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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

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Shane M. O'Neill
Shane M. O'Neill,
User Rank: Author
8/25/2014 | 6:10:01 PM
Re: Pricing
Yes Lorna, the analysts I talked to say hourly pay rate is inefficient, and they encourage pay per job or based on certain results. Or maybe they'll do a lower hourly rate, with a big bonus if the outsourcer reaches a goal (i.e. 100% Web uptime during a retailer's busy season). But this is easier said than done because business outcomes are hard to predict. So companies fall back on hourly rates because it's the standard.
User Rank: Author
8/25/2014 | 2:45:59 PM
Re: Outsourcers
"I'm not sure people are built to do the whole thing anymore because, like the @jjobe said, you just don't see it all outside the smaller companies. Everybody has to be a specialist today." Does this ring true to you too, readers? What happened to rotating people to broaden their skill sets? Are CIOs talking about it but not doing it?
User Rank: Author
8/25/2014 | 2:15:56 PM
Re: Outsourcers
Terry makes some good points here re agile. This whole conversation wouldn't happen at a company like Netflix, which has essentially erased the wall between IT and biz ops. Most companies are not anywhere near that big of a culture leap, however.
User Rank: Author
8/25/2014 | 11:58:56 AM
"If you're not dealing with your own conflicts between IT and the business, outsourcing will not fix them." This is an important point that Michelle raises. If anything, the tensions can get worse when business expectations are not met and IT shifts the blame to the outsourcer.
Lorna Garey
Lorna Garey,
User Rank: Author
8/25/2014 | 11:57:52 AM
Shane, In terms of item #2, cost vs. quality. Is the answer to price per job vs. per hour? Say, $5,000 for [complete job] with additions only if the customer expands the scope. That way if the outsourcer takes longer than it estimated, that doesn't hit IT's budget.
User Rank: Author
8/25/2014 | 11:14:25 AM
Re: On the subject of control freaks . . .
All observations are spot on, though I particularly like, "Don't think the outsourcer will do all the thinking for you."
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