When organisations outsource IT, they traditionally retain a
small in-house team of technical staff to manage the contract. But,
as Julia Vowler reports, many are keeping the wrong balance of
skills and the relationship between client and outsourcer is
suffering.
Outsourcing the IT department does not mean you should outsource
every person with an IT label on them. "The single biggest factor
in making outsourcing successful is the internal IT team," says
Roger Cox, vice-president for strategic sourcing at analyst firm
Gartner.
But the internal IT team in an IT-outsourced organisation is not
simply the most senior layer of IT management minus those that go
across to the outsourcer. There are several key areas that need
modification.
"It is not necessary to replace your chief information officer, but
they do need to become more hybrid managers. They need to become
more like businessmen," says Bob Fawthrop, chief executive of
outsourcing consultancy, Morgan Chambers. However, you may not get
to keep them long. CIOs who successfully manage outsourced IT
"become very knowledgeable people and so they get headhunted," he
says.
The extra skill set that the CIO and key members of the team need
to master is that of service provision contract management. This is
crucially different from product procurement.
"Service providers are not like hardware or software suppliers,"
says Fawthrop. "It is a continuous day-to-day relationship. These
are different skills from the ones internal IT departments tend to
have - they are more like those of strategic sourcing
departments."
The second area that needs modification is that of technical
skills. "There is a technical bias about in-house IT that needs to
be flipped," says Ivor Canovan, global vice president of the
commercial sector at CSC. "Traditionally, IT has about 75%
technical and 25% managerial skills - for outsourcing that has to
be 75% managerial and 25% technical."
Most of the technical staff, of course, go across to the
outsourcer, but does the retained IT team need any technical
skills? "You need enough technical skills to understand what the
outsourcer is bringing and what technology could be useful," says
Cox.
Before the outsourcing deal, it is often those with deep technical
knowledge about the existing IT environment who are seen as most
important, and are often encouraged to stay with offers of
management roles, says Fawthrop. Users should beware the danger of
micro-management, constantly looking over the shoulders of the
outsourcer, and forgetting that internal IT is no longer directly
responsible for technology.
"Experience shows us that those you valued as technical experts
before the outsourcing deal do not easily make the transition to a
more managerial and business interface role," he says.
Additionally, says Canovan, beware that keeping too many in-house
techies could mean they may expand in numbers and start to create a
new internal IT department, which will compete with the outsourcer,
just as business-division IT can compete with corporate IT.
One technology role that should definitely be retained, however, is
at the very top. "You need a chief technical officer who can ensure
that the IT strategy and architecture is aligned to the business
strategy," Canovan says.
This plays a crucial role in ensuring a vital aspect of the
outsourcing relationship is not neglected. "One of the biggest
failings in outsourcing is the lack of innovation," says Fawthrop.
To ensure that IT - whoever delivers it - exploits whatever new
technology can best serve changing business needs, there needs to
be a sharp eye kept on innovation. "The outsourcer should offer
quarterly research and development meetings with technical
innovation in mind and the user needs to have enough technical
knowledge to appraise that," he says.
Trevor Clifton, IBM's strategic outsourcing marketing manager,
agrees. Users need to be able to field people with the capability
of engaging in brainstorming sessions that work through different
business and technology scenarios. "Clients need to be able to
bring their best brains to the table from business and IT, just as
we bring our best brains from IBM Research and our business
consulting services," he says.
Can the retained IT team be constituted out of the original IT
staff, or should users bring in a new internal team? "We have found
very few organisations that have all the skills they need
internally, because there is no career path in IT to generate the
range of capabilities required," says Cox. "The chances of having
them the first time you outsource is minimal."
Even so, most organisations outsourcing IT do not rebuild the
internal team from scratch. "I know of a European bank whose CIO
coped so well with outsourcing because he brought in a new team,
but that is not usual," says Cox.
"More often, users keep a subset of the original department, but
they cannot assume they can just carry on as before," says
Fawthrop. "It requires a change of skills, attitude and approach,
some of which can be taught, but it is a tough call. Some original
people do not fit, and it is not fair to put them in that
position."
