Outsourcing deals can become dangerous territory for the unwary IT
manager. Here Nick Huber outlines some of the hazards that can
seriously affect your IT health
It is Sunday afternoon and as you are slumped in front of the TV, a
supplier is discretely undermining your authority at work. The
supplier, a household name, is pushing hard to extend a lucrative
outsourcing contract with your company. As the IT manager of a
department which has recently laid off staff to cut costs you are
sceptical about the need for an expensive new customer relationship
management system - the second in five years. You advise the board
not to go ahead with the proposed deal.
The supplier is not amused and over a round of golf with your
executive director dismisses your concerns, adding that you have
failed to grasp the strategic benefits of the deal.
The above scenario is a fictional one but, according to industry
insiders, it is representative of the less-publicised tactics to
which suppliers will resort in order to clinch a deal.
Dominic Connor, IT manager at bond broker King & Shaxson, has
witnessed these tactics first-hand, although not in his current
role. "Outsourcing agreements are big money," he says. "The whole
point of them is that senior management don't like or understand
the details of IT. So when you raise an issue [with a supplier]
they will often have access to a more senior level of management,
and will start whispering 'concerns' about your obsession with
'technical' issues while ignoring business drivers.
"Once a mega-deal is signed, it is damn hard to change, and the
manager who spots trouble is likely to be blamed for it. The
supplier knows details you don't, and will use them to make you
look foolish. They are good at this, they do it for a living. You
do not, and you will lose."
Other hardball tactics include incomplete contractual information,
secret offshore outsourcing deals and stealth e-mails.
According to seasoned outsourcing advisers, one of the tactics used
by suppliers is to largely ignore a company's senior IT staff
during negotiations by focusing on winning boardroom support.
"The large suppliers are brilliant at this," says Bob Aylott,
principal consultant at Orbys, an outsourcing advisory firm. "They
maintain a very good relationship with the company board, who are
sold a concept about the deal before it happens. The board
instructs the IT manager to sew up the deal, but the supplier still
has pipeline access to the board."
Problems emerge when there is a gap between what the board wants
from the deal and the practicalities of actually achieving this
grand vision. Senior IT staff who question the supplier's promises
can struggle to persuade executives that all is not well with the
deal. "The supplier can say that these IT staff are just
nit-picking and urge the company to get on with it," says
Aylott.
Colin Beveridge, an interim IT director who has worked for a range
of blue-chip companies, was once on the receiving end of this
tactic. While working for a multinational, Beveridge was evaluating
a bid from a well-known supplier for a £50m outsourcing contract.
Midway through the three-month technical evaluation, the supplier
began to put pressure on the board to sign the contract before the
technical evaluation was completed. "The stakes were high and the
supplier was trying to short-circuit the technical evaluation,"
recalls Beveridge.
Late one night the supplier tried to catch the IT department
off-guard by sending an e-mail, at 11pm, to the business directors
of the project, outlining its case for signing the contract without
technical evaluation. Beveridge believes this was a deliberate
stealth tactic, but as he happened to be at his desk at the time he
read the e-mail. Within an hour he had fired off a rebuttal to the
business directors, before work on the negotiations began the
following morning.
Another supplier tactic is to cherry-pick the best IT staff from
the customer, sketching out the lucrative career they could have
with them. Again, this is understandable, and perfectly legitimate,
but it can make it harder for the user to effectively monitor the
performance of the supplier after the service is handed over.
"Suppliers will snuggle up to the best IT staff in IT departments
and enthuse them in all kinds of ways, for example by talking about
career opportunities," says Aylott. "If you get a good deal and you
don't manage it properly, it goes bad."
But other outsourcing experts argue that more often it is the
corporate user that resorts to dubious practices.
A classic ploy, according to John Yates, chief executive of
technology law firm V-Lex, is for the user to give their supplier
an incomplete record of the total cost for delivering the service -
staff costs, hardware and software - it will be taking on. This is
likely to push up the costs for the supplier, which will have
already worked out a detailed budget for delivering the service to
the user.
"You can almost always guarantee that the cost base for delivering
the service is either incomplete or inaccurate in the customer's
favour," says Yates, who has advised major companies on outsourcing
since the late 1980s.
"The customer may disclose 80% to 90% of their contracts [involved
in delivering the service] but they may forget the remaining 10%,
such as reporting tools and database management systems, or
something like middleware that is easy to overlook."
And if the company forgets to transfer the relevant software
licenses for the outsourced service, this can present their
outsourcing provider with a further unwelcome surprise.
"If the outsourcing supplier has incomplete information when it
takes over a datacentre, someone like Computer Associates will come
knocking on the door to ask for the licences for all the software,"
says Yates.
If an atmosphere of mutual mistrust continues, the supplier may
also decide to withhold important information on the cost of
delivering a service. Many users, for instance, will not be aware
that their supplier is running part of their service from an
offshore outsourcing centre, and is not passing on any savings it
may make.
Users can also be manipulative over staffing issues when entering
into a deal with an outsourcer. "The question of which staff are
going to be transferred over to the supplier is a very difficult
one," says Yates. "Sometimes, before outsourcing takes place, IT
people suddenly get new job titles that don't have IT in the job
title. Staff are given an excuse not to transfer over to the
supplier."
This gameplay goes on for a variety of reasons - an outsourcing
deal can break up closely-knit teams and workplace friendships
going back decades. And whatever the supplier says, most
outsourcing deals are viewed initially with suspicion by the staff
affected.
"It is a bit like turkeys voting for Christmas," says Yates. "If
you are an IT manager with a big budget and 100 staff, do you want
to end up with a skeleton staff and a big [outsourcing] company
running things?"
Another area where sharp practice can occur in outsourcing is the
contract for the deal itself. Suppliers will often push for the
"holy grail" of being able to undertake the usual due diligence
checks after, rather than before, the contract has been signed.
This will allow the supplier to audit the costs of delivering the
service to the user, and adjust the price of the deal if
necessary.
"I can think of one or two examples of this, and big suppliers will
have post-contract price adjustments written into their contracts,"
says Yates. "The customer has burnt their bridges and the supplier
is running their service. You are then dependent on a supplier and
locked into a five- or seven-year deal. Trying to unravel that and
go onto another supplier means you are looking at least another 12
months of procurement."
The outsourcing market is thriving on the current downturn in the
economy and slump in IT spending. But for all the claims by
suppliers and users that outsourcing creates a happy corporate
marriage of equals, the everyday reality is very different.
The ploys outlined above are not unique to outsourcing, of course;
but IT managers need to be fully aware of the smoke and mirrors
that can lurk behind even the most alluring contract.
Outsourcers' tricks of the trade
- The supplier attempts to isolate dissenting voices in the IT
department by appealing directly to the board and their "strategic
vision" for the deal
- The user will give the supplier an incomplete list of all the
costs - staff, software and hardware - involved in delivering the
outsourced service
- The supplier attempts to get the user to agree to post-contract
due diligence, which allows it to raise charges for delivering the
service if it unearths extra costs
- The user's IT staff are mysteriously given non-IT related job
titles shortly before they are due to transfer to a supplier, in
order to retain them.
And How to Avoid Them- Try to ensure constant communication between the company board
and the IT manager/IT director to minimise misunderstandings and
differences of opinion that the supplier could exploit
- Be wary of post-contract clauses that allow the supplier to
increase its charges
- Make sure the list of IT assets and costs given to your
supplier is as comprehensive and up-to-date as possible; it just
creates headaches in the long-run if it is not
- When taking legal advice, find a law firm that has outsourcing
specialists.