Key Questions When Considering Outsourcing: Page 3

Posted February 12, 2002

Steve Andriole

Steve Andriole

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3. Be careful with outsourcing deals intended to transfer knowledge from the outsourcer to in-house professionals. We learned in the late 1980s and early 1990s that knowledge transfer-based outsourcing deals were difficult to make work. Why? Because the outsourcer had no incentive to transfer knowledge and the in-house professionals resented the "training" forced down their throats.

4. If you want to try outsourcing on for size, then partition a big piece of your IT infrastructure -- like your data centers -- and outsource them. Completely. Develop some clear service-level agreements and then monitor the hell out of the performance to see if (a) the outsourcer can do it more cheaply and (b) better.

The implied suggestion here is to outsource what you already know how to do and fully understand, not what you don't understand. And remember that just because you understand how to, for example, run a data center, it doesn't mean that it's core to your business.

5. Really think long and hard about using professionals to architect your outsourcing deals. If you're a medium-sized organization or one that has had some extraordinary IT infrastructure or applications problems over the years, you might want to take a look at using an applications service provider (ASP) who will "rent" applications to your users (who can access the applications over the Internet or through a [much more expensive] virtual private network). This kind of outsourcing is relatively new but already the major systems integrators have begun to partner with enterprise software vendors like SAP to provide access to major applications. It's something to consider.

6. The age of non-shared contracting is over. Any outsourcing deal you sign should have some shared risk built into it. If the outsourcer is unwilling to put any skin in the game then there may be a problem with the whole deal. A confident outsourcer should welcome the opportunity to jointly develop some performance metrics and then hit the metrics to get paid.

These deals can take all kinds of forms. For example, expenses can get paid but a percentage of profit may go into an escrow account to be paid as milestones and metrics are achieved. Regardless of the form, the principle is to share the best and worst aspects of outsourcing by aligning all of the incentives.

7. Strongly consider owning requirements, specifications and designs, but not implementation or support. This rule of thumb is not inviolate but will serve you well. In a sense, owning requirements, specification & designs keeps you in control of the business/IT alignment process while freeing you from (probably) non-core implementation and support tasks.

8. Make sure that metrics are in place long before you sign any outsourcing deals (see below).

9. Do not sign any long-term outsourcing deals unless the deals have huge shared risk features.

Steve Andriole is the Thomas G. Labrecque Professor of Business at Villanova University, where he conducts applied research in business/technology alignment. He is also the founder & CTO of TechVestCo, a new economy consortium that focuses on optimizing investments in information technology. He can be reached at steve@techvestco.com.

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