Outsourcing has gotten a bad rap, but there’s no disputing the good it can do if it’s administered properly. Here’s how to avoid the negative aspects of outsourcing while making the most of its good points.
While virtually every business now relies on information technology (IT) to help provide services or deliver products to the marketplace, things have rarely been more precarious for in-house IT professionals. This is so despite the conventional wisdom that IT is acknowledged to be more strategic than ever.
Increased market competition, more demanding customers, tighter margins and shorter product life cycles have caused businesses to examine where they may be able to focus better on core competencies, reduce risk and costs, and become more agile and competitive. For many companies and small businesses in across all industry segments, outsourcing IT is one answer.
Outsourcing lowers operating costs, eliminates backlogs, improves data input quality, production and document availability. And, in the end, outsourcing adds profits to the bottom line.
But outsourcing is far from a panacea. How an outsourcing relationship is managed–internally and externally–is as important to its ultimate success as the execution of the outsourced tasks themselves. Given that industry analyst Gartner recently reported that outsourcing can trigger an employee backlash, what do organizations need to know to make outsourcing a win-win for all concerned? How can companies best manage the firm they have just retained? What project management issues does outsourcing solve, and what challenges does it entail?
Outsourcing on Paper: Cost-Effective, Valuable, Efficient
Outsourcing IT isn’t only (or even primarily) about costs. In terms of hard dollars, outsourcing isn’t always a decisive win over the in-house approach, although it usually is. The real advantages can be seen in the "soft gains" that accrue–the opportunity costs of not having to reinvent the wheel, and the efficiencies that arise when enlisting a company that specializes in doing the heavy lifting of IT.
Quality is an issue as well. In the hosting market, for instance, a company could hire five system administrators to run their network in-house, and find the collective wisdom limited to the specific experiences of that small team. When a third party assumes control of servers and infrastructure, that firm brings real world experience, gleaned from facing an array of problems across a diverse customer base. Dynamic learning occurs more rapidly because the outsourcing firm is simply in a better position to benefit from–and propagate–"best of breed" practices.
Managing and retaining IT staff is challenging enough in prosperous times; in a down economy, the challenges intensify–and the management responsibilities in outsourcing likewise increase. Keeping IT staff motivated, focused and incentivized is perhaps the most formidable challenge. If an organization’s IT return on investment is on the order of 20-30 percent, reinvention and retraining are apt to be continuous. Accordingly, whether the market is up or down, the case for outsourcing persists. By contrast, if the organization has kept IT entirely in-house, it becomes considerably harder to double, triple or even cut staff, should the need arise. An outsourcing relationship ensures a constant pool of talent.
Outsourcers are occasionally brought in to "clean up" unfinished business left by in-house teams that, for whatever reason, didn’t see a project through to completion. It is always difficult for organizations to have to cut staff or downsize IT operations, especially for professionals who are accustomed to bigger budgets year after year. And when the mandate comes down from the CEO or whomever that IT budgets aren’t going up–and the only way the company is going to make its numbers is let to go of some of its people–doubt looms large. That is the environment in which the quality of the management of outsourced relationships makes all the difference.
Outsourcing tends to occur in waves. Even during those periods when outsourcing is relatively less in vogue, many organizations still elect to outsource non-core functions. The hot topic right now is offshore vs. onshore outsourcing, but overall, the ebb and flow is modest. Outsourcing isn’t trendy; indeed, when factoring in the earnings of public companies engaged in IT sourcing, outsourced IT represents a highly stable segment of the economy. Against this backdrop–and with an eye toward making the relationship between the outsourcing firm and its client organization productive for all concerned–it’s necessary to lay down a few rules.
Rule #1: Get Internal Buy-In.
Let’s face facts: effective IT outsourcing usually means layoffs–and it can change the jobs of some of those who remain. If an outsourcing firm is brought in to displace existing IT staff, internal buy-in must occur well before the decision is made to bring in that third party. Management must know (and intelligently communicate) that headcount will be reduced by so many, and that a plan of action exists to ensure that these cuts, however painful to those involved, ultimately boost the organization.
The best route to obtaining internal buy-in is to move incrementally. Outsource those projects linked to marginal products, rather than to strategic ones. Create an environment where the third party complements existing staff rather than replacing them outright. Doing so can help promote a sense, over time, that internal staff can be deployed somewhere else–or even let go. The more strategic the project is, of course, the greater the political heat; the less strategic, the easier it is to get that buy-in for outsourcing.
Rule #2: Go Beyond Buy-in to General Consensus.
"Buy-in" suggests a passive kind of acceptance. Effective management of outsourced relationships strives to go a step or two beyond. When the outsourcer arrives on the scene, a residue of resentment or lack of understanding frequently follows. The key to defusing that resentment is transparency on the outsourcer’s part, in terms of both its operations and the organization’s goals. When all parties can view how the outsourcer works–through a portal product or some other mechanism–it immediately becomes less likely that signals will get crossed and consensus may be within reach.
While it’s helpful for the outsourcer to embrace a new assignment with enthusiasm, that energy isn’t always enough to counter the feeling among some that this new third party poses a threat. If management is savvy enough to know that some resentment is inevitable, gentle prodding of recalcitrant IT staff members toward a positive outcome can be decisive.
