Outsourcing can offer good returns

IT outsourcing has proved disappointing for many companies, but good management can turn it into a success

IT outsourcing has proved disappointing for many companies, failing to live up to the promises of the business case or deliver the expected return on investment. But good management can turn it into a success, as Liz Warren discovers.

A lot of the time, says Lee Ayling, managing director of the IT advisory team at IT and business transformation consultancy EquaTerra, "IT outsourcing has failed to deliver because organisations don't have the right retained capabilities to manage the contract. Managing a supplier to do things for you, instead of doing them yourself, requires a lot more investment in relationship management, governance and the softer side of IT management."

The success with which an in-house team can be restructured to provide the right retained team to manage an outsourcing deal often depends on the maturity of the CIO and whether they've been through outsourcing before, says Hans Muskens, director of transformation outsourcing services at IT and business services supplier Logica.

Muskens adds, "People in the traditional IT department tend to be more technically oriented and can't always provide all the relationship skills you need when outsourcing. A CIO who has been through outsourcing before will understand up front what extra skills they need to bring in."

Some roles won't change, of course. Forrester Research's framework for the retained team in an outsourcing client suggests that the roles of CIO, technology research, strategy and planning, and enterprise architecture will remain largely unchanged.

Other existing roles that will still be needed but will involve different responsibilities include relationship management for user groups, quality management, security and risk management, and procurement and contract management. The organisation will also need to staff a program office which can oversee new initiatives, although the project office providing day-to-day project management is likely to become the domain of the outsourcer.

Fewer staff required

Roles that will no longer be needed in-house, or where far fewer staff will be needed, range from application management, integration and installation, to data and knowledge management, helpdesk and server and network support. Finally, a completely new role that does need to be introduced, says Andrew Parker, a vice-president and research director with Forrester Research, is supplier management or supplier relationship management.

Ayling suggests companies can typically grow the right in-house team from among their existing employees for 60% of these roles. However, for the remainder, bringing in new blood may be essential. "Outsourcing requires a real change in attitude among senior managers, and you need managers who've managed in that environment before and understand it," he points out.

Ayling continues, "One of the key challenges is to retain enough strategic capability that you don't abdicate responsibility for IT, while avoiding micromanaging your outsourcer and therefore failing to transfer enough risk to your partners in terms of letting them choose how to deliver the service."

Sourcing and supplier management are the two areas where companies most often need to bring in expertise from outside. For instance, Eversheds, which outsourced an IT department supporting 4,500 users to Computacenter Services in 2007, hired new staff with skills in contract and supplier management, since the ability to manage a deal of this size and complexity didn't really exist in-house.

It also brought in new staff on the relationship management side who could not only work with business users to understand their needs but then translate those needs into requirements for the outsourcer.

Shortage of experienced people

What companies must be aware of, Parker warns, is that "in new roles such as supplier management there is a definite shortage of experienced and effective people in the job market." That means many firms will have little choice but to train and grow such expertise internally. Ayling suggests a stop-gap measure while in-house staff get up to speed can be to use interim managers or consultancies.

Heads of IT should also pay as much attention to discussing future prospects with the retained team during the transition as they give to reassuring staff transferring across to the outsourcer, says Malcolm Simms, formerly IT director of law firm Eversheds. Simms is now a director of Konetica, which he co-founded to make use of the expertise gained at Eversheds to provide outsourcing to other law firms.

At Eversheds, where around 80 IT staff were outsourced and 120 retained, Simms sat down with staff staying in-house and explained not only how their current role would change on outsourcing but what completely new opportunities would exist that they might be able to move into straight away.

In the longer term, companies need to think about the career paths they offer to existing staff. Simms argues that "you need to create two or three grades in each role so that junior staff coming into the in-house team can see a career path." Many companies will already have grades for junior and senior business analysts, but Eversheds also created four senior project management roles from among the ten project managers it retained.

