Outsourcing projects offer business lessons

Managing outsourcing arrangements can be a tricky process. Sue Norris finds out what users can do to improve the chances of the relationship prospering

IT outsourcing arrangements can offer big rewards or big losses. Decades of some very public failures, and some possibly less well-publicised successes, have provided a rich resource for businesses embarking on outsourcing projects.

Swansea City Council, HM Revenue and Customs and the NHS National Programme for IT (NPfIT) are among those that have made the headlines for all the wrong reasons.

Meanwhile, in the commercial sector, Sainsbury's, Cable & Wireless, Cahoot and Lloyds TSB are just a few of the big names that have been burnt by delivery problems, missed targets or out-of-control costs. So what is still going wrong?

"While there may be a vague view of what is being outsourced, there remains a lack of clarity about why organisations are doing it. That is hardly a recipe for successful delivery," says Graham Copper, the former head of procurement at the Bank of England, who now provides consultancy services to the financial services industry at CityIQ.

Too often, users invite suppliers to offer them a price too early in the process - before they themselves have set clear objectives. In some cases, users also begin to work with the suppliers at this stage, says Copper. "The risk then is that the supplier will have to guess what it is you need, inappropriate service level agreement (SLA) targets will be set and costs will escalate," he says.

Typically, organisations offloading a major chunk of their internal activities are looking for two overriding benefits: lower costs and the ability to refocus internal resources on activities that have a more direct bearing on company profits.

They assume that a third party with specialist expertise and sizeable resources will do the job better and cheaper, thanks to their more developed infrastructure and skills base, and their greater buying power.

These simple goals seems easily attainable, but Mark Thompson, a university lecturer in information systems at Cambridge University's Judge Business School and chief independent IT strategy adviser for the British shadow cabinet, says that flaws in the process often get in the way. "Most outsourcing projects are far too large and hopelessly optimistic about what might be achieved," he says.

From close analysis of a series of failed outsourcing contracts in the public sector, Thompson has concluded that failed projects share some common characteristics. They are usually too complex and broad-ranging in scope, are badly managed by the user, and fail to align user and outsourcing supplier benefits.

"Single vertical-line activities that are not subject to massive change are consistently the best performers. Large, complex environments that are constantly changing will not deliver return on investment instead, such projects become an opportunity for suppliers to charge for change control," he says.

Users are often to blame for many of the problems, Thompson says. "There is usually really lousy management of the contract once it is in place. Very few of the metrics and SLAs are proactively managed. They may be monitored, but management is then rarely equipped to do something about it when the SLAs fall below targets."

Thompson says that when users lack vigilance, things can go badly wrong. "The contracts will be managed by the outsourcing supplier in line with the optimum financial result for them, which is not necessarily in the client's best interests," he says.

Yet the user is paying to bring an expert on board, and one of the main benefits of doing this is that it frees up internal experts' time for more strategic activities. Having to devote time to monitoring the supplier to ensure the service meets pre-agreed expectations is bound to create some resentment. Surely the point of the contract is that the supplier can be trusted to do what it has committed to do?

Leslie Willcocks, professor of technology, work and globalisation at the London School of Economics, says it is not that simple. He says he is astonished that organisations continue to put critical activities out to tender without being prepared to manage the relationship on an ongoing basis once the job changes hands.

"The NHS IT programme is a prime example. These are very big contracts, but the internal capabilities to manage them are not there - in the public sector, or in the managers hired to manage the programme.

"Ultimately, even though the work is being fulfilled by a third party, the user remains accountable and must retain control," says Willcocks.

"The problem is that outsourcing requires a radical change in approach and management style. Those overseeing this need to take an honest look at their abilities and be smart in their ignorance."

NHS Connecting for Health defends its position by reporting National Audit Office findings from last year that stated the NPfIT to be delivering major savings and to be on budget. The audit office also found that it had made substantial progress, particularly relating to "establishing management systems and structures to match the scale of the challenge". This included "sound project management" and the employment of "high-calibre people".

