Outsourcing IT: It Takes Three to Tango

The quandary has been with us for a long time: IT leaders wrestle with where, how, and even why to outsource services. There are no silver bullets; those who look to outsourcing as a cure-all are shortsighted, and those who offer it as the solution to all known problems are selling magic beans.

Recent statistics indicate conflicting data on IT outsourcing. A January article in CIO Magazine quoted KPMG research showing that 20 – 30% of typically outsourced IT services are predicted to come back in-house. In another recent study, Whitelane Research reported that 42% of the 1,300 organizations polled will "outsource more IT" in 2014. Only 10% said they will "outsource less IT."

These seemingly mixed messages highlight the myriad reasons for outsourcing -- and also underscore the lack of proper analysis that goes into the decision. To me, a company's decision to bring outsourced functions back in-house could mean the organization did a poor job of thinking it through -- and probably failed to compare apples to apples.

Gerald Shields, The Nolan Company

Determining whether to outsource, what functions to outsource, and the specifics of the outsourcing deal itself are not for the feint of heart. And while there are a handful of situations where outsourcing can, in fact, reduce costs, the primary benefits for outsourcing are more strategic. By outsourcing correctly, companies can:

• Free up internal resources for more critical, knowledge-related tasks

• Boost capacity

• Acquire certain technical resources that have been otherwise difficult to procure

• Add knowledge workers that have been missing from the current IT staff

• Clean up some "messy" areas in IT

• Bring in specific, hard-to-find expertise

Having sat at both sides of the table as an outsourcer and as head of an in-house IT organization, I firmly believe that the best agreements involve selectively outsourcing specific, targeted services -- and not the large, multi-service deals of the past.

So, once a company knows why it wants to outsource, it must then choose what functions to turn over, and how to pick the right partner on the right terms.

What to Outsource The often-overlooked first step is to identify areas where outsourcing can help the organization meet its strategic objectives. Selective outsourcing is similar to the way we manage our personal lives. Some of us outsource oil changes, lawn care, or healthcare. Most of us don't fill our own cavities, but we brush our own teeth. But unlike personal outsourcing, the options in IT are less clearly defined -- and the potential costs are too great to simply trust one's gut.

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Enter the independent advisor -- a neutral, third-party expert who can help assess the needs, define objectives, and analyze the options.

How to Outsource

For larger outsourcing initiatives, I can't recommend an outside advisor enough. For starters, vendors are a bad source for objective information when it comes to the day-to-day management of the deal. That's because they're in business to sell outsourcing services. So, providers will always underestimate -- or even fail to disclose altogether -- the amount of oversight required. At the same time, they will minimize accountability. And issues like exception processing and "gap" management are of little or no concern. In other words, the outsourcer will act in its own best interest -- leaving the client responsible for reading the fine print.

Case in point: An IT vendor presented a proposal that promised a 17% reduction in IT costs -- representing a savings to the client of $17 million. Upon further review, an independent agent analyzed the company's current costs and service levels, comparing them to the proposed agreement. After factoring for exceptions, maintenance fees, and other hidden costs, the advising firm revealed that the outsourcing deal would have cost the company 10% more. What looked like a $17 million savings would actually have cost the organization an additional $10 million.

Buyer Beware

I've seen many situations where hiring a specialist would have resulted in a better financial deal, a smoother startup, and a healthier relationship. In my experience, companies looking to outsource can be somewhat naive about what it really takes to manage the arrangement. Typically, internal organizations are overly optimistic -- so they can lose sight of functionality that might fall through the cracks between the two parties. Managing billing and service discrepancies will always take more time and effort than expected. And even after the deal is done, simply negotiating the inevitable ups and downs of the relationship can be confusing and tedious. These issues can easily diminish (or even wipe out) some of the benefits of outsourcing. But if they're anticipated and acknowledged, they can be factored into the bigger picture.

Buy Now or Pay Later

Bottom line, it pays to hire a third party to help design the right outsourcing plan, analyze options, and negotiate a fair deal. Quite simply, the price of finding the right relationship can pale in comparison to the potential cost of getting it wrong. An expert can level the playing field and weed out potentially bad deals. With the skills, data, and insights of an outsourcing "agent," your organization can become a smarter, better-informed consumer of IT services -- and achieve its goals more efficiently.

About the author: Gerald Shields is IT Practice Director for The Nolan Company, a management consulting firm specializing in the insurance industry.