Companies often have unrealistic expectations of outsourcing deals
because the wrong people are consulted when contracts are drawn
up.
The recent news that EDS struggled to deliver a proposed 30% cost
saving to the Driver and Vehicle Licensing Agency (DVLA) after
implementing a new system for registering vehicle details should
serve as a reminder to companies about the harsh realities of
outsourcing contracts.
The anticipated cost reduction was a key feature of a proposal for
the £5m Vehicle System Software (VSS) prepared by EDS in January
1997. The saving was to be delivered "once VSS was implemented" in
October 1999, according to the outsourced services giant.
Experts believe that it is too simple to point the finger at
outsourcing companies and accuse them of under-performing. Robert
Morgan, chief executive of outsourcing consultancy Morgan Chambers,
said, "We see this all the time. In 80% of the cases it is the
client who is wholly responsible for the savings not being
achieved."
He estimates that less than 10% of the problems that occur in
outsourcing contracts can actually be blamed on the outsourcing
company.
Charles Symons, director of Software Measurement Services,
highlighted the need for IT experts to become involved in drawing
up the contracts.
He said, "Generally the problem is that when organisations
outsource, the contract is drawn up by lawyers and accountants who
haven't a clue about controlling value for money in the likes of
software acquisition."
According to Morgan, one of the biggest problems in outsourcing
deals is that clients do not have sufficient control mechanisms to
cope with changes in their contracts with outsourcing companies.
With his company undertaking in the region of 40 outsourcing audits
for businesses each year, Morgan feels that users need to push for
more transparent contracts to prove that the supplier really has
delivered what was ordered.
There is a pressing need for companies to devise procedures to
measure the effectiveness of outsourcing deals. Even some of the
biggest deals are not without their problems.
Last year a report from the National Audit Office (NAO) on EDS'
£2.4bn 10-year deal with the Inland Revenue warned that it was
difficult to prove that the contract had delivered value for money.
The report, which was generally positive about the partnership
between the two organisations, also suggested that benchmarking
against other IT service providers could give an indication of the
comparative value offered by EDS.
This is an important point; the report advocated the use of
external expertise to address what it described as "difficulties in
obtaining usable comparative information from other information
technology providers". Companies should be prepared to compile
information from a range of sources to help work out the ongoing
value of outsourcing deals.
For long-term deals such as the one between EDS and the Inland
Revenue, it goes without saying that companies need to do some
serious forward planning. The NAO warned, "Although there are
incentives in the contract to improve efficiency, these may be
insufficient to keep pace with the market over the 10-year life of
the partnership."
Businesses should always set up their contracts to ensure that they
are getting the value for money they originally envisaged. Symons
argued that there are a number of procedures that businesses can
employ to guarantee this, especially where software is concerned.
He believes that there are three main components of value that need
to be measured and controlled, namely productivity, speed of
delivery and quality. Symons admits that productivity usually gets
the most attention but warns that businesses need to measure and
control all three parameters.
When it comes to measuring the value for money delivered by a
specific software, Symons advocates the use of a technique called
function point analysis. First developed in the late 1970s, the
system involves classifying the components of the software
requirements and specifications, and weighting them according to
specific rules. "In a long-term outsourcing contract, use of these
methods combined with checking performance against external
benchmarks is the only way to ensure continuing and improving value
for money," Symons said. There is no excuse for not doing so,
especially when large sums of public money are at stake, he
said.
On a more basic level, companies should make sure that they have
done all their homework before a deal is even signed. There are
many eventualities to consider before putting pen to paper. These
range from delays in the project delivery to external factors such
as unforeseen events that could affect the project. Morgan said,
"Preparation and understanding are pivotal to what you are trying
to achieve."
If businesses don't prepare properly there is a good chance that
they will end up with egg on their faces.
For its part, the DVLA argued that it seeks value for money in all
its contracts. A spokesman explained that the agency rigorously
scrutinises all IT proposals to ensure that the solutions provide
"value for money and fitness for purpose".
And a spokesman for EDS told Computer Weekly last week that the
original contract for the VSS system was not predicated on the 30%
potential reduction.