Outsourcing is back in favour. Scarcely a week passes without a company announcing another huge IT outsourcing deal. But firms that make deals in haste may repent them at leisure.
Most senior executives are looking for ways to increase their focus on value-adding activities and to drive down infrastructure costs. For many, outsourcing is the tool of choice. There have been surges in outsourcing in the past but this time is different.
First, there is the question of speed. Nowadays, outsourcing deals are often expected to be completed in just two to three months, whereas six to nine months used to be the norm. This sense of urgency is driven, in part, by perceived financial necessity, but it is also indicative of senior management's ease with the concept of outsourcing.
Second, there is the issue of scale. In the past, organisations tended to focus on a single deal, typically IT or finance, but now it is not uncommon to see IT, finance, HR and logistics outsourced simultaneously.
This new landscape brings its own challenges:
- There is no reason why outsourcing deals should not be completed in tight timeframes - the acid test is that all the buyer's expectations and objectives are reflected in the final contract. However, it is common for last-minute hitches to postpone deals. This can give rise to real difficulties if the delay is lengthy. Delay often results from a lack of senior management sponsorship. It is crucial that a board-level sponsor is assigned from day one and is briefed regularly throughout the deal-making process - too many organisations have not decided, even by the 11th hour, who should sign the deal on their behalf.
- Where a number of parallel deals are struck buyers should ensure that they are co-ordinated and that each supplier is clear about the boundaries of its responsibilities to prevent buyers paying twice for the same service.
- Where deals do not go to competitive tender - buyers preferring to deal with a friendly supplier - questions of value-for-money are pertinent. It is possible to mitigate the disadvantages of direct contracting by using price and service benchmarks, which can guide both parties in structuring the deal. Most organisations already have benchmark information about key areas of their operations.
- Another persistent problem is the number and size of unexpected costs - charges levied by the supplier for extras: more PCs to be moved than originally anticipated; requests for special reports; or the scoping of new services. This is due to a lack of preparation or experience on the buyer's part. There is no reason why these should not be agreed before the deal is signed. Determining how to forecast these costs will make budgeting easier.
It is little wonder that buyers are keen to complete outsourcing deals swiftly. Signing the contract signals an end to months of preparation and negotiation and a return to normal for busy executives who are grateful to have handed over responsibility. Good deals will pay for themselves several times over. But the value of preparation cannot be over-emphasised - stones left unturned can quickly become millstones round corporate necks.
Ian Law is a partner at KPMG Consulting