Outsourcing the right way

Outsourcing your IT department can bring benefits as long as you bear in mind some simple rules.

Outsourcing your IT department can bring benefits as long as you bear in mind some simple rules.

Outsourcing even a part of the IT department is a big step for any organisation, and because IT is such an integral part of most businesses it is difficult to define the scope and deliverables for any outsourced service. Even the smallest misjudgement can have long-term effects on growth and profitability, so it is no wonder that contract discussions are often lengthy and complicated.

Nevertheless, outsourcing continues to provide a steady stream of customers, mainly because the potential benefits are clear and usually focus on two issues - cost control and service improvement. The service improvement factor is based on the premise that the supplier has the experience, the staff and the capability to do the job better. Similarly, cost control is perceived to be readily achievable through the supplier's greater purchasing power and economies of scale.

But outsourcing is not for the faint-hearted. Attempts to tie down and closely manage the service provider by dividing their service into modules or adding restrictive controls are all options that have been tried before, and often with disastrous results.

The key to a successful outsourcing contract is simple - be realistic, and build trust with your supplier. If you feel uncomfortable and unconvinced in any way, the best advice is - don't do it or find someone else that you do feel comfortable with.
One aspect that almost always emerges late and is a significant issue in outsourcing contracts is asset ownership and transfer.

The dilemma is whether you should you hand over your hard-won deals to a service provider, lock stock and barrel or retain ownership and manage the inventory and costs closely. Of course, the dilemma is proportional to the level of trust between the customer and the service provider.

Included in the broad definition of assets that are eligible for transfer in an outsourcing agreement are delivery and support staff, hardware, software, network and technical infrastructure, and possibly even buildings. The transfer process for most of these is straightforward, though quite different for each.

The one area, however, that is given the least consideration and yet is key to the success of the outsourcing for both parties is that of licensed software. Normally software products fall into two main categories:

  • Applications that are directly linked to the business.
  • Products that support the IT operation (infrastructure products).

As a general rule, unless your outsourcing agreement includes provision of application development, business-related applications such as payroll and general ledger software should not be transferred as part of the contract, whereas infrastructure software such as performance management products and operating system tools should.

There are a number of reasons for this, one of the most important is that the relationship and the negotiation process with the software supplier resides where it is most effective and there is less likelihood of stiffing. However, there can be exceptions and nothing takes the place of a thorough assessment, including conversations with the suppliers before the outsourcing contract is signed.

The whole area of third-party software is one that often beleaguers outsourcing deals. Aside from the basic problems of inventory management (knowing how many copies of each product are installed and used), there may also be problems when outsourcing triggers a change in use claim by the software supplier. Often, unplanned and significant costs arise and, just as often, it is unclear whether the customer or service provider should pay.

It is worth bearing in mind a few basic facts about this process:

  • Buying and installing licensed software is covered by international laws which are intended to protect the interests of the supplier or owner of that software. To ensure that the balance is maintained, effective and clear contractual terms need to drawn up and agreed and, just as importantly, kept up to date in line with technical/usage changes, re-organisations and changing environments.

  • The responsibility for legally compliant use of software by the company's staff remains with the customer irrespective of the terms of an outsourcing agreement. The supplier may own all the software, hardware support staff and premises, but that does not change the customer's responsibilities.

  • Any change in the business (merger, acquisition, Internet trading or outsourcing) necessitates the need to consider the impact the change will have on third-party agreements. The costs of changing the permission to use software in a new environment, for instance, are often insignificant compared to the delays in the transition process that can occur through licensing problems.

  • In an outsourcing contract, make sure it is absolutely clear what you expect of the service provider, particularly for asset, inventory and software licence management. Include clear responsibilities for costs that arise as well as resources and costs for activities that will achieve legal and contractual compliance.

  • If you are undertaking an outsourcing agreement for a fixed term and there is even the remotest chance that you will change supplier (or even bring the service back in house), consider very carefully the exit options available with your third party agreements. (For instance, owning an upgrade without the base licence is useless and costly to correct).

  • Before you enter into an outsourcing agreement, make sure that you have undertaken your own "due diligence" exercise, and as a result you know exactly what assets you have, what you want to transfer, and the state and migration costs of all your software agreements.

Bill Monk is director at outsourcing specialist LOCS www.locs.org.uk/

Read more on IT outsourcing