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An outsourcing strategy rarely follows a single template. What is a core function for one company is a commodity service for another. The legacy application that is efficiently handled in-house by one IT department might for another be a nightmare worth unloading. Experts caution, however, that the old wishful thinking about "outsourcing our mess for less" usually is still just that: wishful thinking.
One thing holds true for most CIOs: It's prudent to get your outsourcing strategy as correct as possible, given that research and common sense shows you are unlikely to reverse a decision to outsource. In fact, when an outsourcing contract is up for renegotiation, companies end up staying with their current provider upwards of 70% of the time, including when performance or cost has been a problem. Here are six key questions that will help you build an effective outsourcing strategy.
1. Can the IT function be performed according to a set of rules and procedures?
This facet of an outsourcing strategy is the "bright line" between IT
functions that should be outsourced and those which are best kept
in-house. The demarcation can be murky, however. You can find the line
by drawing charts for each domain that's a candidate for outsourcing,
and organizing its functions, from the transactional and simple at one
end of the spectrum to the conceptual and complex at the other.
Routine functions that can be performed by a set of rules and
procedures, lend themselves well to third-party contracts. Conceptual,
ambiguous processes don't lend themselves as well. For example, security
functions can be administered effectively by a third party, but the
company should retain responsibility for security policy. Likewise,
policies about the enterprise's technology architecture should be set
in-house. Otherwise, you invite the sort of conflict of interest where a
third-party provider tells you an application needs 20 more servers
because he has redefined your architecture. According to Gartner,
clients who write contracts demanding aggressive cost reductions every
year often wind up complaining that their vendor is not meeting business
needs. It is totally ridiculous that you can take out 5% to 10% of
costs every year and do it without investing in technology innovation --
the company couldn't do that so how can the outsourcer?
2. Is the application pegged for retirement or being moved to a Software-as-a-Service provider?
Managed service providers make money by optimizing, or getting up to speed on, the application up front and reaping the benefit of that work over the length of the contract. For legacy applications nearing retirement, CIOs should expect to pay premium prices because vendors will not be able to capitalize on their up-front work over time. The exception is when companies want to decommission. It's not often the case that companies insource an application that has previously been outsourced. The exception is when an application supported by a traditional managed hosting provider is going to be retired and replaced by a Software-as-a-Service application: For example, a company moves from Oracle's Siebel customer-relationship management software to Salesforce.com. In cases like that, organizations might choose to bring the hosted application back in-house as they decommission it because bringing it back in-house gives the CIO more control over the costs of winding it down. The other option is to leave the application where it is, and let the outsourcing provider scale back the infrastructure as the app is phased out.
3. Is the application or IT infrastructure unstable?
Often, organizations whose applications or infrastructure are unstable are tempted to outsource their environment to the experts to get it right. If it is something that can be fixed internally, you should do that first. The reason is that you don't want to outsource an operation that is hugely sub-optimized. While you are getting the benefit of wage arbitrage, you are not getting the benefit of the optimization, which will inure to the outsourcer. The exception is when you simply don't have the resources to make the fix, but then you're not going to save a lot of money. In fact, it is not all that uncommon for companies that have outsourced a mess to not only pay a premium for getting it fixed but also wind up taking it back. That was the case with a large wireless carrier that outsourced virtually everything to a top-tier provider with the aim of moving the applications offshore once they were stabilized. The application never became stabilized and ended up being taken back in-house.
4. Is the application's history of change control and change management documented?
This is a variation on Question 3. When an application's processes are not documented, and you basically are turning over just the code to an outsourcer, the provider will have to reverse-engineer the application to figure out how to manage it. The application might be stable, but it still presents a challenge that will cost you. The outsourcing provider is flying blind, and has to figure out quickly how to get their arms around the code, so they can do maintenance and future development.
5. Is the team assessing the application going to be affected if the decision is to outsource it?
There is a lot of due diligence you have to do on an application before moving it out that requires information from the people who have a vested interest in keeping it in-house. If that is the case, CIOs have to deal with that risk. CIOs should be as up-front with employees as possible. In some cases IT staff typically find more opportunities for advancement working for an IT outsourcing provider than in a corporate environment.
6. Does your organization have strong vendor management skills?
Managing an outsourcing provider as a vendor is one function of an outsourcing strategy that should not be delegated. For companies with little experience in managing an outsourcing vendor, moving to a managed services model is fundamentally different from managing the day-to-day lifecycle of an application and more challenging. You either will have to quickly learn those skills - managing to service-level agreements and performance - or hire that capability.
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