IT directors must have battleplan to minimise risks of outsourcing

Users heard advice on getting the most out of outsourcing and how it could turn around a company's fortunes at the Outsource...

Users heard advice on getting the most out of outsourcing and how it could turn around a company's fortunes at the Outsource World conference in London last week.

Companies need a battleplan to minimise the wide range of risks posed by outsourcing deals and reap the full rewards, the head of outsourcing at Lloyds TSB has warned.

Risks include the financial instability of suppliers, contractual disputes and how you would deal with the failure of a critical customer service, said Sharon Harmer, head of smartsourcing and group outsourcing at Lloyds TSB.

In a presentation at the Outsource World conference in London last week, she said, "One of the big risks is that the supplier may not be financially stable for the term of the contract.

"I would suggest that you automatically review the [financial health of the supplier] and you need to think about how you will get out of an outsourcing arrangement before you enter it."

The user also needs to consider the mechanism for taking over the running of a critical service from the supplier in the event of an unforeseen disruption, such as the financial collapse of the supplier or a natural disaster, Harmer added.

In addition, a business should ensure it retains sufficient staff to manage its outsourcing provider and monitor its performance, said Harmer, who is responsible for about £500m of expenditure on outsourcing services at Lloyds TSB.

"You can turn a bad deal around with good relationship management, and you can destroy a good deal with bad relationship management," she said.

Users also need to have realistic expectations about how much the supplier will be able to improve the quality of a service that was previously run in-house, Harmer said.

"There is no point arguing for a service level of 99% if you have not achieved that [in-house]. It will be extremely difficult for the supplier to do that," she said. "You have to understand that under Tupe [Transfer of Undertakings - Protection of Employment] Regulations your IT staff of today will be working for the supplier."

Tips for successful outsourcing       

Competitive advantage
Never outsource something that gives you a competitive advantage. But something critical to a business, such as cheque processing for a bank, can be outsourced, if it does not give an edge over rivals.   

Confusion over the price charged for an outsourced service can breed mistrust between the supplier and the user. Make sure you understand how pricing is calculated. Consider using a benchmarking service to compare the performance and charges of your supplier with others.   

Managing the supplier
Organisations should invest between 3% and 5% of the contract value in managing the relationship with the supplier. Half of the management team's time will be spent dealing with key people in the user organisation. 

Contractual issues
Use external legal advisers if possible, as they are likely to have greater experience in handling outsourcing contracts than your in-house lawyers.   

Mergers and acquisitions
Being locked into a long-term contract may complicate future mergers and acquisitions. 

Source: Sharon Harmer, head of smartsourcing and group outsourcing at Lloyds TSB

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