For far too long, the issue of outsourcing versus
insourcing has had the proportions of a religious debate between
often fanatical supporters and opponents of both.
But this highly partisan passion is not helpful. There are no
absolute rights and wrongs when it comes to how to source IT.
“Sourcing is not a strategy in itself – it has to be the
business strategy that drives the sourcing decision,” says Bob
Carlson, former group head of IT and telecommunications at HSBC,
with 25 years experience at the bank – a major user of outsourced
IT.
"Business strategies can vary hugely – and therefore so will IT
sourcing strategies. For example, a key part of HSBC’s business
strategy is to acquire other companies, and integrate their
customer base, which in turn requires integrated IT systems,
whether those systems are sourced in-house or out, onshore or
offshore,” says Carlson. “Contrast this with GE, whose business
strategy is buying and selling businesses which they therefore do
not want to integrate.”
Any sourcing strategy has therefore to take into account two
such divergent views on integration. Business strategy can also
change totally, and sometimes very swiftly indeed, as radically new
competitors arrive in a market to transform it.
“Kodak used to be in the photographic film business,” says
Carlson. “They got overtaken by Nokia – a telephone company they
assumed had nothing to do with them but which were now selling
mobile phones that could take digital photos.”
IT sourcing strategy must, therefore, map to business strategy
and be flexible enough to allow the business to make radical
changes to adapt to changing market contours. One key advantage of
outsourcing, for example, points out Carlson, is to support a
business strategy of rapid expansion without time-consuming scaling
up of internal IT and the up front costs that requires.
“Outsourcing can give you the opportunity to play on a global
scale,” he says.
However, even when the business strategy does make outsourcing a
compelling sourcing strategy, such as when accelerating
globalisation, it is essential, says Carlson, to appreciate the
risks as well as the opportunities.
“Outsourcing is not a panacea. The worst option is to do with
great efficiency what should not be done at all,” he says.
Some things should not be outsourced. “Do not outsource your own
core competences,” warns Carlson. Moreover, “Never outsource a
problem – often, the quickest way to get a big problem is to
outsource a small one.”
Sort problems out first, internally. "Since IT automates
processes, always look at the processes first,” says Carlson. “Look
at the end-to-end flows of information and follow the transactions
all the way along, find where value is added – often half of all
the stages in a process can be totally unnecessary.
Process re-engineering can cut stages, time and cost, says
Carlson, “Ford, for example, used to have a huge building in
Michigan that just did accounts payable and receivable and purchase
orders all day. Then someone realised that since Ford built cars,
and cars were easy to count, if a thousand cars were shipped then
the company simply needed to pay for four thousand tyres, without
tracking every purchase order. It saved them a fortune, counting
cars instead of tyres.”
Any process re-engineering required should be done in house,
says Carlson.
“Compared with programming, which is a piece of cake, process
change is hard to outsource, “ he says.
Where processes and systems impact corporate governance, says
Carlson, even greater caution must be exercised.
“Sarbanes Oxley makes it illegal to outsource risk,” he says.
That means that for any such outsourced systems and processes, he
says, “Sufficient in-house competence is needed to recognise that
the outsourcer is competent to meet your corporate risk
requirements.”
Assessing outsourcer competence is essential when it comes to
issues of corporate risk, but it is also essential from a
commercial consideration as well.
“Outsourcing fails where there is poor governance and the
wrong expectations of it,” says Carlson.
One very popular expectation is that outsourcing will cut IT
costs.
“The outsourcer has to make a profit, and to pay tax – and what
if the law changes and outsourcing becomes liable to value added
tax, which can of course be applied retroactively? So the
outsourcer has to be highly efficient at running your IT if they
are to pay their costs and cut yours as well,” he says.
Moreover, even if the outsourcer does reduce their clients’ IT
and process costs it may not be the user that benefits. Carlson
says, “IT costs savings always devolve to the customers.”
This is because if any company in a market sector can cut its
costs, then so can all the others. Those savings are then passed on
to all the company’s customers in order to win their custom. The
commercial advantage of any savings in IT costs that an outsourcer
can bring, therefore, are only ever temporary.
Users all too often have expectations that they will remain the
valued customer they were at the contract bidding stage. The
outsourcer has to grow his business, and get new customers – so
will he lose interest in your work?
Another potential dangerous expectation is that outsourcers will
see the world the same way as their users. That may not be so,
especially if there is a difference in nationality and
culture..
“Offshore outsourcing is very different from onshore,” says
Carlson. “The issue of cultural fit is critical – you must have
shared business values, not just between the outsourcer and the
user, but with the user’s own customers. Moreover, never
underestimate the amount of coordination that will be required –
everything always takes longer with distance. The more distant the
offshorer, the more management effort it will take.”
