Sunday, May 07, 2006

Inside Outsourcing

Outsourcing has become a way of doing business because the financial benefits are compelling. This is especially true for Information Technology which represents one of, if not the greatest costs in business.

That being said, the decision to outsource can not, and should not be based solely on financial factors. Other factors critically impact the outcomes of outsourcing and must be evaluated.

As a matter of background, I have been an IT VP and CIO. During the last 10 years I have been involved in 4 outsourcing efforts; most often inheriting them. These included:

* Systems maintenance using a noted public accounting firm
* A large development project with a major firm in India for mission-critical systems on new technology platforms
* A $300 million agreement with one of the world's largest technology companies to outsource an entire IT unction
* Development of business intelligence systems at a major cleaning products company by a leading consulting firm.

I also have experience in Europe, Asia Pacific, India, and Mexico that has helped me gain insight into different cultures and management.

In this article, I review items that in my experience, have shown to be critical factors in the success of outsourcing.

Determining Value

Financial Returns

At the highest level, the best measure for the financial value of outsourcing, is that everything being equal, can the outsourcing company do the same work for less cost?

To that end, outsourcing requires an inventory of applications, equipment, organization, and other areas to see what opportunities exist to get things done better and cheaper.

What typically occurs, is that the vendor initiates the process via top management who likes the potential benefits. That starts a subliminal clock running, along with the incumbency and pressure to get something done. The vendor then conducts an inventory. Then management, in an effort to lower IT costs, reviews the inventory, becomes arbitrary about needs, trims the inventory, and institutes limits and constraints on IT usage to lower the expense of the contract.

When this happens in outsourcing the business becomes under served for it's needs, which results in frustration, if not failure for all involved.

If your company is considering outsourcing, the best approach is to perform an inventory before opening relations with the outsourcing vendor(s).

Understanding and validating what is required to operate a business is the company's job, and contributes to the success of outsourcing. In the simplest terms, decide what you need, and then shop, much like in a bid process.

As such, the inventory should be completed with the business functions involved. The business rationale for the applications and services should be done by the business functions, and presented by them to management for approval, together with IT.

Other Returns

There are many other value points to be considered in the process of outsourcing, many of which can have financial benefits.

Evaluate if the outsourcing company has access to top talent that can be available to you. If you are transitioning staff, confirm that the new company has the expertise to improve their capabilities. If not, what are you gaining?

In one situation I managed, the new vendor placed one new person as the leader of the IT operations group. He significantly improved their qualities, morale, and performance. Moreover, his experience enabled him to lower operating costs with better processes, equipment, and services.

Evaluate if the vendor is a leader in business. Who you do business with can have the same value as the power of networking. How they are viewed in the marketplace can cast a positive or negative shadow on your company. Verify they have the means to stay in business and perform at the levels you need.

Determine if they have resources that can be available to you for other business needs. In the beginning of a relationship, IT management issues are the priority. Later, other things may occur where the outsourcing company can have tremendous, unforeseen value. In my experience, this has been true in developing vendor relationships, for acquisitions, divestitures, economies of scale, and even obtaining capital.

Operating Impacts


Despite the potential benefits from outsourcing, it is still a large, time consuming process. As such, the management team needs to determine the priority of dealing with an outsourcing effort against all other business needs.

In one experience I had, management wanted to be a vanguard for outsourcing, much like they were for the "quality" movement, and other business practices such as EVA, PVA, and CVA from the mid-1990's.

The work for those initiatives, as it was layered on the staff became their job vs. operating the company. The company, which had been unprofitable, never got profitable. It was then sold by its parent and many people became unemployed.

In another experience, the company was very profitable, but debt service from a leveraged buyout absorbed 90% of the profits. Outsourcing IT was seen as a "quick win" to lower costs, increase margins, and help save the company from bankruptcy. Instead, it was disruptive, absorbed critical resources from operating the business, and was futile. Not having enough operating capital ultimately lead to bankruptcy.

At the end of the day, the management team has to find out where has outsourcing worked and why. They need to determine what verifiable, accepted factors contributed to it working, if can work in the company and why, and then decide what to do.


Outsourcing is typically viewed as the CIO's initiative (and often, a mandate handed down to the CIO as penance for the high costs of IT).

