Former Inland Revenue IT director says incentives, not penalties, are key to success
Beware of imposing draconian penalties and liabilities on your outsourcing supplier, as they can backfire on you.
John Yard, who until August was IT director of the Inland Revenue, recommends that users focus on delivery rather than penalties. Yard was responsible for running the outsourcing competition which led to Capgemini replacing EDS as the Inland Revenue's IT outsourcing supplier in July.
Addressing the Computer Weekly 500 Club - whose members include some of the UK's largest users of IT - earlier this month, Yard urged companies that are outsourcing their IT to accept that the first year of the contract can be the most difficult and to prepare for problems by getting relationship management and governance processes right.
Flexibility should be built into any deal so the contract can change as business needs change, Yard said. He also urged users to opt for open-book accounting so they can see how much profit the supplier is making from the contract and to plan their exit strategy.
When problems arise there is a temptation for the user organisation to try to extract penalties from its outsourcing supplier, but Yard warned, "In the debate about penalties people tend to forget about delivery. The danger is that people focus on winning the penalty battle while losing the delivery war.
"You need serious admonition for supplier failures but also to apply balance and appropriateness. Overall, incentives are better because they give the supplier something to aim at and if constructed with care they will focus the supplier on meeting the client's objectives."
One of the keys to successful partnership, said Yard, is to have equally weighted objectives - where failure to achieve them will affect both parties to the same degree. Typically the supplier needs to make a profit in line with the bid and the client will want to ensure it receives a high-quality service.
However, achieving a real partnership is not easy and requires genuine trust on both sides, Yard warned.
"Too many people think partnership is a soft option, which is why things often go wrong," he said. "Open-book accounting and a clear understanding of who is responsible for managing risks are important factors in developing trust on both sides."
Expect your first year of outsourcing to be tough, as outsourcing suppliers get to grips with the reality behind the bid, he warned.
"You get a two- to three-week honeymoon and then you are skiing downhill fast. At about 18 months you have a choice - either to fall off the slope or to start climbing up again slowly - it is a long, hard slog," said Yard.
As a result one of the big challenges is to manage expectations within the user organisation, he said.
"Boards have paid a lot of money upfront to outsource and they expect this to solve the IT problem. So when things go wrong the board will tend to want to kick the supplier but it is important for both sides to work together to understand the underlying reasons for problems and to jointly identify practical solutions.
The former Inland Revenue IT director also emphasised the importance of getting contracts right from the start - including an exit strategy. "At the outset cut through the sales gloss and remember you are competing for resources with all the other customers the outsourcer supplier has," he said.
"While you are negotiating you have the power to define your exit terms and identify what rights you need to take back with you. It is your pre-nuptial contract. Your supplier must know that you can and will exit at some point - so make sure you dig your escape tunnel soundly."
During the past decade Inland Revenue IT has been subject to considerable criticism but Yard remains convinced that outsourcing is the correct strategy. At the most basic level, when the Inland Revenue ran its own IT it had difficulty attracting and retaining high calibre staff.
"We could not have delivered a great deal of what we have, without outsourcing," he said.
Yard's advice on outsourcing
- Accept that the first year will be difficult
- Focus on getting relationship management and governance processes right
- Expect the contract to change as business needs change
- Opt for open-book accounting to see how much profit the supplier is making from you
- Plan an exit strategy.