Managing the Outsourcer Relationship

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Doing everything yourself may sound great, but it quickly becomes tedious and inefficient. So we outsource everything from pumping our water to ironing our shirts and educating our children, focusing instead on our core functions.

The same holds true in IT. Outsourcing continues to grow as a means of cutting costs, improving quality/performance, increasing flexibility, speeding project delivery and gaining access to expertise. According to Gartner Group, companies now spend more than $100 billion dollars per year on IT outsourcing.

“The biggest advantage to outsourcing is that you have immediate access to a skill set that you don’t have in-house,” says Anthony Capiello, manager of operating systems at Barnes & Noble’s (BN) Westbury, N.Y., headquarters.

BN uses contractors from Computer Associates, Inc. to implement major tech roll-outs such as installing Unicenter agents on the company’s servers. That way, he says, it takes the company very little time to get up to speed on technology.

But outsourcing also has a downside. Horror stories abound: Vendor bankruptcy; projects overschedule/overbudget or failing; companies stuck with expensive, long-term contracts that no longer match their business needs; and more.

So what does it take to make the relationship work? There are several key factors to consider, such as deciding what functions to outsource, making the right agreement with the right vendor, managing the relationship on an ongoing basis and having an escape plan for when things go sour. Let’s take a look at each.

What to Outsource

While there are no hard and fast rules to determine which functions to keep in-house and which to let go, there are a couple of broad categories to consider.

A service that has become common enough and reliable enough that it achieves commodity status. In that case, it may be cheaper and simpler to hire someone to do the job than keep it in-house. For example, companies that once employed janitors and messengers now use janitorial and messenger services.

“I like the test Stephen Goldsmith used as mayor of Indianapolis,” says Geoffrey Segal, director of privatization and government reform policy for the Reason Public Policy Institute in Los Angeles.

“He would open up the yellow pages and if he could find at least three private companies that produced a service the city was providing, he looked to outsource it,” Segal says.

In IT, some help desk functions may have fallen into this category. Witness the booming call center business where big companies outsource help desk functions to call centers. While you may still need an employee on site to manage the data center, the call center handles routine functions such as password resets or questions on how to reformat a document.

At the other end of the scale are newer, specialized functions the company doesn’t have the expertise or resources to handle. Currently these might include setting up XML Web services or a wireless LAN. Other items to outsource may include Web hosting, on-site support for remote offices lacking IT personnel, and services that require 24/7 support.

Let’s Make a Deal

Once you know what to outsource, the next item is to select someone to provide it and work out a deal with them. Sometimes, of course, you don’t have a choice of which vendor to use. If you want your sales staff to use the Salesforce.com on-line Sales Force Automation package, for example, there is only one place you can get it.

But most of the time you do have a choice. In such a case you will run any prospective firms through the standard qualifying process of investigating their past experience, financial stability, and speaking with customers to find out how the company performed on similar projects.

“You can’t just pick the first company that comes along,” says Sandy Gettings, CIO of Atlanta-based managed care company CaraVita, which outsources its Web site.

In doing this qualifying, keep in mind that the people who show up for the negotiations may not be the same ones who will be doing the work. So, no matter how impressive the president’s credentials, always find out about the staff who will actually execute the project.

Once you have narrowed the field of potential vendors, it is time to start negotiating the contract. When Orange County (OC), California, negotiated a new contract to outsource its data center, the County developed detailed terms and technical specifications which it incorporated into it model contract which it sent to the three highest-ranked vendors.

This model served as a foundation for the subsequent negotiations. Vendors that couldn’t comply with certain key provisions were automatically disqualified, but the County was flexible on other points.

“OC started out with a model agreement that proved quite difficult for us to conform to, at times,” says Naomi Marr, vice president of technology solutions at winning vendor Affiliated Computer Services, Inc., based in Dallas. “But after some negotiations we both became more flexible and creative.”

Points to include in a contract are response time to service requests, system uptime, reimbursement of additional expenses, change management, dispute resolution procedures, reporting requirements, provisions for future technology upgrades and contingency plans for the growth or contraction of the business.

“Most sourcing agreements are signed on five- or 10-year contracts — way beyond most long-range plans in today’s volatile business world,” says Neil Barton, a consultant with Compass America, Inc. of Reston, Va. “A company forced to lay off 10,000 workers may be bound to continue to pay for support of 10,000 unused desktops, because that’s what the terms stipulate.”

Making it Last

Once the contract is signed, the real work has just begun. Just because someone else is doing the work doesn’t mean you no longer have responsibility for the success or failure of the project or service. You may have hired a nanny, but it’s still your baby.

“I still have to justify deadlines, oversee the accomplishment of certain milestones, determine how much tech will be rolled out and monitor the products,” says Barnes & Noble’s Capiello.

Contracts should provide for regular reports, meetings and performance metrics, but they can’t dictate the people-handling skills that are essential to any successful activity. Capiello believes in treating the contractors just as if they were one of his own employees, including inviting the person to the company’s Christmas party.

“He’s just an additional member of my staff so we have meetings and send e-mails,” Capiello explains. “That’s the advantage of a long-term service contract.”

David Clements, director of Information Services for On Assignment, Inc., a professional staffing firm headquartered in Calabasas, Calif., uses United Service Networking for on-site support at the company’s 70 offices. He finds that it is cheaper for the company to spend the money to send a technician to the site to read the error messages than to have a non-tech savvy employee try to sort out a problem over the phone.

“Any time a conversation would last more than 20 minutes, we will use an outside service,” he says.

Like Capiello, Clements also sees the value in maintaining a long-term relationship with vendors. So, when it came time to roll out a DSL network to all the offices, he stuck with USNet rather than putting the job out for bid.

“Knowing the job will be managed well far outweighs any minor price savings we may have gotten from another vendor,” he explains.

Exit Strategy

But, while Crawford, Capiello and Clements both have successful relationships they want to keep going, outsourcing doesn’t always work out as well.

Thus it’s important to have an exit strategy in place before things go sour. You need to negotiate any conditions for terminating the contract before you sign on the dotted line. This includes any additional charges, and a smooth transfer of any knowledge or assets back to you or over to the new outsourcing firm. Binding non-competition and trade secrets agreements are also vital, so you don’t find that you have just financed R&D for the competition.