Outsourcing your IT department can bring benefits as long as you
bear in mind some simple rules.
Outsourcing even a part of the IT department is a big step for any
organisation, and because IT is such an integral part of most
businesses it is difficult to define the scope and deliverables for
any outsourced service. Even the smallest misjudgement can have
long-term effects on growth and profitability, so it is no wonder
that contract discussions are often lengthy and complicated.
Nevertheless, outsourcing continues to provide a steady stream of
customers, mainly because the potential benefits are clear and
usually focus on two issues - cost control and service improvement.
The service improvement factor is based on the premise that the
supplier has the experience, the staff and the capability to do the
job better. Similarly, cost control is perceived to be readily
achievable through the supplier's greater purchasing power and
economies of scale.
But outsourcing is not for the faint-hearted. Attempts to tie down
and closely manage the service provider by dividing their service
into modules or adding restrictive controls are all options that
have been tried before, and often with disastrous results.
The key to a successful outsourcing contract is simple - be
realistic, and build trust with your supplier. If you feel
uncomfortable and unconvinced in any way, the best advice is -
don't do it or find someone else that you do feel comfortable with.
One aspect that almost always emerges late and is a significant
issue in outsourcing contracts is asset ownership and
transfer.
The dilemma is whether you should you hand over your hard-won deals
to a service provider, lock stock and barrel or retain ownership
and manage the inventory and costs closely. Of course, the dilemma
is proportional to the level of trust between the customer and the
service provider.
Included in the broad definition of assets that are eligible for
transfer in an outsourcing agreement are delivery and support
staff, hardware, software, network and technical infrastructure,
and possibly even buildings. The transfer process for most of these
is straightforward, though quite different for each.
The one area, however, that is given the least consideration and
yet is key to the success of the outsourcing for both parties is
that of licensed software. Normally software products fall into two
main categories:
- Applications that are directly linked to the business.
- Products that support the IT operation (infrastructure
products).
As a general rule, unless your outsourcing agreement includes
provision of application development, business-related applications
such as payroll and general ledger software should not be
transferred as part of the contract, whereas infrastructure
software such as performance management products and operating
system tools should.
There are a number of reasons for this, one of the most important
is that the relationship and the negotiation process with the
software supplier resides where it is most effective and there is
less likelihood of stiffing. However, there can be exceptions and
nothing takes the place of a thorough assessment, including
conversations with the suppliers before the outsourcing contract is
signed.
The whole area of third-party software is one that often beleaguers
outsourcing deals. Aside from the basic problems of inventory
management (knowing how many copies of each product are installed
and used), there may also be problems when outsourcing triggers a
change in use claim by the software supplier. Often, unplanned and
significant costs arise and, just as often, it is unclear whether
the customer or service provider should pay.
It is worth bearing in mind a few basic facts about this process:
- Buying and installing licensed software is covered by
international laws which are intended to protect the interests of
the supplier or owner of that software. To ensure that the balance
is maintained, effective and clear contractual terms need to drawn
up and agreed and, just as importantly, kept up to date in line
with technical/usage changes, re-organisations and changing
environments.
- The responsibility for legally compliant use of software by the
company's staff remains with the customer irrespective of the terms
of an outsourcing agreement. The supplier may own all the software,
hardware support staff and premises, but that does not change the
customer's responsibilities.
- Any change in the business (merger, acquisition, Internet
trading or outsourcing) necessitates the need to consider the
impact the change will have on third-party agreements. The costs of
changing the permission to use software in a new environment, for
instance, are often insignificant compared to the delays in the
transition process that can occur through licensing problems.
- In an outsourcing contract, make sure it is absolutely clear
what you expect of the service provider, particularly for asset,
inventory and software licence management. Include clear
responsibilities for costs that arise as well as resources and
costs for activities that will achieve legal and contractual
compliance.
- If you are undertaking an outsourcing agreement for a fixed
term and there is even the remotest chance that you will change
supplier (or even bring the service back in house), consider very
carefully the exit options available with your third party
agreements. (For instance, owning an upgrade without the base
licence is useless and costly to correct).
- Before you enter into an outsourcing agreement, make sure that
you have undertaken your own "due diligence" exercise, and as a
result you know exactly what assets you have, what you want to
transfer, and the state and migration costs of all your software
agreements.
Bill Monk is director at outsourcing specialist LOCSwww.locs.org.uk/