Strategic CIO // IT Strategy
News
8/25/2014
09:06 AM
Connect Directly
LinkedIn
Twitter
Google+
RSS
E-Mail
100%
0%

4 Outsourcing Mistakes Companies Still Make

Control freaks, blame games, and other misguided attempts at building a better business through IT outsourcing.

There's still no script for the Great American IT outsourcing project. But today's most common outsourcing pitfalls have less to do with technology and everything to do with relationships and communication. Or lack thereof.

"Both companies have to rise to the occasion to make it work," says Romi Mahajan, president of marketing consulting firm, the KKM Group, which outsources some of its IT operations.

[GE Capital looks to hire more IT employees and reduce outsourcing for strategic work. Read GE Capital CIO: Outsourcing Went Too Far.]

Nevertheless, communication breakdowns and finger pointing frequently derail even the best-laid outsourcing plans. Here are four missteps to avoid.

1. You play the blame game
Whether onshoring in Kansas City or offshoring in India, outsourcing is a relationship. If communication is poor or scarce and blame is passed around, you won't form a lasting business relationship.

Mahajan, who will be a panelist at a session at Interop New York (Sept. 29 – Oct. 3) called "Outsourcing, Virtualization and Cloud Computing - A Sign of the Broken Relationship Between IT and The Business?," gets to see outsourcing from both sides of the fence. He's an advisor to India-based outsourcer Advaiya Solutions, as well as president of KKM Group.

Mahajan notes that complex projects, such as a CRM implementation, can run into big trouble over a minor technical glitch or a miscommunication between people.

"The customer blames the offshore company for overpromising, and a routine issue then becomes a mountain of a problem," he says. "I see this kind of 'us versus them' thinking a lot. It delays projects for months."

2. You focus on pay rates over results
Companies outsourcing IT resources often fixate on getting the lowest hourly rate without seeing the big picture, says Forrester principal analyst Liz Herbert. They should always ask: What is the overall pyramid -- are we getting low rates but a huge team?

Outsourcer A, for example, could have rates of $100 per hour, but staff the project with lots and lots of junior, offshore talent with limited experience. Outsourcer B could have rates of $200 per hour, and staff the project with one-third the number of workers as Outsourcer A but use more experienced people.

3. You're a control freak
Companies should be careful not to micromanage. The whole point of choosing an outsourcer is for IT skills and expertise, but too many companies squash efficiencies by over-dictating how a project should run, says Herbert.

For instance, a company contracts with an outsourcer for SAP support on systems used to run a manufacturing plant. The real goal of the project is to improve plant output. However, if the company micromanages the specific technologies and SLAs, it'll lose out on the outsourcer bringing in its own ideas to help reach the real business goal: plant production.

Outsourcing pricing models commonly use the concept of full-time equivalents (FTEs), which measures how many full-time workers are needed to perform tasks. But Herbert says Forrester research shows that if a company moves from an FTE-based approach to one where the outsourcer manages the resources according to what it thinks is best throughout the project, the client can save 20% to 30% in most cases.

"The client rarely has the right expertise to know exactly what mix and how many FTEs they need -- and, of course, this changes over time."

And having SLAs that are not aligned with business goals can lead to troubling scenarios where the outsourcer is technically achieving all the SLAs but the client is not getting business results. "It's a case of 'all the SLAs are green' but our business goal is red," says Herbert.

4. You think you can outsource your whole brain
However, there's a danger in straying too far from the control freak. Mahajan says too many companies think their job is done just because they've signed an outsourcing contract -- they assume the outsourcer is a mind reader and give it too much leeway.

"It's almost impossible to convey 100% the desired outcome of an IT outsourcing project," says Mahajan. "Only the company knows exactly what it wants to achieve. Don't think the outsourcer will do all the thinking for you."

Business goals can be moving targets, and if companies don't keep explaining those goals throughout the process, the relationship will sour fast. 

The mistake of "outsourcing your brain" can signal poor planning as well as leadership problems within the company, says Michele Chubirka, senior security architect at Packet Pushers, a popular podcast for networking pros.

