Managing outsourcing

In a recent roundtable discussion, Gartner vice president Ian Marriott proclaimed the average IT department will look very different in 2010 than it does today.  Rather than being staffed by groups of technical people, a company’s IT department will have lots of relationship managers – people who will manage the company’s outsourced suppliers. 

“The IT department will need fewer technical skills and more business skills,” Marriott is quoted as saying in an IDG News Service article about the roundtable event (see story link below).  He advises CIOs to think in terms of “IT Lite.”  This doesn’t mean that the IT department won’t be important.  It does mean, however, that outsourcing technical activities will become more dominant, and the IT staffers will be the glue between the outsource service providers and the internal organizations that need the services.

Marriott’s comments mirror the viewpoints of Michael Murphy and Robert DiGiovanni, partners at the law firm Shaw Pittman, which provides integrated legal and consulting services to guide companies through major outsourcing projects.  Murphy and DiGiovanni believe the CIO and CFO should work together to formulate and lead an outsourcing plan.  The practice of outsourcing IT functions used to be viewed as a transaction controlled at the CIO level.  Today, with IT being more strategic in the overall operations of a business, the outsourcing of IT services is intertwined with the company’s financial decisions.

“CIOs and CFOs are collaborating more effectively today,” says Murphy.  “They are looking at IT outsourcing as a strategic business decision.  Together these executives should be asking a series of questions: Why are we doing this? Will outsourcing reduce our costs?  How will it add value to the enterprise?  How will the transaction’s ROI be analyzed?  How do we define success?”

The Shaw Pittman consultants point out that many companies traditionally thought of outsourcing IT in terms of a corporate divestiture – the people and the technology resources were turned over to another company to use and manage.  The new way of thinking about outsourcing is not as a divestiture, but as a merger of resources.  “It’s not just ‘give me the best price you can’ anymore,” says Murphy.  “Companies that are outsourcing their IT functions need to think in terms of blending the best of what is part of the old organization with the benefits of what the service provider offers.”

A critical success factor in an outsourcing endeavor is to retain key employees on both sides of the contract.  You want to make sure that your highly trained and knowledgeable employees are retained for your contract by the new service provider.  Plus, you want to keep some of those people in-house as the liaison to the outsourcing organization, i.e., “the glue.”  These are the people with critical knowledge of the business processes as well as the IT functions that support them.  Ironically, this may initially add costs to the outsourcing deal that is intended to save money, but it will pay off in the long run.  “Failure to invest in relationship management means outsourcing will fail,” says Steve Prentice, Gartner group vice president of hardware and systems.  Marriott recommends setting aside about 5% of the value of the outsourcing deal for the purpose of managing the deal.

DiGiovanni recommends you pay close attention to the management structures that support the contract relationship.  “There is often a disconnect between expectations at the management level and what’s actually delivered at the process level,” he says.  “You also need to make sure the parties share a common understanding regarding critical interactions at the operational level.”

Other sage advice provided by Shaw Pittman:

* Leverage the benefits of competition among the bidders for your outsourcing contract. 

* Focus on the performance and cost of the IT functions and not necessarily on the IT platform or technology, but don’t let the service provider lead you down a path of vendor lock-in.

* Don’t sign a contract that the outsourcer places in front of you – have a neutral third party look at it to make sure it is fair to both sides.  Above all, avoid exclusivity in the contract.

Linda Musthaler is vice president of Currid & Company.  You can write to her at mailto:Linda.Musthaler@currid.com