Rule #3: Counter Backlash With Education.
Employee backlash is often manifested in passive-aggressive ways-not sharing immediate deadlines or the full scope of the assignment with the outsourcer, for example, thereby triggering talk that the outsourcer isn’t delivering on the promise. Education is an effective antidote to situations where the ground hasn’t been cleared as well as it should have been in advance, and can reverse uncertainty, ambivalence and even downright hostility.
Situations occasionally occur when those new to outsourcing approach the outsourcer with assumptions that don’t turn out to be well-grounded. This pattern was chronic during the dot.com era, where companies were built overnight and needed to tap a huge skill base at a moment’s notice. In some cases, managers themselves were new to the outsourcing process. Demands for instant response were complicated by requirements that armies of internal IT staff also be involved the process Ò hardly a recipe for mutual success.
Education should begin during the sales cycle. Determine how educated the organization is on the outsourcing process and see if they’ve done it before. It always helps make our lives a bit easier in terms of fulfillment of the service later on. The more knowledgeable they are on how to manage this relationship the more successful it is going to be.
Rule #4: Communicate — To Avoid Asserting Control.
Companies win with complete communication. In outsourcing, communication’s twin is control–and the perception of control. It is vital that the outsourcer never seize control from the customer (or appear to do so) because that is when complications arise. Maintaining open lines of communication so that the customer feels he or she is still in control–and having a portal-type product that provides a complete window into the operation–is vital to securing a strong, stable relationship. At the end of the day, a client who feels in the dark may well assume the outsourcer isn’t fully on the case.
Rules #5: Clarify Roles, and Stick to Them.
In today’s market, most organizations have tried various outsourcers, with varying degrees of success. Because not every encounter is a positive one, companies often have their defenses up, and it’s not unusual for hurdles to exist at the outset–even in a fresh relationship that isn’t immediately leading to job loss. In that environment, the very best way to overcome these hurdles is to emphasize the (non-threatening) partner role: that the outsourcer is more of an offshoot of the IT department than an adversary or replacement. The consistent goal is to make it easier for IT managers and IT staff to do what they must do to meet the business’s needs. The outsourcer’s key function is not just to affect head count; it’s to help the organization improve upon the services it could obtain internally at a given budget level.
Rule #6: Learn and Apply Patience.
It typically takes about three months before both sides in a relationship are fully comfortable with one another and truly understand mutual expectations. Even for outsourcers with well-defined processes, writing that custom playbook takes a bit of time. Patience invariably fosters teamwork, and avoids common laments that can afflict outsourcing relationships. Once the mutual discovery phase is over, it’s time to for everyone to get comfortable with how things are going. At that point, however, if the comfort level isn’t there, for any reason, it’s an optimum time for management on both sides to examine why.
Rule #7: Impose and Enforce Structure.
In order to have a successful outsourcing engagement, companies need clear, concrete goals. A goal shouldn’t be something vague (like, "we want to get our IT outsourced"), it should be as concrete as, "we offered our exchange server hosting to this company and we will make sure that service availability is 99.9 percent or greater." To hit that goal, organize formal, frequent meetings (even twice a week) until everyone knows what the milestones and the deadlines are. After the first few months, once a decent product or service is up and running, it’s less important to adhere to a rigid structure around deliverables. Weekly meetings, with an overview of outstanding items, new items, upcoming items, etc., should suffice.
Management has a major role to play here. Prior to bringing in an outsourcer, some organizations find that IT staff has been sitting around doing very little, if anything. That isn’t because there is nothing to do, it’s because management hasn’t said, "Here’s the IT project, here are the goals we have, here’s what we have to do, here’s what will help us strategically." Because these edicts are not handed down, no one has been clear on the mandate. In an outsourcing relationship, by contrast, there tends to be a great deal more specificity because hard dollars are leaving the company. The best discovery meetings address budget issues head on; the charge then becomes to determine exactly what the organization wants from its investment. What is the goal? What is the value to the organization? What’s to come out of this? These are the kinds of questions that make for smoother relationships.
Rule #8: Keep the Humanity in the Equation (then, re-read Rules #1-#7).
In the end, outsourcing is a human business. Emotions do come into play, since jobs are ultimately at stake. Keeping that big picture in mind, have a clear-cut goal for what the relationship is going to be. Identify and maintain a single, designated point of contact who is tasked with managing the outsourcer; don’t have six contact people, and don’t let management responsibilities stray from the IT realm to other departments. Have weekly review meetings with the outsourcer to make sure that goals are being hit; don’t assume that the outsourcer is doing its job.
Ask for feedback from the outsourcer; use this seasoned third party as a live, informal auditing arm. Ask for ideas about recommended internal improvements. (Side benefit: If the outsourcer doesn’t offer input, that in itself may be a red flag.) Good outsourcers will always find issues, because the nature of the business is to gain an intricate look into internal operations. If the outsourcing relationship is on a solid footing and the outsourcer is on its game, the firm’s best practices will come into play. That, in turn, should provide ample comfort to everyone involved–and retire the backlash in the process.
Suresh Srinivasan is president and co-founder of BroadSpire, an IT managed services provider in Los Angeles.