As startups and small companies rapidly grow their IT departments’ infrastructure and processes, managing increasing workloads and operational complexity becomes a significant challenge. While some organizations might have the resources to bring in additional employees to support IT maintenance in house, many continue to turn to outsourcing.
Outsourcing has continued to see consistent growth, with India’s offshoring market alone projected to increase by 12-15 percent this year. But, the reality is that many of these initiatives fail to meet enterprises’ cost-savings objectives. In fact, most companies only receive 72 percent of the value they anticipated from new outsourcing contracts. These ROI figures have left many wondering: why it is that outsourcing so often falls short? As more IT dollars are being spent on outsourcing practices, how can organizations mitigate disappointing performance?
There are many mistakes businesses make when it comes to their outsourcing deals, starting with the planning stage and on through their execution. Here are the five most common reasons why outsourcing often fails to deliver expected results, and how to avoid them:
1. Lack of a strategic plan
The success of an outsourcing project is massively at risk if companies are unclear on what exactly they want to outsource. Many will aim to outsource their entire IT function without considering a more target-oriented, “out-tasking” approach. Out-tasking refers to transferring only specific IT processes to the outsourcing provider, as opposed to the entire IT function. In this way, the outsourcing provider becomes something of an adjunct staff resource that applies their expertise or sophisticated tools to that particular task.
By determining objectives based on particular IT tasks instead of assessing the IT department as a whole, organizations are far more likely to yield a more flexible and controlled outsourcing experience. The first step in defining strategic out-tasking objectives is to invest in a detailed inventory of IT operations with a clear analysis of strengths and weaknesses. The most successful plans are those that retain adequate, in-house control over critical and proprietary applications and systems, leaving non-core competencies to outsourcing providers. Those critical competencies tend to be the very elements that differentiate businesses’ products or services from their competitors, which is why maintaining close oversight of them is vital.
2. Inadequate analysis of the outsourcing provider’s operating model
Bargain shopping for outsourcing vendors — selecting them at the lowest cost and hoping for the highest quality — is one of the primary reasons why organizations experience such a discrepancy between what they anticipate to achieve through the deal and the resulting ROI.
While the cost of the deal is certainly a high-priority consideration, companies should evaluate their prospective vendors on a number of other fronts. Outsourcing vendors’ IT maturity and capabilities, for example, are two cornerstones of successful deals. Only after close analysis of their innovative strengths and operating models will organizations be able to determine whether the supplier is able to deliver real, added value. Particular attributes to examine might include leadership, IT architecture design, business and IT vision, contract management and delivery of services.
3. Poor contract management
Drafting the contract is a critical stage that requires thorough attention to avoid leaving any gray areas or items open to interpretation. Loosely defined contracts could result in a series of change requests down the line, potentially bringing additional costs. Ultimately, companies could face an unnecessarily expensive, complex and drawn-out transition period.
While successful contract management should reflect specific detail, it should also be flexible. In today’s IT market, systems and services can change a great deal over a short period of time. By incorporating guidelines for managing unexpected contingencies, organizations can ensure they are not caught in a bind as technology evolves.
4. Poor transition management
The transition period is perhaps one of the most complex stages of an outsourcing deal, taking anywhere from three months to a year to complete. It also sets the stage for the remainder of the deal, as a successful transition launches the new relationship with a sense of trust and positive momentum.
During this time, as knowledge, tasks and technology are moved from a company to its outsourcing provider, it is important that employees on either side of the exchange are kept up to speed on agreed-upon processes and procedures. Management responsibilities, go-live dates, delivery deadlines and metrics should be well communicated among all parties to ensure a stable and successful transition.
5. Inconsistent or insufficient communication with outsourcing providers
While signing a contractual agreement demonstrates a sense of trust in skills and capabilities, companies should continue to maintain a consistent level of oversight, refraining from providing outsourcers with exclusive trust once contracts have been signed. The key to maintaining a consistent level of involvement is frequent communication and regular exchanges of business-related information.
Of course, effective communication can be challenging when it must transcend not only organizational cultures but also geographical and language barriers. However, there are several steps both outsourcing providers and companies can take to overcome these challenges. For example, educating employees can help clarify certain terms that might be misconstrued. Also, developing communication channels that prevent mixed messages — for instance, using written instructions or image-based WebEx presentations to detail projects — can aid information exchange and prevent instructions from being lost in translation.
Outsource in moderation
When it’s well thought out and properly executed, outsourcing can be an effective tool to manage and improve IT operations, while keeping costs low. With clear communication and careful planning at each stage of the deal, starting at selection of the outsourcing provider, through the drafting of the contract and completing the transition, businesses are likely to realize the benefits of outsourcing.
But, even with these best practices in place, outsourcing critical processes and applications risks a loss of organizations’ control over their most business-centric functions. With recent advances in cloud and automation technology, businesses can still afford to manage core competencies in house while maintaining high levels of efficiency, and with a more effective application of human capital. Today, outsourcing is more about labor automation and less about labor rate arbitrage.
By applying these five procedures to outsourcing for management of existing, back-end IT processes, companies can easily avoid the common pitfalls of such deals.
Jonathan Crane is the chief commercial officer at IPsoft, where he orchestrates acquisition of key strategic assets. He has been a communications industry leader for more than 35 years, including numerous executive positions at corporations such as MCI, Savvis, ROLM, Marcam Solutions and Lightstream. He was a key architect of the early success of MCI and was brought back to lead troubled Worldcom out of bankruptcy. Recently, Jonathan was chairman of the board and president of Savvis.