In practice, the CIO rarely, if ever makes a major outsourcing decision. A decision of such magnitude is typically made collectively at the management roundtable (if not at the board level). As the ultimate end users, other senior managers and their organizations will be impacted.

As such, without maintaining a continued commitment and support at all levels, outsourcing doesn't work well.

Preparation for questions like the following should be addressed before an outsourcing decision is made: Is management willing to enforce the disciplines they required and agreed to? Are people at the operational levels supportive of their commitments?

If these issues and others like them are not addressed and managed effectively, resistance (often silent) starts, then grows and undermines the outsourcing effort.


In many areas of the country, a company is a legacy and representative of that area. Long standing relationships with government, with employees, and between employees are significant contributors to a company's success.

As such, outsourcing requires a culture that is open to outsiders. If a company is insular, "outsourcing" with "outsiders" will inhibit benefits from outsourcing.

Consider the following items:

Media - I would suggest that dealing with the media is one of the most critical issues related to outsourcing. How the media views and presents outsourcing will affect how stakeholders respond to outsourcing. In a recent article in the Chicago Tribune, Sears announced an IT outsourcing, but made clear that part of the criteria for choosing a provider would be assuring the benefits of the affected employees.

A proactive strategy that deals with content, distribution mechanisms, timing, addressees, responses, and unforeseen issues is vital.

Government - You will have to manage political agendas for maintaining jobs where your company does business. You will have to address where jobs will be getting done, by whom, and why. For example, using resources in India has compelling financial benefits, but there are also compelling political issues, as in Mexico and the Asia Pacific region.

The Community - The community will be concerned about the impact on job opportunities, real estate vacancies and values, corporate contributions and volunteers, and other similar issues. A strategy for managing these issues that includes community action is important.

Customers - Customers can be and are impacted. In the 12/22/03 issue of Fortune Magazine, an article on page 44 highlights companies who have outsourced customer service to offshore locations, and are losing customers due to cultural misunderstandings. As a result, they are revisiting their off-shore outsourcing strategies.

Business Relationships - Your business partners must also be recognized. Many may not like outsourcing. They may resent the fact that you are doing it, and the impact on the community. Moreover, they may not like the vendor you have chosen, have had a bad experience with that vendor, and not want to do business with them on your behalf.

Company and Vendor Match - You must also evaluate the match of style and personality of your company and the outsourcing company. People who don�t like each other don't work well together. In a situation I took over, the match was so poor, and hostile, that I had to cancel the agreement. The company culture made it extremely difficult to work with outside providers, and that had to be considered in every subsequent situation.

Background Differences - I inherited a troubled project with a manager who was not getting along with a peer in England. When I probed deeper, I found the problems, of all things, were from differences in how in "UK English" and "US English". In another company, I encountered outright racism from employees towards people from India. The location of the company, in an outlying area, and personal backgrounds in the workforce played into the situation significantly.

Employee Treatment

I've left this section until last, because in the very end, it is the affected employees who make outsourcing successful.

How they are treated is critical. What respect you show for their history in the company, and how you make that influence the outsourcing initiative is critical.

Initially, positive actions will definitely shape the view of employees who will not be affected by the outsourcing. Otherwise, they will worry for their coworkers who are their friends, and sometimes will even rally for their foes. They will fear for their own jobs and future. They will become untrusting of management and less productive.

For the affected employees, no one wants to be rejected. When a company decides to outsource, their perception becomes that their work and value to the organization isn't good. They find it even more humiliating that economics overrides their company identity, motivation, dedication, loyalty, and tenure.

They will have fear about not being retained by the outsourcing company. They will fear for their future and well-being of their family. They will be less productive. They will be untrusting. And often, their view of benefits for themselves will become clouded.

In one situation, I had 110 employees who were going to be transitioned in a total outsourcing to the outsourcing company. The company is literally one of the finest in the world with opportunities, pay, benefits, and training far beyond what they had ever received.

With the right management strategy and actions, they remained productive and subsequently realized the opportunities they had. After the transition, virtually all of them got increased pay and training, and many were promoted in recognition of their abilities and experience.

Most significantly, they became much more capable, motivated, and productive contributors to the company they were no longer employed by, but still came to work at every day.

Every bit of their company identity, motivation, dedication, and loyalty was brought forward to the benefit of both companies. Within the scope of their efforts, financial benefits were achieved.

It is the affected employees who make outsourcing successful.
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