When leading IT directors met to discuss the criteria for successful outsourcing, the importance of governance and in-house management was a key theme
Outsourcing is not sustainable without a clear process and governance structure, and it is essential to retain a core team which understands both the technology and the business.
That was the conclusion of a Worshipful Company of Information Technologists breakfast meeting in September. The meeting, to discuss the criteria for successful outsourcing, drew on the experience of John Yard, until August IT director at the Inland Revenue; Roy Jakes, former IT director of drinks giant Diageo; and Alan Shepherd, former director of research at Royal Mail.
Outsourcing has to balance the needs of the business in two ways, the meeting heard. It has to maintain continuity of service along with a high degree of security and the integrity of customer data. But it also needs to accommodate the business' need for long-term competitiveness, which depends on being able to exploit IT.
"[When IT is outsourced] the chief executive is still accountable, being legally liable for continuity of service and the integrity of customer data, as well as keeping world-class quality. The day-to-day work can be subcontracted out, but you cannot subcontract accountability or liability," said Shepherd.
That is the reason why an organisation has to retain a small team with the capability and empowerment to set strategy. The team's function will be to state what IT can do for the business; articulate to suppliers what they are expected to do, monitor them, and if necessary take corrective action. The team will also manage links back into the organisation, to suppliers and other parties, and to the workers on the ground.
"You cannot expect suppliers to do that on their own," said Shepherd. "That is the area where so much outsourcing goes wrong.
"The general recommendation from independent research is to retain and maintain a small core team. This team should take up about 5% of the IT budget or 5% of the staff (if the whole operation is outsourced) to manage these activities."
Retaining a small internal IT infrastructure, along with having effective business and governance processes was also the key to success for Jakes, who spent 25 years in IT at Diageo.
In October 2003 Diageo transferred its core systems to Accenture in order to speed up the roll-out of a single SAP business approach worldwide.
"Diageo was concerned not to lose the expertise and knowledge of its processes and IT, and to maintain control over key decisions," said Jakes. "When outsourcing business processes you have to ask if you are losing the skills of the business? What is being outsourced? Is it IT, or a knowledge of core processes?"
Jakes separated business process management from IT management and retained it inside the business. Before the outsourcing arrangement commenced, Diageo set up a clear ownership management structure through a senior-level, director-led, cross-business unit process ownership group.
It also set up a super-user group - a structure of key users to handle process improvement and training and to answer the "what if?" questions. This was key.
"We made the process owners the point of contact to get business ownership. That is the key to understanding governance," said Jakes.
Diageo also retained strategy and IT architecture, in a group of about nine people, with clear responsibilities and terms of engagement in working with partners. Its role was to guide future direction and put checks and balances on the outsourced organisation.
Finally, governance was broken down into three areas. Routine service management, based on a seven-year contract against a baseline cost. Overspend or underspend resulted in shared penalties and benefits to Diageo and the outsourcing supplier.
Minor enhancements were decided close to the business, with business units bidding for a fixed pool of resources. Major projects were business-led, fixed-price, business management projects conforming to standard project management disciplines.
The importance of getting governance processes right was also highlighted by Yard. However, as revealed in an in-depth interview in Computer Weekly last week, the former Inland Revenue IT director believes relationship management and and understanding the motives of suppliers is vital.
At the WCIT meeting, Yard drew attention to the three directions organisations could go with outsourcing, each with its own issues.
Organisations can keep their work in-house, or, if already outsourced, bring it back in-house. "There is nothing wrong in that," Yard said. "But if you have your own IT organisation, be clear about how to attract, retain and refresh skills. How do they stay up to date? You can lose competitive advantage unless people really know what is happening. It is sometimes a problem keeping up to date with technical developments in-house."
On the other hand, organisations have to consider that if they outsource they are in competition with all the other organisations using that supplier, he said.
"Most suppliers have not got enough high-calibre resources either. For example, if an outsourcer's salesman says their best person will work in a place like Telford ask them why? Why would he work there?" said Yard.
"Outsourced organisations have to fight to get the best resources from their outsourcer. I want more than my fair share. I am in competition with everyone else who outsources to that supplier."
Sending work offshore brings additional issues of getting people to understand what you are trying to do, Yard said.
"In drawing up contracts, engage in debate so that there is common understanding. What it is all about is having short, defined frameworks, operated with trust and honesty on the ground," he said.
"Long-term relationships need to be looked at in relation to the totality of the business and be sufficiently flexible to take account of changes in the world around them if you are to stay ahead of the game. Outsourcing has got to be consciously managed."
Key advice from the WCIT meeting on outsourcing
Beware penalising suppliers If you penalise suppliers, the account can be seen as failing, or it can become an unpleasant place to work, and the best people will move on. It is worth remembering that the best people can choose where they want to work.
Do not outsource a problem
Too many organisations sell a problem, and the supplier does not know what it is buying. All outsourcing does is change the way you manage the delivery of IT. You cannot just chuck IT over the wall.
Beware "macho" contracts
You need penalties, but these are best done through admonitions, rather than putting the company to the wall and making it go bust.
Appoint a committed manager
You need a leader with passion because often the honeymoon with the outsourcer is short. The contract will not cover everything, and when the going gets tough you need to resist the temptation to beat up the supplier. Often the problems arise from faults on both sides. The hardest task on the client side is to manage your own board - they will often feel the problem of IT was solved when the deal was signed.
Escalate important decisions
You need a contract management team, but do not leave them to make big decisions - these should be escalated to a relationship manager to look at the impact they will have on delivery. If not resolved, escalate them to the board. The board has to be involved and take responsibility since for most organisations IT is the core business enabler.
Source: John Yard
The Worshipful Company of Information Technologists is running a series of breakfast meetings for senior decision makers in the IT community. The programme is part of the company's work to uphold a long tradition among London's City livery companies of furthering and upholding the standards, integrity, and professionalism of their trade.
More information: www.wcit.org.uk