Talk to any user and you will always get the same response. Most see their outsourcing deals as failures but are completely powerless to change them.
Speaking at the recent Dataquest Service Trends conference in San Francisco, the re- search group found that users were dissatisfied with their outsourcing suppliers, but the dissatisfaction was not enough to slow down the momentum in the booming outsourcing market (PC Dealer, 23 April).
Rita Terdiman, research director at the Gartner Group, said: ?We?re starting to sense unhappiness in outsourcing land. It won?t lead to a shift away from the trend to outsource ? users need outsourcing too much for that ? but the users may fight back with the threat of contract renegotiation.?
Terdiman predicted that more than half of the outsourcing deals signed to date will not be considered successful by senior management because they have not delivered the expected increases in IT effectiveness or business value. She cited a survey of 1,400 chief information officers across the globe, conducted by management consultancy Deloitte & Touche, which confirmed the level of dissatisfaction.
?The actual benefits of outsourcing fell short of expectations in every region of the world surveyed,? she said.
The area where directors had expected to see the biggest improvement was vendor sophistication and expertise, which was named by 60 per cent of those surveyed. But only 35 per cent claimed to have actually achieved this benefit. Outsourcing had fallen short of expectations in the areas of quality of delivery and cost reduction.
Terdiman warned of storm clouds on the outsourcing horizon as users become increasingly vocal about their gripes. ?There now exists a sizeable body of experience about how easy or difficult the management of an outsourcing relationship is,? she said. ?This is not at all reassuring. Indeed, recently the number of complaints expressed by customers has increased dramatically.?
But users have to accept their share of responsibility for the presumed failure of outsourcing deals. Vendors often oversell the deal, she said. ?Users allow this to happen and end up with unrealistic expectations regarding the deal. Customers do not yet realise or accept that the management of outsourcing relationships takes more time and effort than they had anticipated when deciding how to structure the deal.?
There is a simple conclusion to draw from the experiences of corporates which have outsourced. ?The degree of satisfaction reported by users seems to be tied to initial expectations,? said Terdiman. ?The more realistic the initial expectations, the more successful the deals.?
Terdiman said corporates are forced to outsource to reduce costs, but she also pointed out that organisations do not have enough resources to successfully look after their IT needs.
Having decided to outsource, companies need to determine how extensive this process will be and examine ways of structuring the deal for maximum efficiency. Terdiman dismissed the notion that outsourcing is an all-or-nothing activity. ?Most deals involve outsourcing one or more individual IT functions. We expect users to selectively outsource additional IT functions or bring certain functions back in-house each year as circumstances dictate.?
The opportunistic outsourcing approach is dictated by external events, such as the introduction of Windows 95 and the consequent need for trained staff to manage the upgrade. The year 2000 conversion issue is a classic example of this phenomenon, said Terdiman, and will result in a flurry of ousourcing deals as firms struggle to meet the deadline with too few skilled personnel.
Terdiman identified two models of outsourcing deal: selective and strategic. The selective model is the norm, typically driven by a tactical business need such as a need to downsize or restructure. Such deals are put in place by IT management and are usually between two and five years in duration.
Strategic megadeals are driven by senior business management, cost more than $1 billion, last for anything up to 10 years and are driven by major corporate events, such as re-engineering, mergers or acquisitions. Terdiman cited two examples of such megadeals ? JP Morgan and DuPont ? to illustrate different ways users can structure deals to maximise their benefit.
In the case of JP Morgan, the bank signed a $2 billion, seven-year deal in which Computer Sciences (CSC) is nominally prime contractor, but there are three other companies tied up in the contract as well.
All four suppliers share a collective responsibility to JP Mor-gan: if one area falls short, all the suppliers are expected to take the hit, thus making them to work together. There is in practice a fifth partner in this deal, as JP Morgan has elected to play an active role in setting the strategic direction for IT, enabling it to retain tight control over its infrastructure.
Over at DuPont, a $4 billion, 10-year deal has been divided between CSC and Andersen Consulting, with the former winning the lion?s share of the business. DuPont signed separate agreements with the two companies to provide a specific set of defined services.
But by 2000, Gartner Group expects at least 30 per cent of outsourcing megadeals to be user driven with one supplier selected as prime contractor. ?This approach takes away some of the management headache. But some suppliers don?t want to do that,? warned Terdiman.
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