"If you're not dealing with your own conflicts between IT and the business, outsourcing will not fix them," Chubirka says. "An outsourcer should always provide expertise that you don't have in-house -- period."

(Chubirka will also be on the Interop New York panel with Mahajan.)

Indian outsourcer Advaiya (where Mahajan serves as an advisor) dealt with such a conundrum when it developed an entire technical framework for several hundreds of thousands of dollars for a well-known tech vendor. The vendor decided it didn't want to use the framework but didn't communicate that to Advaiya.

"We did all this work and the vendor didn't want to pay at the end, but they didn't update our team along the way," Mahajan says. "We were working in a vacuum."

In its ninth year, Interop New York (Sept. 29 to Oct. 3) is the premier event for the Northeast IT market. Strongly represented vertical industries include financial services, government, and education. Join more than 5,000 attendees to learn about IT leadership, cloud, collaboration, infrastructure, mobility, risk management and security, and SDN, as well as explore 125 exhibitors' offerings. Register with Discount Code MPIWK to save $200 off Total Access & Conference Passes.

Shane O'Neill is Managing Editor for InformationWeek. Prior to joining InformationWeek, he served in various roles at CIO.com, most notably as assistant managing editor and senior writer covering Microsoft. He has also been an editor and writer at eWeek and TechTarget. ... View Full Bio

Comment  | 
Print  | 
More Insights
Comments
Newest First  |  Oldest First  |  Threaded View
Page 1 / 3   >   >>
jjobe323
50%
50%
jjobe323,
User Rank: Apprentice
9/2/2014 | 8:06:13 AM
Outsourcing possibilities are increased through proper communication
"Either way, companies should not forget why they need to outsource."  We outsource because our fearless leader has decreed any job we need done that someone else advertises in the Yellow Pages shall be outsourced.  This has lead to a 70% reduction in 'regular' employees, & an as-yet inestimable cost in the commonly sneered-at concept of 'institutional knowledge'.

"We solicit outsourcing because there are times when we need extra work force for things we are dead sure we cannot accomplish and in situations that doesn't help adding the extra staff on our payroll."  Over half of the outsourced work is contracted to a single company which a) fills several staff augmentation position in this business area already, b) is owned & operated by a person who used to work for the organization [i.e., was around when the current masters were serfs], & c) acquired over 50% of its staff from people who used to work in this organization.  While there may be no collusion or kick-backs, it seems a bit too cozy an arrangement.  The APPEARANCE of impropriety, after all . . .

"Companies should thus ensure that they hire the right people and for the right reasons, and because these reasons can change, consistent communication between the two parties is paramount."  For those of us who still work as employees vs. staff augmentation, it looks a lot like there's some sort of quid pro quo between our organization & the seemingly overwhelming favourite outsource company management prefers.  Yes, the bids are lower than other companies, but the deliverables are inferior, require massive expenditures in resources to repair or even implement, & the favourite outsource company gets ever fatter.
jjobe323
50%
50%
jjobe323,
User Rank: Apprentice
9/2/2014 | 7:46:25 AM
2. You focus on pay rates over results
Amen, Sibling.  (Not taking anything for granted even though you include a picture.)