Whether the outsourcer is on or offshore, emphasises Carlson,
managing the relationship with him is not only vital, but
inevitably it is another cost to consider.
“Relationship management is critical and must be well defined,”
he says. “Flexibility and goodwill are far, far more important than
service level agreements and price, which are not important issues
in comparison because everything about the contract will inevitably
change over time, often rapidly, making renegotiation
necessary.”
But, critical though relationship management is to ensure
outsourcing is successful, it is not the first thing that should be
addressed when outsourcing.
Carlson is blunt about the first priority any outsourcing
contract must engage with. “The first clause of the contract you
write is the exit clause,” he says. "It’s imperative to agree how
the contract will terminate while the supplier is still selling and
negotiating with you. If you can’t get the exit conditions at that
point, you're doomed.”
A key aspect of any exit clause, irrespective of the financial
implications, is what happens to your IT.
“It’s critical you have a way to recover your intellectual
property, your data and your systems. Remember too, that if your
supplier is in trouble, you are in trouble. Law courts simply pick
over the bones of both. The judge won’t have a clue about IT,
neither will the jury. You might as well roll the dice in Las Vegas
as go to court for a resolution,” says Carlson.
Nor is it an option to avoid thinking about the end of the
contract. “All contracts terminate at some point,” says
Carlson.
This reminder should be borne in mind especially if those who
sign the contract at the user end do not intend to be there when it
concludes, leaving a messy termination for others to sort
out.
The second clause to set out, says Carlson, is the one dealing
with the governance, principles and relationship management.
“The relationship should be equal,” he says. “It will be a case
of ‘we have a problem’. There has to be a clear escalation process
to take the heat out of any problem, early on, and to
find solutions.”
Nor is there any point assuming that won’t be necessary. “You
have to go into outsourcing with the idea that there will be
problems, or you will get meltdown,” says Carlson.
The other assumption you must accept as a de facto part of
outsourcing is that the contract cannot be static. “You must
include change management clauses because everything will change
during the outsourcing term,” he says.
Not only will IT requirements inevitably change to track
business changes, but also there will be personnel turnover on both
sides.
“The people will change,” he says. “In a year, the guys who set
up the contract won’t have anything to do with it any more. You’ll
hit problems that are not covered by the contract and those who
devised it will have moved on.”
It is imperative, therefore, to have mechanisms and management
structures in place that will last for the duration, and that these
processes are adequately staffed and resourced.
Only, says Carlson, when the issues of termination and
relationship and contract management have been dealt with, should
issues about what the outsourcer will actually do, and to what
standard, be discussed.
“The last thing to talk about is the work, the price and the
service levels,” he says. “Those are the easy parts.”
Essentially, because outsourcing is such a key decision, running
part of the organisation that is critical to daily operations and
future survivability of the business by enabling business change,
the key to successful outsourcing, says Carlson, is the
relationship.
“If you’re building a relationship, keep the purchasing people
away,” he says. “They add value by checking that the contract
covers everything, and that is very good in a purchasing
relationship, but not in a partnership relationship.
"Far better to bring in your own company’s marketing people
because not only will they get on with the outsourcer’s marketing
people that you are dealing with during contract set up, but also,
most importantly, they will have the skills to recognise the
outsourcer’s own marketing ploys that you may not.”
“Be in no doubt,” says Carlson, “that the decision to outsource
is a major one, carrying significant risks as well as potential
benefits, and should never be undertaken without due
cognisance.”
“When you outsource IT it's still your business. It’s not a
transaction, it's a commitment,” he says.
But it's a commitment that must be reciprocated. “Outsourcing
is a joint venture whether you like it or not – you both have skin
in the game.”
Outsourcing checklist
• Business strategy is the key driver in the outsourcing
decision
• Don’t outsource a problem – re-engineer your processes before
outsourcing them and the IT that runs them
• Don’t seek to outsource risk – corporate governance
regulations disallow it
• Don’t allow outsourcing to dangerously deskill your company in
vital competencies
• Outsourcing risk increases with the distance of the
outsourcer
• Costs must factor in the outsourcer’s marketing costs and
profit margins
• Any cost savings will eventually be passed on to customers
thanks to competition
• Business and requirements will change, so build in flexibility
and renegotiability
• Detailing work, service levels and price are less important
than setting out partnership, relationship and problem resolution
terms
• The contract and the relationship must be designed to be
independent of those that initiate them, because people will move
on
• Engage your own marketing people in contract negotiation –
they will be able to spot the supplier’s ploys
• All contracts will terminate – write your exit clause before
you agree any other clause, when you still have power to negotiate
strongly
• All outsourcing is a joint venture – insist on both sides
having skin in the game.
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