The high level benefits of outsourcing ITservices are fairly well-known within the ITindustry. Even so, many clients do not fullyunderstand “why” and “how” anoutsourcing relationship can provide thesepotential benefits. Those who do understandthe benefits may not understand the risksthat must be managed in order to achievethose benefits. This white paper is intendedto explain the most common outsourcingrisks so that you can understand them andmitigate them early in the sourcing process.Understanding these potential risks willallow you to make a better informedsourcing decision.RewardsAlthough the benefits of outsourcing arefairly well-known, it is worth summarizingthem for reference.Reduced CostCompanies that provide IT outsourcingservices function in an increasinglycompetitive marketplace. This marketpressure, coupled with the scale ofcapabilities, abundance of lower-cost (buthighly skilled) labor and investments inproductivity tools and processes, means aprovider can more than likely deliverservices at a much lower price than you cando on your own. Additionally, you willimprove your ability to achieve year-over-year savings, as annual reductions are oftendocumented in an outsourcing agreement.Improved QualitySimply stated, outsourcing providers aremotivated to improve the quality of youroperations. Outsourcing providers haveliterally invested billions of dollars to buildthe tools and processes they use to deliverIT services to clients, and they use theseinvestments to differentiate their ability todeliver high quality services at market-basedcosts. The cost models typically used byproviders will assume some annualreduction in resources (and therefore costs)based on the quality improvements theyassume they can make. Additionally, amarket-based outsourcing agreement willdrive adherence to well-defined servicelevels, some of which are expected toimprove over time. As the old saying goes,“what gets measured gets managed.” Thislevel of formality and the existence ofcontractual commitments can drive deliveryimprovements quicker and farther thanmost organizations can do internally.Ability to Redeploy ResourcesIncreasingly this is becoming one of themore important drivers affecting sourcingdecisions. The challenge many ITdepartments face is how to free up some oftheir most knowledgeable people to workWorld-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.Contact: firstname.lastname@example.org or (214) 696-6410_________________________________________________________________________________________
on initiatives that will truly add value to thebusiness. Some of these people become“superstar firefighters” over time, and arecontinually pulled into operational issueswhich diminish their ability to drive strategicchange. Without a significant event like anew outsourcing agreement, it can be hardto overcome the organizational inertia thatkeeps these people locked into their currentrole. As quality improvements are made andthe provider becomes skilled at addressingoperational issues, these people can beredeployed into higher value planning,engineering or development work, and youget the added benefit that they are still inthe organization “just in case” their skills areneeded. Lastly, using an outsourcingprovider allows you to temporarily procurespecific expertise and apply it where desiredwithout needing to permanently add staff.Improved Delivery CapabilityProcuring managed services from anoutsourcing provider, if done well and ifstructured by a market-based agreement,encourages a higher level of performancerelated to services, service levels, innovationand process maturity. Creating andnegotiating an outsourcing contract requiresyou to spend time articulating the specificservices to be performed and how thoseservices will be measured. Integrating yourprocesses with those of another companyrequires a higher level of process disciplineand documentation so the overall flow ofwork and associated responsibilities areseamless to the business users andpotentially to end consumers as well.Innovation comes from explicitly statedcontractual requirements as well as from thebehaviors necessary to continuouslyimprove the environment so contractrequirements are achieved and the providercan maintain their profit margin. In fact,many times the provider wants to movemore quickly than the client, so itbecomes a situation where the client isthrottling the amount of improvementbased on the speed at which theorganization can absorb it.World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.Contact: email@example.com or (214) 696-6410_________________________________________________________________________________________“Many organizationsdo not fully understand“why” and “how”an outsourcingrelationship can providepotential benefits.Those who dounderstand the benefitsmay not understand therisks that must bemanaged in order toachieve those benefits.”
RisksThe potential risks of outsourcing are notnearly as well-understood as the potentialrewards. An important observation is thatmany times clients develop risk mitigationstrategies that are almost solely based ontechnical risk. Understandably, there areconcerns and issues that need to be workedthrough in every outsourcing relationship.Issues such as connectivity, knowledgetransfer, lack of certain skills, migratingenvironments, etc… are important and needto be addressed, but they are very rarely thecause of significant conflict. No matter yourspecific technical requirements, chances arethe provider has the depth and breadth oftechnical knowledge to overcome thosetypes of issues, although there may be somethat do not get resolved as quickly or cleanlyas expected. Sometimes, there are evencertain specific tasks that the client ends upretaining because they are so unique andspecialized, but that is the exception and notthe rule. Rather, the bulk of substantialconflict between clients and providersduring and immediately after transition tendto fall into one of the following categories.The good news is that these risks can bemitigated through careful planning andexecution early in the sourcing process.Lack of CommunicationThe importance of a detailed and managedcommunications plan cannot beover-emphasized. This is not just a couple ofexecutive-level communications describingwhat is occurring. This is about ensuringyour retained employees, your non-retainedemployees, your employees who aretransferring to the provider, your executives,your stakeholders, your leadership team andyes even your potential new provider arebeing told what they need to know whenthey need to know it. Without a structuredcommunications plan and process thatexplains what is happening and why, therewill be voids that will be filled withmisinformation and a reluctance to change.This can lead to unplanned employeeturnover, missed transition plans, and a lackof understanding and buy-in from theconsumers of IT services. Actively pursueways to keep your provider informed (evenWorld-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.Contact: firstname.lastname@example.org or (214) 696-6410_________________________________________________________________________________________“The potential risksof outsourcingnot nearly as well-understood as thepotential rewards.”