It has been our unfortunate fate to be the port-o-potty clean-up crew.
SunitaT0
50%
50%
SunitaT0,
User Rank: Ninja
8/31/2014 | 2:40:19 PM
Re: On the subject of control freaks . . .
Highly skilled employees are easily found but they are not compensated well in terms of western economy, and not just that, the time difference and possible miscommunication creates a whole plethora of problems for employees and outsourcing managers alike.
shamika
50%
50%
shamika,
User Rank: Ninja
8/31/2014 | 7:55:45 AM
contingency
Well what do you all think about keeping the main business place as the contingency site
shamika
50%
50%
shamika,
User Rank: Ninja
8/31/2014 | 7:53:59 AM
Re: Pay rates and potential
@ SachinEE I have seen most of the outsourced work is directed to the south Asian countries. I believe it is mainly because of the low labor charges.
shamika
50%
50%
shamika,
User Rank: Ninja
8/31/2014 | 7:51:04 AM
Re: On the subject of control freaks . . .
While outsourcing takes place it is also important to look in to aspects such as; highly skilled employees, people with specialized knowledge, ability to perform highly repetitive tasks.
shamika
50%
50%
shamika,
User Rank: Ninja
8/31/2014 | 7:48:40 AM
Re: On the subject of control freaks . . .
In my opinion, more small businesses are outsourcing tasks these days because technology has advanced to the point of professionals being able to work from anywhere in the world, coupled with the availability and accessibility of extremely qualified professionals who have decided or been forced to leave the corporate world, for example  virtual executive assistants, marketing directors, graphic designers, transcriptionists, paralegals, web designers, HR consultants, bookkeepers, PR directors, IT specialists are some of the main areas.
zerox203
100%
0%
zerox203,
User Rank: Ninja
8/30/2014 | 11:14:57 PM
Re: Outsourcing Mistakes
The funny thing about all this is, ''Outsourcing" is not (or should not be) a buzzword, a dirty word, or any other kind of special word at this point. It's a standard practice that's been around forever - it ought to be well understood, and not viewed as some foreign, inexplicable process by IT managers. Yet, you're exactly right, Shane - these seemingly obvious mistakes still seem all too common at companies both large and small. Do we really still need to tell trained professionals that they need to communicate their needs with their business partners (or risk failure!),  just because we're dealing with outsourcing? Apparently, we do.

There's no doubt that there's plenty of room for discussion on best practices when it comes to outsourcing, because it's a complex area.  At the same time, though, there ought to be a certain base level of competency that can be expected of managers on the topic... or they should not be employed in the first place. Now, in fairness, this applies to the managers on the other end of the outsourcing equation  (foreign or not) as well, right? You shouldn't need a memo to tell you that your client would like profits to go up and cost to go down, that's a lame excuse. If you're going to advertise that you can provide someone the same service as a competitor at a better price, then you should back up that claim.
yalanand
100%
0%
yalanand,
User Rank: Ninja
8/30/2014 | 2:21:30 PM
Outsourcing possibilities are increased through proper communication
The observation in this post by Shane O'Neill underlines just how costly outsourcing mistakes can be, whether the errors are committed by the client or the outsourcer. To gain from the flexibility accorded by outsourcing, companies should never ignore the outsourcer and they should maintain effective communication for a mutually beneficial relationship.

Either way, companies should not forget why they need to outsource.We solicit outsourcing because there are times when we need extra work force for things we are dead sure we cannot accomplish and in situations that doesn't help adding the extra staff on our payroll. Companies should thus ensure that they hire the right people and for the right reasons, and because these reasons can change, consistent communication between the two parties is paramount.
KarthikS742
50%
50%
KarthikS742,
User Rank: Apprentice
8/29/2014 | 2:40:54 PM
More frequent communication around Business goals
"Business goals can be moving targets, and if companies don't keep explaining those goals throughout the process, the relationship will sour fast. "

In my experience - this particular point cannot be stressed enough. The IT vendor makes several investments in terms of having a business savvy engagement management team , a team that not only provides IT operations management expertise and technology consulting input but also an understanding of the sector or business. However in some cases those investments aren't leveraged well because of inadequate attention given to this aspect. If a client is interested in the vendor helping it meet business results, it should emphasise that the engagement leaders have some understanding of their business and also invest some of its time in explaining its business goals driving the IT initiative and giving updates on those goals from time to time. 
Page 1 / 3   >   >>
Register for InformationWeek Newsletters
White Papers
Current Issue
InformationWeek Tech Digest, Nov. 10, 2014
Just 30% of respondents to our new survey say their companies are very or extremely effective at identifying critical data and analyzing it to make decisions, down from 42% in 2013. What gives?
Video
Slideshows
Twitter Feed
InformationWeek Radio
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.