Outsourcing-Making the right choice

Issues to consider before tyou take the outsourcing plunge.
Posted September 1, 1999
By

David Burkett


(Page 1 of 3)


In this article:
Chart: Outsourcing scenarios

To survive the relentless competition of today's global economy, companies need to constantly cut costs and improve efficiency. A good way to do this is by outsourcing IT services. However, many organizations select an outsourcing vendor and negotiate a contract without a clear understanding of their business objectives or the quality of their in-house IT services. The result is often an agreement that fails either to address strategic requirements or to maximize operational efficiency.

Before you make any decision on outsourcing, you need to gather all the facts by undertaking a thorough preoutsourcing analysis of business objectives, internal performance, staffing levels, and vendor capabilities. You must foster a dialogue between IT and business units to define specifically how the outsourcer is to deliver value, and you need to undertake detailed measurement and benchmarking of existing costs, service levels, and market and industry trends. Performing these steps gives you the information you need to find the best vendor for the job.

Organizations undertaking a preoutsource analysis are better positioned to negotiate an effective agreement and to establish the foundation for a long-term partnership. In some instances, organizations that evaluate their internal operations discover-to their surprise-that outsourcing isn't necessarily the best approach to IT management.

Regardless of the outcome of the process, a thorough preoutsourcing evaluation allows organizations to develop a baseline of IT objectives, establish benchmarks, define improvement targets, introduce commercial discipline to internal IT management, and assess staff and skill requirements.

In this article I'll explain the important factors to keep in mind and the steps to take before you decide to outsource. Remember-a little work beforehand can save you huge amounts of time and money later.

Defining objectives

The first question to ask before outsourcing is a simple one: What does your organization want from this agreement? Does your business require no-frills commodity IT products and services-boxes, wires, and basic maintenance? If so, then you should focus on a relationship that delivers efficiencies at the lowest possible cost. For example, mainframe data centers and data communication networks are becoming increasingly available; so outsourcing negotiations involving these two areas should focus on cost and efficiency, rather than strategic value.

In contrast, the preoutsourcing evaluation for a business requiring a strategic partner to deliver value-added services and competitive advantage must address IT alignment with business objectives, effectiveness metrics, and industry-specific outsourcer capabilities. A good example of this is an e-commerce solution designed to build market share and customer loyalty.

The chart below, illustrates possible outsourcing scenarios. The vertical axis represents scope of services, such as network availability, desktop maintenance, and application development, while the horizontal axis represents cost. Only quadrant A and quadrant C (the lower-left and upper-right corners) represent viable agreements. In quadrant A, the client receives commodity products and services at the lowest possible cost. In quadrant C, the client pays a reasonable premium for value-added services.

Many outsourcing relationships don't work. In quadrant B, the client gets-or expects-value-added services at commodity cost. In quadrant D, meanwhile, the client pays top dollar for commodity service. Neither scenario is fair or viable over the long term. These problems often result from inadequate-or nonexistent-
preoutsourcing evaluation and analysis.



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