Establishing understanding and trust in your outsourcing relationship

* The part that customers play in making outsourcing deals successful

Everyone likes a good "project gone bad" story. This may be in part why the market perception around outsourcing is that more than half of projects go bad. You don't have to look far to find an article that makes this statement.

For example, in a recent story headlined "Does outsourcing need SLAs?", IT Week references studies claiming that more than half of outsourcing projects are unsuccessful. While no specific study is mentioned, there have been many such studies in the headlines of late. IT Week makes the point that many contracts can have too many SLAs, with sometimes conflicting SLAs. Since they are not helping the success rate, are they contributing to the problems?

Changes in the use of SLAs have been a trend over the past several years as companies have gotten smarter about what to measure and to measure only a few key performance indicators (KPI). Chris Carrington, leader of North American outsourcing for Capgemini, says that older contracts, those between 3- and 6-years-old, may have hundreds of SLAs and require 10 to 15 people to pull together metrics and evaluate performance each month. Recent contracts have fewer SLAs and these are more focused on business-related results or end user experience. This is in contrast to the more traditional and more granular technical measurements, such as system uptime or CPU utilization.

A recent study conducted by Capgemini and CFO Research surveyed 288 CFOs about their outsourcing experiences. Some of the study results include

* 57.3% outsourced IT application development.

* 65.4% of those who did said the outsourcing met or exceeded expectations.

* 49% outsourced IT application hosting.

* 73.8% of those who did said the outsourcing met or exceeded expectations.

* 45.8% outsourced HR benefits administration.

* 83.3% of those who did said the outsourcing met or exceeded expectations.

* 46.2% outsourced IT infrastructure management.

* 66.2% of those who did said the outsourcing met or exceeded expectations.

* 42.7% outsourced HR compensation/payroll.

* 79.7% of those who did said the outsourcing met or exceeded expectations.

* 30.8% of respondents said their companies have outsourced finance-transaction processing (accounts/payable, accounts/receivable, etc.) (68.8% have not).

* 75% of those who did outsource finance-transaction processing said the outsourcing met or exceeded their expectations.

* 25.3% outsourced call centers and customer service.

* 67% of those who did said the outsourcing met or exceeded expectations.

* 19.1% outsourced HR staffing and training.

* 74.5% of those who did said the outsourcing met or exceeded expectations.

* 15.6% outsourced general ledger, fixed asset management and tax compliance.

* 77.6% of those who did said the outsourcing met or exceeded expectations.

* 17.4% outsourced logistics and procurement.

* 74% of those who did said the outsourcing met or exceeded expectations.

The Capgemini study did only look at companies with more than $500 million in revenue. These larger organizations may bring a greater experience and discipline to the outsourcing procurement process and in the ongoing management of the deal. They also likely demand greater respect from the vendor. Different results might be found if smaller business were considered in the data. Which brings up an interesting point, how much of the success of an outsourcing relationship lies with the customer?

Another recent study of 300 C-level executives by PA Consulting Group revealed that the client can play a significant role in the outcome of their deal.

I think it is clear that many companies have had success with outsourcing relationships. However, it takes effort on the part of the client to make the deal successful. Clearly understanding requirements, documenting metrics and reporting needed to validate service quality, and focusing on a few key SLAs are all important to making outsourcing work. The biggest factor is establishing a trust relationship with the vendor.

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Copyright © 2006 IDG Communications, Inc.

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