It might seem strange that BT should win a contract to
provide all Royal Mail's network services only a year or so after
contracting out its own internal desktop IT support to
Computacenter. The Computacenter deal was perhaps not the best
advert for BT's services, but it was a striking example of a key
argument companies give for outsourcing their IT to a third
party.
This argument is laid out by Peter Baxter, IT
services manager, at drinks retailer Thresher Group, who says, "Our
commitment to outsourcing reflects a determination that everyone
should be focused on achieving our core objectives as a retailer
rather than tied up with overhead administration.
"The IT department's role is to manage delivery of IT services
rather than deliver those services ourselves. We can achieve this
by leveraging the expertise and resources of external suppliers who
can also provide more flexible service than would be possible
internally."
The need for such clarity of vision from the start is underlined by
Les Graney, Royal Mail's IT director when it contracted out its IT
two years ago and now associate director of Digital Fuel, which
helps companies monitor their suppliers.
"Initially Royal Mail did not decide to outsource but rather to
explore whether it would be advantageous to do so," he says. "We
did not start by saying 'let's outsource', and then shortlist some
suppliers. It was only when we looked at everything and got all the
numbers together that I was able to recommend to the board that we
went ahead. Up to then it was only an option, among others. You
really must understand what you are doing and why: this is not just
an idea but the basis for the future."
It is also not a way of getting rid of problems or internal
failings, experts say.
"If outsourcing is driven by an attempt to fix problems that are
not under control, it can be a big mistake," says Allan Frank, a
senior fellow at consultancy Hackett.
"Companies box themselves into a corner that forces them to make
classic bad choices in outsourcing. They do not focus on
standardisation internally, so it becomes very difficult to manage
projects. In desperation, they outsource. This strategy is likely
to fail."
So clear, positive objectives are needed. Graney says cost savings
are always likely to top the list, but related issues include new
skills to exploit emerging technologies, a desire to focus on core
business, a need for 24-hour support with specific service levels,
and the wholesale replacement of old systems with a comprehensive
business package from the likes of SAP.
Different objectives demand the consideration of different
approaches.
"It all depends on your objectives and your circumstances," Graney
says. "At Royal Mail we did not want one company saying it could do
everything: we wanted specialists. But we did want to deal with
only one company, so we went for a consortium with a prime
contractor. We got good specialist companies working together, but
Royal Mail only deals directly with one company - CSC.
"Selective outsourcing is another option, depending on your
circumstances. If you are just outsourcing datacentre operations,
for example, you can focus tightly on the services provided.
"There is a lot to be said for having several small specialist
contracts rather than one big one, where you can lose sight of
details and things can get swept under the carpet.
"However, you bear the risk of integrating all the separate
contracts. If there is a problem between the network and the
datacentre, the contractors might blame each other and it is your
responsibility to make sure everything works together."
Going offshore to cheaper countries, although raising extra issues,
is basically just another option, as far as Graney is concerned.
"It's horses for courses," he says. "There are benefits of cost and
24-hour working, but there is extra risk. So, as always, it is a
risk-management exercise."
Whatever approach is taken, it is vital to get the sums right.
Hidden costs emerged as the biggest complaint among nearly half of
the 25 major organisations surveyed by Deloitte Consulting - to the
extent that they achieved no cost savings at all. More than half
absorbed costs that they thought were their supplier's
responsibility.
"Everything looks rosy when you explore the market, because the
suppliers are trying to entice you," says Graney. "In addition,
when it comes to bidding, they are all very competitive. But when
you find a winner and examine the details, issues will come to
light: perhaps a pension black hole that has not been
costed."
The choice of supplier must depend on far more than cost, say users
and suppliers. In particular, users must be happy that they have a
true partner with a matching culture.
"Outsourcing is not a one-off purchase: it can be a long-term close
partnership," says Martyn Hart, chairman of user and supplier
industry body the National Outsourcing Association.
"You obviously look at cost and experience, but one of the most
important issues is cultural fit. If the companies do not gel,
there is little likelihood that the partnership will last. Similar
working ethics, vision and expectations will ensure that the
outsourcing relationship runs far more smoothly."
Baxter agrees. "Major players had plenty of pedigree but could n0t
provide the reassurance we needed about our JDE application
packages. Tier-one quality also comes with tier-one costs.
"Some smaller suppliers had the application experience but a
company of our stature needed more confidence in their commercial
robustness."
The personal involvement of Astech Consultants managing director
Danny Turner swung the deal.
"He was pivotal," Baxter says. "It makes a change when the
supplier's managing director is an enthusiast for your
applications, is not scared to be candid when providing services,
and clearly wants the agreement to work well financially for both
parties."
When it comes to negotiating, users can feel they are at the mercy
of suppliers and should consider using experienced external
advisers.
Graney says, "Every company has a first time - which means the
amateur is pitted against the big names of IT, who are
professionals and have played the game 100 times. Everyone takes a
position at the start and you work towards a compromise - but the
suppliers know where they are weak and where they have got to dig
in their heels. The user company doing it for the first time might
not spot this."
By the same token, the contract and the relationship with the
supplier must be managed: this is stressed time and again by users
and advisers.
"Our research shows that 80% of all outsource contracts that fail
do so because of poor governance," says Ian Leask, managing
consultant at Compass Management Consultancy. "Governance here
means that both sides have the right processes, methodologies and
people in place to manage the deal."
Leask says users should allow 3% to 6% of the annual contract value
for management; analyst firm Gartner recommends 5% to 10%. Some
users and advisers say a senior technical expert or small team
should be kept on to monitor and, if necessary, challenge the
supplier's later proposals.
A final piece of advice comes from the National Outsourcing
Association. Hart says, "Outsourcing seems to be in vogue at
present - but it is not necessarily the panacea for all companies.
The outsourcing decision is interlinked with the individual
business case and often it is in the interest of the organisation,
its staff and shareholders to retain the process in-house."
Steps to outsourcing success
Know your objectives.
Understand each stakeholder's perspective: suppliers, directors,
IT staff, end-users.
Communicate with staff as early as possible.
Thoroughly investigate the market .
Understand the various outsourcing options.
Do not select a supplier on price alone: look for a similar
culture and potential to build a relationship; look at service
quality, company stability, payment mechanisms, direct and indirect
costs, handling of people issues.
Negotiate a sound contract: consider using outsourcing
advisers.
Consider keeping a small technical internal team.
Manage the contract and the relationship l Constantly look for
ways to use the supplier's expertise.
Be well prepared for the end of the contract.
Source: Consultant Elizabeth Sparrow, author of Successful IT
Outsourcing (Springer), and A Guide to Global Sourcing (British
Computer Society).
Outsourcing options
Selective: specific IT functions outsourced, some services stay
in-house.
Tactical: typically short-term for specific projects.
Strategic: longer relationship, with both parties working to
develop a partnership approach.
Transitional: supporting major changes such as an infrastructure
upgrade. The supplier might manage old systems while in-house staff
focus on new technology.
Benefit-based: both parties invest up-front in IT service
development and share risks and rewards.
Joint venture: services are run by a separate organisation with
its own management, formed by the customer and the supplier.
Utility: systems are run remotely by a supplier at its own site
and paid for according to use. l Offshore: IT work is moved
overseas.
Business process outsourcing: an entire process, both the IT and
human components.
Source: Consultant Elizabeth Sparrow, author of Successful
IT Outsourcing (Springer), and A Guide to Global Sourcing
(British Computer Society).