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What is Outsourcing
There are as many definitions of outsourcing as there are ways to screw it up. But at its most basic, outsourcing is simply the farming out of services to a third party. With regards to information technology, outsourcing can include anything from outsourcing all management of IT to an IBM or EDS to outsourcing a very small and easily defined service, such as disaster recovery or data storage, and everything in between.
The term outsourcing is often used interchangeably—and incorrectly—with off shoring, usually by those in a heated debate. But off shoring (or, more accurately, offshore outsourcing) is, in fact, a small but important subset of outsourcing wherein a company outsources services to a third party in a country other than the one in which the client company is based, primarily to take advantage of lower labor costs. This subject has proven to be a political hot potato (see Offshore Outsourcing: The Politics and Offshore Outsourcing：The People) because unlike domestic outsourcing, in which employees often have the opportunity to keep their jobs and transfer to the outsourcer, offshore outsourcing is more likely to result in layoffs.
The business case for outsourcing varies by situation, but reasons for outsourcing often include one or more of the following:
Lower costs (due to economies of scale or lower labor rates)
The ability to focus on core competencies by ridding yourself of peripheral ones
Lack of in-house resources
Getting work done more efficiently or effectively
Increased flexibility to meet changing business and commercial conditions
Tighter control of budget through predictable costs
Lower ongoing investment in internal infrastructure
Access to innovation and thought leadership
ITO, BPO, KPO—what’s the difference
Business process outsourcing—or BPO—is the outsourcing of a specific business process task, such as payroll. It’s often divided into two categories: back office outsourcing, which includes internal business functions such as billing or purchasing, and front office outsourcing, which includes customer-related services such as marketing or tech support. Information technology outsourcing (ITO), therefore, is a subset of business process outsourcing.
While most business process outsourcing involves executing standardized processes for a company, knowledge process outsourcing—or KPO—involves processes that demand advanced research and analytical, technical and decision-making skills. Less mature than the BPO industry, sample KPO work includes pharmaceutical R&D, data mining and patent research. The KPO industry is just beginning to gain acceptance in corporate America.
IT outsourcing clearly falls under the domain of the CIO. But often CIOs will be asked to be involved—or even oversee—non-ITO business process and knowledge process outsourcing efforts. CIOs are tapped not only because they often have developed skill in outsourcing, but also because business and knowledge process work being outsourced often goes hand in hand with IT systems and support.
What is the Best Length for an Outsourcing Contract
What’s the best length for a skirt? While the outsourcing industry is not quite as fickle as fashion, the prevailing wisdom about the best length for an outsourcing contract has changed over the years. When outsourcing first emerged as a viable option for providing IT services and support, long contracts—as many as 10 years in length—were the norm. As some of those initial deals lost their shine, clients and vendors began to look at contracts of shorter duration.
So what is the best length for an outsourcing contract? As with most other questions about outsourcing, the answer really depends on what’s being outsourced and why. A transformational outsourcing deal will require more time to reap benefits for both client and vendor and therefore must be structured as a longer-term contract. But when outsourcing desktop maintenance or data center support, a shorter relationship may work better. Generally speaking, overly long contracts (more than seven years) are frowned upon unless there is a great deal of flexibility built into the contract.
Should I outsource everything to one vendor Or should I use a best-of-breed approach
Several years ago, the megadeal— multi-billion-dollar IT services contracts awarded to one vendor—hit an all-time high, and the IBMs and EDSs of the world couldn’t have been happier. But this wholesale outsourcing approach proved difficult to manage for many companies. Today, although the megadeal is not dead, the trend has turned toward the multi-vendor approach, incorporating the services of several best-of-breed vendors to meet IT demands. And the major IT services players say they are able to accommodate this change. The highest-profile example of this brand of outsourcing is GM. After years of outsourcing much of its IT to EDS, GM is pursuing what it calls the "third wave" of outsourcing, bringing together a cadre of competing outsourcers to work together.
