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2/25/2004
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SmartAdvice: Cost Is Only One Factor In Outsourcing Decisions

Outline very specific goals for outsourcing before you lock in an agreement, or be prepared to be disappointed, The Advisory Council says. Also, ways to get better customer service from PC vendors, and how to turn compliance with Sarbanes-Oxley into a plus.

Editor's Note: Welcome to SmartAdvice, a weekly column by The Advisory Council (TAC), an advisory service firm. The feature answers three questions of core interest to you, ranging from career advice to enterprise strategies to how to deal with vendors. Submit questions directly to smartadvice@tacadvisory.com

Question A: What factors, other than cost, should be considered in making an outsourcing decision?

Our advice: Your organizational objectives, internal capabilities, and internal constraints set the foundation for any outsourcing engagement. Concentrate on these considerations first.

IT outsourcing is a broad subject covering everything from freestanding, individual projects to the full-scale externalization of an entire IT organization. Not surprisingly, the factors vary by the type of outsourcing engagement being pursued. At a high level, however, there are some common considerations for any outsourcing decisions:

Organizational Objectives
Why is your company contemplating outsourcing in the first place? Although cost cutting is the most commonly cited objective for outsourcing, many other objectives are possible, including:

  • Freeing internal resources for more strategic pursuits;


  • Reducing time-to-market for a critical project;


  • Improving internal efficiency by gaining state-of-the-art practices; and


  • Moving portions of IT "off the books," thereby turning a fixed expense into a variable expense.


Related Links

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InformationWeek: IT Services


Each of these objectives has an enormous impact on outsourcing strategy, and the types of projects that should be chosen, as well as vendor selection. For example, an objective of freeing internal IT resources for other assignments implies being able to clearly isolate and transfer nonstrategic work efforts, and places a premium on choosing a low cost, operationally efficient provider. In contrast, reducing time to market requires a short transition, high resource availability, and excellent project management.

Internal Capabilities
What are the strengths and weaknesses of your IT organization? Outsourcing should complement and take advantage of your organization's strengths, while compensating for its weaknesses.

It's difficult, but critical, to be totally objective in making this evaluation. What your organization likes and wants to do isn't necessarily what it's best at doing. In addition, your organization's capabilities will determine which types of outsourcing engagements are more likely to be successful. For example, an IT organization with weak processes should defer to its outsourcing partner on standards and practices; otherwise it will significantly degrade partner performance. Inexperienced IT organizations should start simply, and move to more complex arrangements as they gain outsourcing maturity.

Internal Constraints
What constraints will your company impose on an outsourcing arrangement? All too often, companies choose an aggressive outsourcing objective without considering the roadblocks they impose that will prevent the attainment of that objective. For example, one company was unwilling to consider layoffs, use of offshore resources, or outsourcing of mission-critical applications, yet it wanted cost cutting as its primary objective. Predictably, management was tremendously disappointed with the limited savings identified in vendor proposals.

Key constraints that affect the choice and viability of outsourcing arrangements include:

  • Personnel restrictions, such as union contracts or "no layoff" policies;


  • Regulatory restrictions, such as data-privacy laws;


  • Company culture, such as user expectations on response time and IT "face time"; and


  • Business restrictions, including trade-secret protections and disaster-recovery requirements.

Service-Provider Capabilities
Choosing the right outsourcing partner is a large topic in its own right, but this task is significantly eased if the considerations discussed above are well understood. Organizational objectives, internal capabilities, and internal constraints drive vendor-selection criteria such as governance and skill requirements, cost structures, and acceptable locations. If your organization is seeking a quick, low-cost solution to implement a small development project, it will need very different provider capabilities than if the goal is to transfer responsibility for a service level-based, 200-person, mission-critical maintenance and support team. Some important considerations are:

  • Contractual flexibility;


  • Experience in handling the desired type of engagement;


  • Size and depth of the provider's resource pool;


  • Strength of methodologies, processes, and project-management capabilities; and


  • Quality of references.

Drive Business Value
Outsourcing is a flexible tool that can address a variety of business objectives as long as it's implemented properly. Resist the temptation to jump into vendor selection before fully understanding all of your internal considerations. Addressing these considerations first will ensure that your organization selects the right projects, vendor, and type of outsourcing engagement to successfully meet its desired objectives.

-- Ian Hayes

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