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.
This was first published in March 2004