As Canovan says, although a lot of work goes into changing the
culture of the transferred staff to become service providers, the
same effort is not always put into the remaining staff to become
good service provider managers. To fill the gap on service provider
manager skills, it is often a good idea to bring in new people,
hiring those who have done such a job before. It can even be useful
to hire someone who is a former outsourcer, on the
poacher-turned-gamekeeper principle.
It is vital to keep enough of the original department so as to not
lose their detailed knowledge of the business and the issues it
will face - an intangible but critical knowledge, says Fawthrop.
"There is a whole lot of learning [about the company's use of IT]
that they do not have to do." Business analysts, for example,
should be retained for each business division, because of their
specialist knowledge of requirements, says Canovan.
Although there is no one-size-fits-all prescription for what the
internal IT function should look like for all users, organisations
outsourcing their IT need to bear in mind that even though they
have outsourced their IT, they must invest in resources to manage
that relationship successfully. That can sometimes be difficult for
the organisation to appreciate.
"Our outsourcing best practice group often asks us how it can build
a case to get resources [for internal IT] or how does it convince
the board it is necessary," says Cox.
How much needs to be spent on in-house resources? "The rule of
thumb ratio is to invest between 5% and 10% of the contract value
in resources on the client side," says Clifton.
Fawthrop thinks that 5% to 8% of the overall cost of the contract
should be spent. A single strategic outsourcing deal should cost
less to manage than a complex multi-supplier deal.
Not everyone meets this target. Morgan Chambers recently surveyed
150 outsourced IT organisations and discovered that 30% spent more
than 7% of the outsourcing contract value on managing the contract
and 23% spent over 10%.
"Such overspending is not justified and needs to be immediately
addressed," says Fawthrop.
The calibre of the in-house team makes a huge difference to the
cost, says Cox. "If the internal team is not good enough, the cost
of managing the contract can be two or three times more than it
should be." When it is good, expect to spend between 4% and 5% of
the entire IT budget on the internal team.
What numbers should be in retained IT? When the Royal Mail
outsourced last year, it retained about 200 IT staff and
transferred about 1,700 to the outsourcer. BHS, which outsourced 10
years ago, kept seven staff and transferred about 100. Pilkington
outsourced 45 staff and retained eight.
"The 5% to 10% mark is about right," says Canovan. "A big retained
team tends to over-manage. The internal team should probably be
bigger at the start of the contract, during the transition phase
but it will then slim down to normal running and become the
strategic IT unit."
But the one golden rule when deciding how to construct the retained
IT team is to remember that no outsourcing contract is written in
stone. Business and technology are highly dynamic and the one
constant characteristic of all outsourcing agreements is that they
too must be dynamic and flexible - and therefore so must the
constitution of the internal IT resources.
Do you really need any internal IT at
all?
Keeping an internal IT team once you have outsourced makes as
much sense as having your ex live with you after you are married to
keep an eye on your performance.
From EDS's point of view, when a user takes them on, EDS becomes
the corporate IT. "The perfect integration [between the outsourcer
and the client] is when the outsourcer aligns so deeply with the
business that if we were asked who we worked for we would have to
pause and think," says Sheelagh Whittaker, managing director of
EDS's public sector division.
Whittaker sees dangers in retaining too large an internal IT
team. A retained team can be counterproductive, constantly second
guessing what the user is already paying the outsourcer to do, she
says.
So how does the user ensure that the outsourcer is subject to
adequate governance?
In the same way that internal IT is governed, says Whittaker.
Outsourced IT can be audited in the same way as internal IT, and
there should be board-level representation, although preferably at
chief operating officer level.
The COO should head the steering committee on IT governance
which should run in parallel with the issue escalation process.
"You must have a structure with the capacity to hold regular
reviews with the CFO and the most senior outsourcing executive for
the user," says Whittaker.
You also need to ensure the contract ensures a real partnership
between outsourcer and user, says Whittaker.