But the multisourcing approach is itself not without great challenges. According to CIO Senior Writer Susannah Patton, to make sure they are getting the most from their various outsourcers, CIOs need to dedicate staff to oversee each vendor relationship and establish regular reviews of vendor performance with measurement applications such as dashboards or vendor scorecards. In contract negotiations, CIOs need to spell out that vendors should cooperate and refrain from blaming each other, or else risk losing the job. CIOs need to find qualified staff with financial as well as technical skills to help run a project management office or some other body that can track all outsourcing agreements. The whole new set of skills is outlined in Multiple Choice Answers.
How do I decide what vendor or vendors to work with
Selecting a service provider is a difficult decision. But start by realizing that no one outsourcer is going to be an exact fit for your needs. Trade-offs will be necessary. To make an informed decision, you need to articulate what you want to gain from the outsourcing relationship and extract from that your most important criteria for a service provider. It’s important to figure this out before soliciting any outsourcers who will undoubtedly come in with their own ideas of what’s best for your organization, based largely on their own capabilities and strengths.
Some examples of the questions you’ll need to consider include:
What’s more important to you: the total amount of savings an outsourcer can provide you or how quickly they can cut your costs?
Do you want broad capabilities or expertise in a specific area?
Do you want low, fixed costs or more variable price options?
Once you define and prioritize your needs, you’ll be better able to decide what trade-offs are worth making.
Can I get outside help with this decision
Many organizations bring in an outside sourcing consultant or adviser to help them figure out what their requirements are and what priority to give them. While third-party expertise can certainly help, it’s important to research the adviser well. Some consultants may have a vested interested in getting you to pursue outsourcing rather than helping you figure out if outsourcing is a good option or not and then helping you figure out your requirements and priorities. A good adviser can help an inexperienced buyer through the vendor-selection process, aiding them in steps like conducting due diligence, choosing providers to participate in the RFP process, creating a model or scoring system for evaluating responses, and making the final decision. Help can also be found within your own organization, from within IT and from the business. These people can help you figure out what your requirements should be. There is often a reluctance to do this because any hint of an impending outsourcing decision can send shivers throughout IT and the larger organization. But anecdotal evidence suggests that bringing people into the decision-making process earlier rather than later makes for better choices and also creates an openness around the process that goes a long way toward allaying fears.
Do you have any tips for negotiations
The advice given above for selecting a provider holds true for negotiating terms with the outsourcer you ultimately select. A third-party services provider has one thing in mind when entering negotiations: making the most money while assuming the least amount of risk. Clearly understanding what you want to get out of the relationship and keeping that the focus of negotiations is the job of the buyer. Balancing the risks and benefits for both parties is the goal of the negotiation process, which can get emotional and even contentious. But smart buyers will take the lead in negotiations, prioritizing issues that are important to them, rather than being led around by the outsourcer.
Creating a timeline and completion date for negotiations will help to rein in the negotiation process. Without one, such discussions could go on forever. But if a particular issue needs more time, don’t be a slave to the date. Take a little extra time to work it out.
Finally, don’t make any steps toward transitioning the work to the outsourcer while in negotiations. An outsourcing contract is never a done deal until you sign on the dotted line, and if you make steps toward moving the work to the outsourcer, you will be handing over more power over the negotiating process to the provider.
How important is ongoing relationship management to outsourcing success
The success or failure of an outsourcing deal is unknown on the day the contract is inked. Getting the contract right is necessary, but not sufficient for a good outcome. One study found that customers said at least 15 percent of their total outsourcing contract value is at stake when it comes to getting vendor management right. A highly collaborative relationship based on effective contract management and trust can add value to an outsourcing relationship. An acrimonious relationship, however, can detract significantly from the value of the arrangement, the positives degraded by the greater need for monitoring and auditing. In that environment, conflicts frequently escalate and projects don’t get done.
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