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Five ways to avoid outsourcing blunders

Date

Sylvia Pennington

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Trust... outsourcing is attractive but has its challenges.

Trust... outsourcing is attractive but has its challenges.

Paying someone else less to do a better job: that's the premise that makes outsourcing of any service or task so popular.

In the information and communications technology sector alone, outsourcing is a $US251 billion industry, according to Gartner's latest reckoning.

Some Australian companies are now fourth-generation customers of IT outsourcing companies and sophisticated proponents of the model. Substantial savings on offer in the emerging cloud computing sphere are encouraging others to consider it.

Reaping the benefits of an IT outsourcing deal, however, isn't as simple as signing on the line.

IT Pro asked industry experts to share their top tips on how to avoid the high-tech equivalent of a bad marriage and costly divorce:

1. Don't fixate on the bottom line

Outsourcing contracts are predicated on cost savings but it's a mistake to focus too hard on screwing suppliers down to rock-bottom level. You might get a cheaper price, says Gartner research vice-president Jim Longwood, but it will come with inflexible conditions and minimal service levels. Suppliers who are struggling to break even have no incentive to lift their game and will look to cut corners where they can.

"Delays are inevitable with lower costs," agrees Dimension Data IT outsourcing general manager Haydn Faltyn.

"You want the supplier to be motivated and keen to deliver, and they won't be if they're not making any money on the deal. You want them to be keen to keep investing in technology and resources."

2. What's going to work? Teamwork

Set and forget once you've signed on the line? Not if you want the union to be long and happy and the fights fair and swiftly resolved.

Issues have the potential to escalate much faster on outsourcing deals where the parties have underinvested in relationship management. Insisting the vendor supplies a proficient and dedicated troubleshooter is crucial, says Intelligent Business Research Services (IBRS) adviser Alan Hansell.

"When a major incident occurs, the client's senior management team needs immediate access to an account manager who has the delegation to negotiate a solution or can bring the provider's CEO into the negotiations," he says.

3. Hard yards up front

Moving to an IT outsourcing model or a new supplier is a major change in modus operandi for most companies. You're in it together for the long haul, and it will be a longer haul if things get off on the wrong foot, Faltyn says.

Lots of on-the-ground presence from both parties in the first few months should ensure a smooth transition.

"Good project management at this point can make all the difference," Faltyn says. "You're trying to embed the customer's DNA into your business and bring your own best practice to the deal."

4. 50 shades of co-operation

Finding the equilibrium where trust is countered by power is difficult. Outsourcing clients will achieve optimum results when they strike this balance, Longwood says.

So it's vital to ensure penalties for non-performance are significant.

If they're too low, it can be cheaper for suppliers to continue paying them rather than addressing issues, he suggests. Whereas a 10-20 per cent hit to the monthly fee will ensure problems are swiftly remedied.

5. Bend with the wind

It's not a marriage for life – or a short-term fling. Determining the optimum length for an outsourcing contract can be tricky. Longer-term deals couple the promise of greater savings with the risk of being locked in too long with a supplier whose dedication may wane. Conversely, chopping and changing means high switching costs and associated business disruption.

Rolling contracts with a base of three or four years are the answer for many, Longwood says. Flexible terms and conditions allowing the parties to part ways if circumstances change should also be included in the deal.

Have you been involved in an outsourcing deal that's gone very well, or a messy divorce when it hasn't? Share your stories with us.

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20 comments

  • No one ever asked me or anyone I know on the subject of outsourcing. It was alwayts the headquarters ( US or Western Europe) that made the decisions on such matters.

    Commenter
    tarzan
    Location
    NSW
    Date and time
    August 24, 2012, 12:47PM
    • "Decisions made of the golf course" is how I describe them.

      Often "decisions made on overseas golf courses" in the case you describe where a foreign head office directs it.

