All reports say the outsourcing market is booming like never before - the annual growth rate is 37 per cent, according to ITnet. But apocryphal stories about outsourcing contracts going wrong are also on the increase. The IT industry is increasingly being tarred with the same brush as that of unscrupulous third parties which take on contracts they are unqualified or too understaffed to fulfil properly.
Tim Catling, managing consultant with PA, says there is a lot of marrying in haste and repenting at leisure. 'Outsourcing is more than just having breakfast with EDS,' he says. 'Both parties need to set up proper structured debates before jumping into contracts.' The secret of successful outsourcing for both parties is full and open consultation before anything is signed. Rob Wirzyscz of the Computer and Software Services Association says: 'It can be difficult to get companies to talk about potential problems in the early stages of discussions, but it is the only way if problems are to be avoided later.'
One problem with small and medium-sized resellers providing outsourcing services is that they can find themselves agreeing to undertake a function which they do not have the staff skills to cope with. 'It is tempting to accept the work first and look for the staff to do it later,' says one reseller.
To satisfy the increase in demand for outsourcing, resellers are either taking on specialists, retraining staff to deal with specific services, or subcontracting to freelancers. But it is hard to find high-calibre people. Wirzsycz says: 'The phenomenon of resellers outsourcing their outsourcing is becoming more common. But it is not always such a good idea as it removes the level of responsibility one step further down the line, and the customer will probably suffer.' The right staff are certainly crucial to satisfying outsourcing deals, but there are also other issues. One is the complications which can arise when new third parties take over outsourced contracts. Staff who are employed by a reseller can also find themselves working on sensitive information belonging to a client.
From the customer's point of view the benefits of outsourcing are reduced and manageable costs and flexibility. But there is often resistance against using a reseller for outsourcing services, and a preference for an outsourcing consultancy. Clients take the view that resellers are obliged to improve and optimise their use of IT, and they should not have to pay extra for the privilege. The trick, say some resellers, is to provide outsourcing in areas which are separate from the value add customers expect.
Clients are also reluctant to pass responsibility for information that is crucial to the company to outsiders which will not have the same degree of care. Discontent with this arrangement is the most common reason why companies which try outsourcing eventually take it back in-house.
Although demand may be high, the competition is fierce. Frank Lee, MD of Sema Group Consulting, says the way resellers can differentiate themselves from outsourcing agencies, which focus on operational services, is by offering management consultancy.
Lee says: 'Management consultancy adds significant value and gives a true strategic partnership with the client, unlike more traditional facilities management. It also involves far more than just getting a client to run its hardware and software at a reduced cost.'
He says the term covers the skill to manage areas such as organisation design, communication, culture change and human resources, and helping the customer get the best out of outsourcing contracts. 'Just helping the customer decide which are the best outsourcing strategies can be an outsourcing service in itself,' says Lee.
Resellers find that successful outsourcing is about managing the relationship after the contract is signed, says Ian Dewis of CSC Index' Foundation IT research organisation. Nigel Duke of City Systems agrees: 'If customers just try to parcel out their IT, it is likely to end up a costly mistake.' Duke says resellers need to be cautious about the 'wrong type of outsourcing'. This arises when clients take on an outsourcing firm to manage a legacy system, when they should replace it with more appropriate technology. 'Outsourcing firms are causing more problems by selling back to the client what it has already got and making a profit on it.' Such outsourcing can lead to higher costs, IT that is still ineffective, and even lower staff morale.
'Resellers need to make sure their customers implement strategic outsourcing,' says Duke, 'with a business perspective that will solve IT problems and give finance directors a return on investment.' If they don't, they will be creating a host of problems.
Duke says that successful outsourcing has certain key features. These include: the customer keeping a strategic internal presence; the provider accepting risk; the provider accepting all the hassles; and the provider showing awareness of business reality. By sharing the risk, says Duke, customers will be convinced outsourcing has merit.
Dewis says resellers should expect clients to renegotiate their contracts over time. 'Negotiation is not a one-off event at the time of signing, as a firm's IT requirements will change.' He believes it is inevitable that conflicts will arise. 'Outsourcers are not angels, and if the relationship is not to be poisoned it must be professionally managed.'