during the contract negotiation phase), notjust from a transition perspective but also tokeep them fully apprised of the activitiesand objectives of the business. This willallow them to better understand yourrequirements and to deliver the bestsolution possible.Your Inability to Change BehaviorThe IT leadership team in place today quiteprobably became successful through theirability to manage specific technology andpeople. However, a substantially differentset of skills is required to successfullymanage an outsourcing relationship. Leadersmust learn to manage expectations andoutcomes and let the outsourcing providermanage how that work gets done. This isdone by managing relationships, governanceprocesses, status reporting, issue tracking,prioritizing, service level management, andprocess discipline. Unfortunately it can bedifficult for some people to move from oneparadigm to another. If these types ofleaders cannot change but remain in aposition to direct the provider, they becomea source of friction in the relationship andcan keep you from receiving the maximumvalue from your outsourcing provider. Makesure your leaders have the right skills tomanage an outsourcing relationship, orreplace them with ones who do.Loss of Business KnowledgeAt the dawn of the millennium, it wassomewhat common for companies tooutsource virtually all of their services to aprovider, often time only leaving a CIO and acouple of lieutenants in place to manage therelationship. Unfortunately, companiesdiscovered that they had outsourced toomuch, and by doing so had lost much oftheir “tribal knowledge” so they struggled tostay aligned to the business. The good newsis that arrangement is rarely used anymore,and companies now realize they must retaina sufficient level of strategic resources tomanage the outsourcing relationship,manage the relationships with the business,maintain overall accountability for delivery,and to set overall direction and priorities.A ls o, a s yo u deve l o p yourtransition plans you must address howknowledge will be transferred to theprovider. In some cases it is primarily donethrough the transfer of certain subjectmatter experts to the provider, while inmany cases it is really dependent on thesystem documentation and training sessionsused to share knowledge with the provider.As you develop transition plans and designyour retained organization, ensure that youfully comprehend the need to build andretain key business knowledge.World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.Contact: email@example.com or (214) 696-6410_________________________________________________________________________________________
Unclear ExpectationsThere are rarely cases where an outsourcingprovider does not and cannot provide theservices they committed to in theoutsourcing agreement. However, there isalways a slight risk that something was notthoroughly understood and documentedduring the negotiation phase, and that forsome reason cannot be adequatelysupported in the new contract. What canyou do? As they say, the bestdefense is a good offense, and there areseveral mechanisms you can design into theoutsourcing agreement to protect yourself inthese cases. For example, make sure torequire a commitment to follow a definedset of industry standards (e.g., ITIL, CMMi)so that services are more easily transferrableto other providers if required. Make sure thecontract is flexible enough to allow for somechange in scope without terminationpenalties. Define a strong, market-basedservice level agreement that definesremedies and penalties, and define andimplement a governance process thatensures delivery and relationship issues arequickly escalated to the right executivelevels for resolution. From a vendormanagement perspective, you may alsowant to consider a multi-vendor strategythat maintains some competitive tensionwhile also providing you with a “hot backup”provider in the event that certain servicesare not being delivered as expected.Business Case Not AchievedUltimately, the goal of an outsourcingrelationship is to achieve the definedsourcing objectives while meeting thebusiness case upon which the decision wasmade. Oftentimes, the focus after contractsignature is solely on the technical aspectsof the transition of services, and it becomesnearly impossible as the months go by totrack performance back to the businesscase. Even when the business case istracked and managed, it is found that theoriginal business case was inaccurate orinadequate, and therefore the actual costsare higher than expected while thecorresponding overall savings are less thanexpected. The best way to mitigate thissituation is to ensure the business case isthorough, comprehends all expectedinvestments, savings, and new charges, andis developed with a level of detail that canwithstand scrutiny from the CFO and board.World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.Contact: firstname.lastname@example.org or (214) 696-6410_________________________________________________________________________________________“Ultimately, the goal of anoutsourcing relationship isto achieve the definedsourcing objectives whilemeeting the business caseupon which the decisionwas made.”
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.Contact: email@example.com or (214) 696-6410_________________________________________________________________________________________It should include assumed ramp up of services, ramp down of retained organization expenses,one-time costs for transition, legal fees, advisory fees and the like, retaining of certainresources, appropriate contingencies, expected changes due to growth and scope changes,COLA impacts, and so on. The business case should be updated periodically andreported against the baseline business case to identify any significant variances.ConclusionWhile benefits of outsourcing IT services are fairly well-known, many clients do not fullyunderstand the risks that must be managed in order to achieve these benefits. Prior tofinalizing a decision to outsource, make sure to think about how you will communicate withkey stakeholders, change the behaviors of your leadership team to manage an outsourcingrelationship, retain the required level of business knowledge, clarify and thoroughlydocument expectations, and develop and manage a solid business case. By doing so, you willmake a better informed sourcing decision and will be better prepared to realize the benefitsthat an outsourcing relationship can provide.