Sashi Reddi, Claudio Muruzabal, Juliecollaboration is complexity. Having too many systems Craig, and Larry Marion.16 The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.