Outsourcing Management: Mistakes to Avoid

While outsourcing IT services could save a company money and human resources, if not managed properly, it also could lead to expensive mistakes, unmet expectations and even project failure. Analysts offer tips and words of caution.
While outsourcing IT services could save a company money and human resources, if not managed properly, it also could lead to expensive mistakes, unmet expectations and even project failure.

"It's a very deep and wide pool of quicksand," says Matthew Berk, a senior analyst with New York-based Jupiter Research. "Wherever there's outsourcing, there's struggle... There are a lot of things that can go dramatically wrong."

And industry analysts say very few outsourcing projects are problem free. There's simply too many things that can go wrong, too many parts of the project that need to be carefully overseen, and too many aspects of the contract to be delicately negotiated to keep companies from becoming mired in some sort of management issue.

What can go wrong?

Well, it's a long list. When an IT manager is going over a potential contract, he has to make sure his company (not the vendor) will end up owning the source code. He has to make sure that the contract is flexible enough that the service being outsourced can change as the business changes. Is there a system set up to gauge the success of the project? Is there one person established as the liaison and can she speak the language where the work is being done?

If an IT manager thinks he can hand a project to a third party and be done with it, she's wrong.

"It's extremely tricky," says Stan Lepeak, vice president of industry analysts Meta Group. "That's why there's a lot of dissatisfaction with the ultimate results... People figure once we enter into the outsourcing agreement, we'll put it on autopilot and all go do something else. It just doesn't work that way. How will daily operations change when someone outside of the company is managing this operation? If you have a problem, it's a lot different to walk down the hall and talk with someone than it is to call around the other side of the world. How are you even going to address problems?"

As confusing and complicated as it is, managing outsourcing projects is something that IT managers better master because there's no sign of outsourcing slowing down.

Make No Assumptions

Worldwide spending on IT outsourcing surpassed $68 billion in 2002 and is expected to top $99 billion by 2007, according to a study just released by Massachusetts-based analyst firm IDC. Here in the U.S., corporate and government spending on IT outsourcing services reached $30 billion last year and is predicted to surpass $43 billion by 2007.

"Companies around the world are turning to outsourcing to help reduce or stabilize costs, access advanced technology, compensate for a lack of skilled IT workers, improve business efficiency... and remain competitive in the global marketplace," says Cynthia Doyle, program manager for IT Outsourcing and Utility Services research at IDC. But Doyle also says that better managing those outsourcing contracts is an issue that most every company is wrestling with.

"You may assume the vendor comes in and takes over, and you can wash your hands of it. It just doesn't work that way," says Doyle, who notes that IDC doesn't have specific statistics on outsourcing success and failure but adds that it's commonly accepted that half of all outsourcing engagements fail. "The relationships require quite a bit of communication between the vendor and the customer. They also require a great deal of flexibility.''

Doyle also says many companies run into trouble when they choose a vendor based solely on price. Sometimes you get what you pay for.

"Companies are conscious of cost cutting in this economy... but making a decision based purely on price is a mistake," says Doyle. "Responsiveness of the vendor's customer service is incredibly important. Guarantees in service-level agreements. Industry expertise. Flexibility. You want to feel comfortable with your vendor. Make sure they understand how to use technology to move your business to the next level and attain your business goals."

Peter Moldave, a partner at Boston-based Lucash, Gesmer & Updegrove, LLP, says one thing IT managers underestimate is how much time will be required to manage the outsourcing project and vendor relationship. Moldave who used to work for Apple Computer, is an attorney focused on corporate law.

Danger of Divided Loyalties

"People have to consider if this is something they can control from a distance," says Moldave, who notes that while several people in house may be involved with the outsourcing project, there needs to be one person in ultimate control. "Sometimes when you figure in the cost of the time you spend managing the relationship, it costs more than you thought you'd save."

Moldave, along with the other analysts, also warns IT managers to be wary of divided loyalties.

A third-party handling software development, for instance, may be most concerned with benefiting his own business.

"Before, people working on the project were your own employees and you trusted them," says Moldave. "Now you have to have people checking the checkers because these people don't have loyalty to you and your company... It's more time that you have to spend on the project that you probably didn't count on."

Here's a list of some of the things an IT manager should think about when setting up an outsourcing relationship, according to the industry analysts:

  • When writing up the contract, make sure your company owns the source code for the final product;
  • Build the flexibility to renegotiate pricing and terms into the contract;
  • Once you have a strong contract, template it so you don't have to keep recreating the wheel;
  • Decide at the outset who will manage the relationship;
  • Make sure you give yourself enough time to properly set up the relationship. Don't rush this first step;
  • Realize that the person who used to run the operation in house may not be the right person to manage outsourcing the work;
  • Decide early on how you will measure the success of the project;
  • Do not underestimate what it takes to manage a third-party relationship;
  • Agree upon dispute mediations up front;
  • Have a clear understanding between customer and vendor of what is in the scope of the deal. Are changes and upgrades part of the deal, or would you have to pay more for them?;
  • Does the vendor consider his relationship with you strategic? If you do and he doesn't, you're out of sync at the start;
  • Be clear about the capabilities and expertise of the vendor. Don't get snowed by a good sales pitch.

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