Ayling suggests that another tactic you can use to provide career development is to cycle staff round each of the key functions in the retained organisation.

You also need to think about how you bring junior staff on board now that many of the traditional entry points into IT - helpdesk, server and network support, and programming - have been passed to the outsourcer. Ayling thinks organisations that have outsourced need to cast their net more widely when recruiting than they have in the past: they need to be willing to take on people who have previously worked on the supplier side, for instance, or to bring in people with a finance or general procurement background.

However, Parker thinks attracting new staff to a smaller in-house team over the longer term shouldn't be an issue. "The new type of IT organisation has many attractive career openings," he points out. "They're simply different from what exists with a fully in-house operated IT group, and everyone involved in the recruitment process needs to understand that and adjust their behaviour accordingly."

Muskens adds that staff will increasingly join the IT department from junior roles in other areas of the business, as the need for detailed technical knowledge decreases and commercial skills become more important. In fact, Parker suggests, organisations should make the IT function one of the core departments where high-performing young managers must spend time during their career development.

"Activities such as sourcing and supplier management, relationship management, strategy and planning, procurement and contracts all have very strong business components, and need not be restricted solely to individuals with pure IT qualifications," he confirms. "Putting these activities in the career path of more general managers brings more talent into play, and also builds contacts and communication across the gulf between IT and business that many companies have traditionally suffered from."

Case study: Steamship Mutual

When protection and indemnity association Steamship Mutual outsourced its technical infrastructure support to IT services provider Wirebird around three years ago, the key roles it needed to retain in-house were those of system architects.

"Our system architects identify what is needed going forward from an operational perspective to support our business in providing a full range of marine liability insurance to members in the commercial shipping industry," explains Roy Hutchinson, Steamship Mutual's operations director.

"They then work closely with Wirebird to understand the implications of those new applications for the infrastructure, and to determine how the infrastructure needs to be developed to sustain an organisation that generates annual premium income of $250bn and employs around 150 staff in four offices worldwide," adds Hutchinson.

Retaining these system architects was one half of the challenge. The other half was to bring in additional contract management capabilities to ensure Steamship Mutual effectively manages both ongoing operations and any variations to the contract.

This is key because, in addition to supporting any new applications required by Steamship Mutual, Wirebird is also able to propose its own suggestions for developing the infrastructure, with the aim of cutting costs or improving performance and sharing any cost reductions equally between client and outsourcer.

Moreover, having initially kept application development and database management in-house when transferring infrastructure support to Wirebird, Steamship Mutual has more recently begun nearshoring some application development work to a company in Poland.

This has again altered the composition of the in-house team, this time in favour of business analysis, requirements definition and project management rather than coders.

Top tips for creating your in-house team

  • Start thinking about the roles you need in your retained team as soon as you start developing your business case for outsourcing. The structure of your in-house team will have a huge effect on your ability to manage your supplier, as well as represent a significant ongoing cost.
  • Create a lean in-house team so that you don't duplicate roles in-house and in the outsourcer. The business case for outsourcing can quickly evaporate if you retain too many people.
  • Make sure the roles in your in-house team are focused either on what you as an organisation need to do to serve your own customers or on managing the outsourcer. If they are not, you need to question whether you need those roles.
  • Think about what skills your existing staff already have, and be prepared to move them into new roles, even if you'll also need to retain the role they are currently filling.
  • Be prepared to look for the skills you need in places where you haven't traditionally recruited IT staff, such as suppliers, finance staff and procurement professionals.
  • Review your in-house team every time you change the outsourced services you're buying, to make sure you continue to have a team that meets your needs.
  • Keep the in-house team motivated by moving them round into different roles or switching them between dealing with routine operations and dealing with tasks involving change, such as performance reviews or the introduction of new services.
  • Consider short-term job swaps between your staff and the outsourcer's staff. It can be a very effective way in building relationships as people get a taste of "the other side" and work with a wider range of people from the other company.

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