Outsourcing Best Practices

The recent outsourcing environment has witnessed an interesting change in dynamics. Clients are more frequently taking the initiative to examine all parts of their IS infrastructure; often on a global basis. They are pushing vendors to provide total integrated “end to end” methods utilizing a variety of discrete functions. The current demand is for maximized savings, increased productivity and flexible contract solutions. This has created projects with incredible complexity; requiring vendors to provide a wider set of skills to win contract awards. This is stressing the large vendor’s ability to produce at committed service levels.

Outsourcing vendors have traditionally been best at performing on-going “commodity -like” tasks such as data center operations, that provide platform support. This has allowed them to leverage existing resources and maximize profits. The commodity – like outsourceable functions such as messaging, imaging, training, maintenance and hardware or software procurement, either have low profit margins or require a high level of specialized expertise. None mirror the old data center paradigm of leveraging redundancy.

Vendors, in their search for higher margins and greater opportunities, are increasingly looking at solutions oriented or strategic efforts. These projects often occur around offshore and agile application development as well as business process re-engineering.

Demand for new technologies like Saas, Iaas, server virtualization and cloud services are forcing top providers to offer “bleeding edge” services; always a costly proposition; especially in the “ramp up stage”.

How have vendors responded to this increased competitive pressure? The answer often lies with the concept of “best of breed” or “best-in-class”. It has always been traditional for vendors to tap into internal resources enterprise wide to fulfill outside obligations. Today, the larger firms are compartmentalizing and off-loading entire functions to internal units that often have little synergy. It’s no longer unique for an outsourced client to see data center operations performed by a southeastern center, network operations handled by a Texas megacenter, applications development and legacy maintenance by several offshore and near shore providers

Another variation of this theme occurs when a large vendor “subs” out some of the awarded function to an outside firm. We have seen this occur with data center personnel, on specialized applications projects and with various components of network services like Help Desk, LAN/WAN implementation and PC maintenance. This happened recently at a large utility, which quickly found that its large vendor was unable to comply with contract terms and they “requested” that they look to a specialized network-integrator to fill up to 15 positions; using contractors.

In both variations the client is confronted with the paradox that an attempt to maximize control by working with one vendor, or in effect “one stop shopping”, may actually lead to a potential reduction of control and possibly lower service levels. It requires the customer to “manage” the vendor relationship much more closely. While “best of breed” certainly is a legitimate concept; one wonders if all clients are informed of the approach prior to migration planning or actual implementation. Most large national vendors would claim such an environment is simply asset management of either internal or external resources available to them. They would also argue that a consortium of external “best of breed” vendors is unwieldy, difficult to control and sets up a potential for on-going disputes arbitration.

Why then, with such assumptions, do they engage in virtually the same practice? The answer is simply that most vendors are caught in an asset management pinch in fulfilling increasing contracts as they try to manage their internal head count in a tough economic environment. They are being pushed to provide more specific solution oriented services with over committed staffs that are straining to learn and apply the new technologies.

What is fascinating about this scenario is that most customers aren’t even aware that they face such issues. Certainly, it’s not in the vendor’s best short term interest to create an air of uncertainty regarding their ability to deliver on contracted terms.

Yet with more specific smaller projects being outsourced or contemplated, one should be proactive to create the desired “win-win” situation. In building a solution to this problem, it is imperative to engage in a thorough and contemplative process of developing a good business case for outsourcing. We strongly suggest our clients do a base case analysis of their current environment; including the development of a comprehensive scope of work and defined service level commitments. They must determine, through analysis of the corporate business plan, what in IS is strategic and what is not. At this point; when one has clearly defined what is to be accomplished and by whom, then you can decide whether to outsource, move to an internal shared services environment, return the function to the business unit or redefine the central IS role.

If the decision is to outsource or partner, it is strongly suggested clients go through a structured process that includes the creation of an overall project plan, a human resources strategy, a well throughout communication plan, a comprehensive “Request for Proposal,” a formal bid process including vendor evaluation modeling, detailed contract negotiations and contract creation and the development of an extremely detailed plan of implementation.

The process itself, if done correctly, should help solve the best -of -breed vs. one-stop shopping dilemma. Clients can create RFP’s that have modular characteristics, providing for the inclusion of both large generalists and smaller niche specialists. All are held to the same decision criteria. Under this methodology, one can compare all the large vendors against each other as well as against a “cluster” of specialists who you can group together into an ad-hoc generalist. Now it is easier to compare the merits of each approach, look at the trade-offs and make a decision.

With this set of knowledge, customers have the option of awarding to a large global provider but writing a modular contract that allows them to reopen specific utility or commodity like pieces of the enterprise. This sets up an ongoing process where the vendor is constantly being measured against individual quality specialists, who can be brought in at certain milestone dates in the relationship. Another option that the process creates is to alert winning vendors in advance that they may have to partner with certain smaller companies. It becomes their job to “manage” a small group of “best-of-class” providers within the context of the larger contract. Finally, some may wish to award the contract or pieces of it simply to any company that proves in the bidding process that it can provide the best service.

Ultimately what is at stake here is a company’s philosophy about controlling its own destiny. In awarding to a large well known generalist you must be made aware in advance of how they plan to fulfill contractual commitments. It is clear that this requires substantially more upfront due diligence, but should pay enormous rewards over the long haul.

More and more over the past decade customers look to their internal sourcing groups to handle the bidding process. While these groups have undeniably become very sophisticated, their skills sets and business emphasis remain controlling head count and cost cutting. It simply is not in the DNA of a typical Sourcing Group to integrate strategic alternatives, measure business customer needs with the overall IT strategy or do due diligence on competing new technologies with the prospective sourcing events.

Simply put, Best Practices in Sourcing does not always coincide with Best Practices in IT Procurement. Those companies, who understand or are faced with that conundrum, often turn to external experts, such as TBI who can apply a wider, and offer more experienced view to the examination of using the outsourcing tactic.

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