The NHS Connecting for Health argues that it now benefits from "strong and forceful leadership" and "a strong team dynamic and feeling, and a strong sense of purpose". Time will tell.

But Willcocks finds that many organisations do not conduct an audit of their retained management capabilities as part of the handover. "I can go into virtually any organisation and spot the same weaknesses, both at the time of the contract and four or five years in, and it is the same mistakes being made over and over again," he says.

Although a user organisation will think that the problem lies 70% with the supplier, really 60% of the fault is down to the user, says Willcocks.

Common errors on the user's part include handing over too much of the technical capability, the architectural planning and the strategy and blueprint with unrealistic expectations. He says the user then fails to provide adequate or regular direction and interaction.

Failing to interact with the supplier can be disastrous, but the "partnership" approach often promised by outsourcing suppliers will not necessarily improve the chances of successful delivery.

Martyn Hart, chairman of the National Outsourcing Association (NOA), says that a partnership will only produce results if the user is prepared to meet the supplier halfway.

"To deliver a healthy relationship, user and supplier teams need to plan how governance should take place to achieve the objectives of both parties," he says.

He points to the example of an NOA member that has formed a single team with the user, in which both sides are represented equally. A partnership, in other words. In this arrangement both parties have something to gain from the arrangement.

Many user organisations focus on negotiating down prices, and enforcing penalties if SLAs are not met, but offering the carrot rather than the stick can be a more powerful motivator.

"The outsourcing supplier needs to make a reasonable return," says Copper. "Users that look for lowest cost rather than value for money are asking for problems."

Willcocks agrees. "If the scope to make a profit is not there, the supplier will make one somehow - probably by cutting back on service."

Favouring value over cost-cutting and penalties involves providing incentives for the supplier to over achieve - to deliver what has been agreed, and then take the service to the next level, so that performance is always improving. Users adopting this approach stand to achieve more from their outsourcing relationships.

The key is to spend time ensuring that the supplier understands exactly what the user's broader business objectives are and the key targets it is aiming for - besides cost reduction and improvements in efficiency.

With the bigger picture in sight, the supplier stands a better chance of making improvements in the areas that really matter.

Willcocks points to various outsourcing agreements that have worked well, such as DuPont's experience with Accenture and CSC, and insurance industry consortium Polaris' agreement with LogicaCMG.

He says that much of the success of these arrangements was down to the maturity of the users' approaches to outsourcing. "Putting in the groundwork really is the key to greater success in outsourcing. It is a case of a stitch in time saves nine," he says.

Communicating the objectives of an outsourcing contract to areas outside the IT department walls is another vital element. "Communicating the key elements of the deal to all of the stakeholders - to shareholders, employees and unions if needs be - has to be done so that workers will not become upset and feel under-informed," says Hart.

Hart cited an example where during a 2005 outsourcing deal poor internal communications led to strike action. "A more sturdy communications structure has now been put in place and this seems to have solved a lot of the problems," he says.

Flexibility is also crucial, says Thompson. For every expert that advises having watertight contracts, others will emphasise the importance of allowing leeway. This is important in case requirements change, and also so that the supplier is encouraged to take a more responsible role, seeing beyond smaller issues to the broader impact of their service on the user's business.

Thompson says, "Very few outsource deals are flexible enough to allow for major change. The public sector, in particular, goes through frequent massive changes. A good example is when two public sector organisations merge, and the processes of one are shoehorned into the existing outsourcing contract of the other - with snowballing costs and significant challenges for the outsourcing supplier in meeting the increased demand."

However rigid or flexible the terms of the contract are, measuring the output is critical, as situations can only be improved if there is sufficient regular feedback and redirection.

Having realistic expectations is also essential and seems to be a particular failing of outsourcing agreements. Graham Oakes, an independent consultant based in Cheshire, believes projects begin to fail when they lose touch with reality.

"Most failure modes - scope creep, poor stakeholder and expectation management, poor estimation, etc - come down to this root cause. Outsourcing makes reality management more complex because there are more parties, more agendas and more places to hide," he says.

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