Robert Smith Wilson, sales and marketing director of Compass, encourages clients not to outsource if it is not cost-effective. The Compass 'evaluation of outsourcing and insourcing' service helps organisations assess whether outsourcing is the best option. 'In some cases we advise against outsourcing,' he says, 'particularly when a company's business depends on innovative IT.' It should not be assumed that economies of scale are automatic, says Smith Wilson, and resellers would be foolish to assume responsibility for something which the customer can do cheaper in-house.
Ian Robertson of Oracle UK, author of The Truth about Outsourcing, says: 'Resellers can provide real value add with outsourcing services. They can provide management and help customers maintain control.' Outsourcing can also benefit the reseller, Robertson says, by differentiating it from its competitors and sustaining its uniqueness. 'There is a huge range of activities common to most businesses, which have traditionally been carried out in-house, which a reseller with the right skills can undertake.' These include customer support, sales, IT, property, training, finance, manufacturing and development.
But he says the cost of outsourcing may be more than many firms expect. 'The true cost of buying-in services are the obvious ones of materials, labour, overhead and margin, but there are hidden costs such as warranties, distribution, education, development, inventory, tooling, premiums, insurance, transport, and the cost of maintaining quality levels.' The most persuasive argument for resellers trying to obtain outsourcing will always be cost, says Robertson, but there is a danger that market forces will make the reseller compete on price and consequently be unable to deliver a service which satisfies.
On the whole, outsourcing providers are getting it right, concludes John Willmott of Input. 'Outsourcing suppliers are beginning to out-score IT departments in a number of areas such as superior technical knowledge and better project management skills.'
Outsourcing is by definition a third-party activity, but is it something that smaller resellers should think about undertaking? Most certainly, says Mike Newman of Pacific Systems International. 'The demand for outsourcing services is the fastest-growing part of our business. Demand is outpacing our capacity to satisfy it.' Newman sees outsourcing as a natural extension of the business of reselling. 'You put in some hardware and software and then you provide the skills to run it,' he says.
But the fashion for outsourcing has waned since the 80s. These days, while the overall demand for outsourcing is increasing, many companies are pulling their non-core activity back in-house. Questions about whether computing should be considered a core activity, and is too precious to be given over to a third party, have made many corporates wary of the outsourcing providers it uses.
Certainly Newman sees the need to reassure his customers that their IT is in safe hands. 'We often start by offering to take care of something which is peripheral and a pain, such as managing their backup and archiving overnight. Or we'll offer to provide a systems watch, which we do with remote diagnostics, so save them the cost and bother of having staff on the premises at night.' Once one element of an outsourced arrangement goes well, says Newman, it is only a matter of time before Pacific Systems is offering to take over the support and care of a system all round the clock. 'A good outsource deal is when you offer a cost-effective service.' But the key to a good outsourcing deal comes down to relationships, says Newman. 'We deliver respect and confidence, and that reassures the client. We make sure we understand the issues, recruit and deploy the right staff to each client, and then project-manage the contract properly.' Outsourcing is not really an IT-specific matter, he says. It should be addressed using standard management good practice techniques.
A report from Input called 'Pricing Mechanisms in Information Systems Outsourcing' says that although the general levels of customer satisfaction with IT outsourcing are high, one area of conflict is the pricing of services.
John Willmott of Input says: 'Providers wish to implement pricing mechanisms that guarantee higher levels of profitability, but customers expect both innovation and value for money to be delivered simultaneously.' There is often a gulf, he says, between the customers' expectations of the reduction in their expenses that outsourcing will bring and the reality achieved. But the main problem is not the initial level of cost at contract startup but the clients' perception that any initial cost savings are not sustained. After a couple of years customers often think that they are not achieving value for money. This leads to a renegotiation of contracts after a couple of years, usually with the customer obtaining a reduction in cost.
Willmott says: 'Clients also think that suppliers do not share risk adequately, even when an element of risk-sharing is promoted by the vendor.' This may be caused by different perspectives of incentives and penalties which mean the customer thinks penalty clauses are necessary to ensure targets are met but to the suppliers they indicate a lack of trust.
In his book 'The Truth About Outsourcing', Oracle's Ian Robertson says the successful outsourcing partnership depends on:
- being open
- building a relationship and working together
- knowing where you stand in terms of productivity and profitability
- understanding mutual needs
- understanding mutual benefits
- sharing risk.
Resellers that are successful will be able to demonstrate:
- cultural compatibility
- continuous value add
- contract flexibility
- complementary skills.
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