      Commenter
      Nathan
      Location
      Sydney
      Date and time
      August 27, 2012, 10:44AM
  • I have worked for many outsourcing firms, it is good when your small 1-20, but when your looking at larger organisations it's best to have someone internal, someone or even two that knows the system in and out, problems with outsourcing is that you end up being a number rather than having that "quick response"

    Don't get stuck with remote support, and having to pay $120-160per hour to a tech offsite, where you can get a good knowladgeable tech onsite for around the same price (if not cheaper)

    They will always be doing other work on other customers while fixing your problem, and not focusing on just you, or expect a 4hour turn around if you are one of the unlucky ones.

    If you still decide to go through an outsourced firm make sure you have them sign an NDA as you don't want your data going walk abouts :)

    Commenter
    A-Z
    Location
    Sydney
    Date and time
    August 24, 2012, 1:31PM
    • Outsourcing, cheap labour and cheap quality that requires additional re-work. Not worth the effort overall. It drags down productivity.
      Justin

      Commenter
      JustinSofo
      Date and time
      August 24, 2012, 4:41PM
      • "Paying someone else less to do a better job"

        An interesting opening comment. In my experience, it's been the exact opposite. I've seen companies pay a fortune for absolute rubbish, when they could have hired their own development team for far less and got a much better product.

        Commenter
        Bob
        Date and time
        August 24, 2012, 7:07PM
        • I outsourced the programming of my app Animals Ahoy to a development firm in India. Maybe I got lucky, but they were courteous, professional, delivered on time and on budget. I found these tips extremely helpful:

          1) Do your due diligence. It pays to do your research, identify the things that are important for you, send out multiple requests for quotation and screen them against your requirements. Always look for firms that can provide client references.

          2) Have a comprehensive specification document. This is the bible against which delivery should be compared. Ideally it should comprise part of your contract with the service provider. There's a fine line between specifying too much and not allowing yourself room to move in case things change, but in general, specifying more (especially when you are dealing with non-native English speakers) is better than specifying less.

          3) Outsource on a project basis. It's not always possible, but if you can outsource specific projects it is much easier to define exactly what you expect to be delivered, how long it should take and how much it should cost (see below). Open-ended service agreements pass more risk back to you.

          4) Agree on a fixed fee and fixed deadline. Any work on an hourly basis passes most of the risk back to you, even with tight Service Level Agreements. After all, if you specify exactly what you want, a good service provider should be able to tell you how long and how much it will take to deliver.

          5) Maintain constant communication. I speak to my programmers every single day. Even a minor issue not identified and addressed immediately can have large implications in future. And always remember: cost overruns are far easier to control than time overruns. You can never get hours back.

          Commenter
          George Argy
          Date and time
          August 24, 2012, 8:23PM
          • So you replace a team that can work on their own with one that requires micromanagement?

            Commenter
            Nathan
            Location
            Sydney
            Date and time
            August 27, 2012, 10:56AM
          • Do you really trust your external parties with your data?

            I sure as hell would not trust any outsourced provider with my data, all help-desk staff usually have access to all your email, financial data, the rest of company data.

            Yes your paying someone money in house but at least you can expect your questions to be answered in English and someone to fix it right there and then.

            Commenter
            A-Z
            Date and time
            August 28, 2012, 4:09PM
        • We outsourced all our IT & Marketing. We now get much better results and pay outsource staff about A$400 per month per person, no sick leave, no holiday pay, no wage disputes, no PAYG, No coffee/toilet brakes, no office politics, no hassle, no hiring office space and equipment… need I go on? . We had been paying in-house IT & Marketing $6000+ per month, per person. All the money saved equals extra profit and a good night’s sleep.

          Any business that can outsource should outsource or have their heads read. Or just go broke.

          Commenter
          ShopOnline
          Location
          Australia
          Date and time
          August 24, 2012, 8:52PM
          • 100% agree on what A-Z said. Out sourcing is for companies run by accountants because they are too dumb to run it themselves.

            Commenter
            Mark
            Location
            Sydney
            Date and time
            August 25, 2012, 11:03AM

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