Here you read … why false expectations of outsourcing usually have fatal consequences; which problems are most common in outsourcing relationships; to what extent customers may be partly to blame for the failure; what the transparency of the internal performance contributes to the success of the outsourcing project.
The external assignment of IT services is still in vogue. This can be proven by various market studies. More than 50 percent of CIOs have IT outsourcing in their IT strategy. Forecasts of the market volume also underline this development; They predict a volume of more than 15 billion euros for the German IT outsourcing market by 2006. That would correspond to a growth of around eleven percent – all the more remarkable, as already 37 percent of the surveyed companies have outsourced at least parts of the IT to an external IT service provider.
However, companies often do not achieve the goals associated with IT outsourcing. In individual cases, even entire projects fail and must be reversed. Studies suggest that around a quarter of all outsourcing contracts in the first three years lead to disputes with the vendor because the originally set goals were missed. With an extended horizon of five years, this affects every second contract.
Simply stating that helps a little. It is more interesting to look at the reasons that led to this situation. From this, measures can be derived for reducing risk and tackling it at an early stage. Under the title “Calling a Change in the Outsourcing Market”, Deloitte examined the motivations and requirements of outsourcing customers. According to the study, in 70 percent of cases, intentional cost reductions are the main driver of outsourcing. However, 38 percent of the study participants experienced a nasty surprise: they were faced with additional costs that they had assumed were already included in the contract.
The second most common reasons for outsourcing were quality improvement and access to best practices. 57 percent of respondents cited this aspect. Also, this hope was disappointed in many cases: 31 percent of the participants made the experience that the service provider acted complacently once the ink was dry under the contract.
Asked about the main problems in outsourcing relationships, 59 percent of the study respondents said that they are mainly looking for undelivered or wrongly provided services. From the customer’s point of view, this stumbling block is therefore much more serious than a cost overrun (15 percent of the entries).
However, companies may also have to ask themselves what they are to blame for the failure of an IT outsourcing project: the essential prerequisite for success is the “maturity level” of the client. Many companies are vigorously pursuing the outsourcing path, even heading for more complicated constructs such as multi-provider sourcing, even though they are not yet fully organized. Without transparency about the internal IT service provision and the requirements of the IT customers, they are having a hard time with IT outsourcing. This fact is obvious, but obviously deters only a few from an outsourcing project.
However, maturity alone is not a guarantee for successful outsourcing. To understand what matters, it is helpful to look at the outsourcing process from start to finish. This allows the risks in the individual phases to be identified and corresponding countermeasures to be planned and initiated.
Phase I: Sourcing strategy and evaluation.
Here it is important to define the objectives, scope of coverage and provider portfolio. Often there are no clear ideas about the outsourcing goals and the IT core competences. Therefore, these issues must be discussed with all major stakeholders. At this stage, the company runs the risk of limiting or even losing its flexibility by excluding alternative options without real evaluation. Choosing a sourcing model that suits the respective company means urgently: Evaluating all alternatives – taking into account the current sourcing portfolio and the expected development.
Phase II: Call for tender and preparation of the business case.
A high risk is due to the lack of quality of supply. This aspect is partly due to the unclear definition of objectives, but also to the mentioned lack of transparency regarding the structures of the internal IT service provision and the requirements of the departments. The outsourcing client simply assumes that an external IT provider knows more about providing IT services than he does. That’s generally true too. However, it is forgotten that the external information about the company-specific aspects in the IT service delivery missing. This leads to friction in the transfer of IT services to the provider. It is necessary to define exactly in the invitation to tender how the service provision is currently presented and what requirements are placed on the IT provider.
In addition, the selection process is competitive. The business case must correspond with the advertised IT services. Frequently, the bidding process requires higher performance than before – for example with regard to the hotline times in the user helpdesk. But this is often not considered in the context of internal cost analysis.
A common failure is to accept cost reductions through standardization of systems, but to disregard the project costs involved. In any case, an internal business case must be set up that contains all the cost components. Then, the providers need to be queried for an equally complete cost model that enables a cost comparison with the internal business case.
Phase III: Supplier selection and due diligence.
Here the danger lies of course in the choice of the wrong IT provider. It can have different causes. On the one hand, there is the possibility that the selection criteria do not fit the defined goals. On the other hand, the valuation process may not be defined transparently so that, for example, the individual criteria are only weighted after the actual valuation. Therefore, before the selection, the valuation model and the entire valuation process must be defined.
Particular attention should be paid here to the uniform definition and application of the rating scale. In addition, the evaluation competence must be ensured. It is advisable to select the evaluators according to their respective special topics – finance, technology, personnel, etc. Keep away from employees who are affected by a transfer of personnel because they may not be able to judge neutrally.
Here is often observed that the service provider determines the course of the negotiations and content. Instead, the client should set up a negotiation strategy and negotiation plan. The latter defines in which discussion which topics are discussed and which goals can be reached with regard to individual topics.
In any case, the internal legal department should be involved in the contract negotiations. However, if, as is often the case, they are not sufficiently familiar with the specifics of outsourcing contracts, a specialized external lawyer must be brought on board. Incidentally, it is already advisable to involve an in-house lawyer in the tendering process in order to set the course early for the contract negotiations.
Another risk is that the design of the contract is largely based on the current situation, so leaves little room for future developments – for example, in terms of quantity structures, geography, etc. -. Even if future developments are not completely predictable, the contract should be flexible.
Phase V: Transition.
After signing the contract, the company starts to transfer the IT services to the selected provider. Here, too, lurk some tricks. Perhaps key milestones in the transfer will not be met, or business-critical systems will fail. Therefore, a realistic project plan for the transfer has to be prepared in advance, in which the dependencies of individual activities and systems are taken into account. Above all, the business-critical systems must be named explicitly, and at least for their failure, a case-back plan is to be worked out. If the provider takes over part of the personnel, the HR department and works council must be involved at an early stage.