It has been a hectic year for Simon Thomas, CIO at retailer Threshers. Back in February, the company signed a five-year...
£8m outsourcing contract with services company Xansa after six months of negotiation.
After a tricky transition between Xansa and the company's previous outsourcing partner, EDS, the contract came into effect at the end of May - but for Thomas and his team, the hard work is by no means over.
"Getting to the point where you sign the contract is a long, hard slog, certainly. But after that, you are faced with the daily effort of making that relationship work," says Thomas.
The key to getting outsourcing right is to take a holistic view. Every stage, from building the business case right through to the termination of the contract at the end of its term, needs to be carefully managed - and the CIO needs to be involved right from the start.
The decision to outsource usually comes down to whether IT capabilities can be delivered better, faster or cheaper by a third party than they can in-house, says Michael Schaefer, operations and IT director at independent mortgage broker Chase de Vere.
"If they can, then you have got yourself a business case," he says, adding that the IT director usually has the best information with which to make that judgment call - or at least guide the thinking of their colleagues on the management team.
The right request
IT directors have much to offer during the tendering process, because it is at this stage that requirements are documented and the request for proposal is built.
As a guideline, the request for proposal should cover scope, schedule, technical requirements and, in some cases, contract terms and conditions.
"I always send a terms sheet out with the request for proposal," says Mike Bell, CIO at retailer Somerfield. "If a supplier is not willing to meet those terms, then they need not bother responding. I know what I need, and the basic terms are not up for discussion."
Most outsourcing veterans agree that a rushed request for proposal with too little detail is a potential time bomb that could lead to years of poor performance. But an over-long request for proposal can also be a problem, says Thomas.
"Large request for proposal documents are just confusing," he says. "We try to keep things tight, but not too shallow." In the deal ultimately awarded to Xansa, that approach resulted in an request for proposal of about 100 pages.
Either way, detail is key, says Ray Cooke, IT manager at logistics firm Unipart Logistics. Cooke manages the company's outsourcing contract with service provider Computacenter, originally signed in 1999 and renewed in 2005 for a further three years.
"You should be very open about your needs and expectations in the request for proposal. It is not just there to detail the service you require, but also outline the commercial elements of the deal you are looking for," he says.
"If, for example, you want an 'open book' deal - where the user sees the margins the outsourcing supplier is making - then the request for proposal is the place to make that absolutely clear. The same goes for the engagement model you want to use. Give prospective bidders all the details and you will avoid wasting their time and yours," Cooke says.
The evaluation process
When the bidders respond to the request for proposal, it is time for the procurement team to start evaluating the responses and putting the bidders through their paces.
That is a task that Glyn Evans, assistant to the chief executive on transformation at Birmingham City Council, took very seriously when looking for an outsourcing supplier to join the council in Service Birmingham, a public-private partnership that would not only provide the council's IT infrastructure, but also take charge of individual transformation projects on its behalf.
"It was essential that the procurement process thoroughly tested the bidders' ability to deliver, and proved to our complete satisfaction that we could work together with them as a team," says Evans.
As a result, the two companies that made it to the final stage of supplier selection - IBM and Capita - underwent a rigorous 12-week test of their commitment and dedication.
"The two bidders were asked to perform proof of concepts and develop full business cases in consultation with council workers for projects in three areas: customer services, efficiency and adult services," Evans says.
"In addition, this phase was a fully negotiated one, with council teams meeting with the bidders on a weekly basis. That gave us a real feel for their performance," he says.
Capita was eventually named as the preferred bidder in December 2005, and a 10-year contract worth £475m was signed three months later.
It is also important to remember that what is needed is an outsourcing supplier that offers a good cultural fit with your organisation, not just one that offers the best financial terms.
At Unipart Logistics, Cooke chose Computacenter because it demonstrated expertise in the disciplines of continuous improvement, six sigma and lean processes - all of which are core to the way Unipart is managed. "That gave us an affinity with Computacenter that other suppliers could not match," says Cooke.
The job of finalising terms and conditions will run more smoothly if the supplier and user have developed a good relationship during the selection phase, says Thomas.
"Contract negotiation is always tense - it is a situation where everyone has interests to protect. But if you have come to the right decision with your supplier, these conversations should not get too heated," he says.
It is also worth remembering that if you drive too hard a bargain, the relationship cannot go anywhere. "What is the point of proceeding if there is not something to be gained by both sides in the partnership?" says Thomas.
By the time the contract is signed, the nature of assets, payment structures and governance should all be defined. Metrics in the form of service level agreements (SLAs) should also be in place.
Managing the transition
The next stage - transitioning internal operations to an outsourcing partner - typically involves transfer of assets, potential conversions of operating platforms and processes and, in some cases, a move of processing to an outsourcing supplier's facilities. It may also include the transition of personnel to the supplier's payroll or the transfer of work to an offshore supplier.
This can be a tricky time if a firm is transitioning from one outsourcing provider to another, as the team at Threshers found out. "It would be nice to think that you could leave the suppliers to work nicely with each other, but the fact is, you will probably play referee sooner or later," says Thomas.
When the contract comes into force, performance management begins. Throughout the lifecycle of an outsourcing contract, the user should be evaluating the effectiveness of the agreement and providing feedback to the outsourcing supplier, usually in the form of operational metrics.
This is where many organisations encounter problems, often due to inexperience. In a survey by outsourcing advisory service TPI, 61% of users admitted to placing more emphasis on setting up their outsourcing contract than on managing it - and said they had been disappointed with the results as a direct result.
"It is critical for users to recognise that the manner in which an outsourcing relationship is managed is as important as forging the relationship at the outset - if not more so," says Stuart Harris, a partner at TPI.
Get the measure of performance
In performance measurement terms, a useful point of reference is the IT Infrastructure Library Service Catalogue. This outlines the SLAs that should be used to measure IT, whether provided in-house or by a third party, and also the frequency with which they should be measured. This is the approach used by Thomas and his team at Threshers.
At Unipart, Cooke benchmarks his outsourcing suppliers annually, using services from Gartner and Compass Management Consulting, which keep reference databases full of the details of similar outsourcing contracts.
"Wherever we are performance-wise relative to the rest of the index, that is what we want to sustain or improve year on year," says Cooke. "The outcome has been that Computacenter has always ensured that we can do that," he says.
In addition to day-to-day interactions, most organisations insist on a steady schedule of formal meetings with their outsourcing partners. At Unipart, there are weekly meetings to discuss recent risks and issues, monthly service-review meetings where SLAs are discussed, quarterly meetings geared towards improvement, and annual meetings where the entire relationship is reviewed.
The annual review is also a fixture at Cheshire County Council, which outsources its broadband network and all desktop support to A&O. "The council gives a presentation outlining our IT strategy, local issues and needs and the changing political environment.
"Our supplier then does a return presentation, demonstrating how it is going to support all that. From these presentations, an action plan is formed," says Steve Hopson, CIO at the council.
Towards the end of an outsourcing contract, whether that end is due to normal contract expiration or forced by poor service, the effectiveness of the outsourcing relationship will usually be reassessed. This judgement may lead to an extension of the arrangement, a modification of the strategy, or a re-tendering of the contract.
But no firm should be too hasty to change things without a full evaluation, says Cooke. "If things are not going well, you may not solve the problem by switching providers. The problem, in fact, might be you."