I’ve spent many years as a consultant helping companies analyze their business to improve performance and reduce costs, Clients large and small often ask questions regarding outsourcing/managed-sourcing. They’ve often read case study after case study showing how companies of their size/in their industry have shown real cost savings from their IT outsourcing programs, but their own initiative seems to be lacking in some fashion, often experiencing cost overruns and sub-par service levels.
I always come back with the same answer – A question: Did you have the right information to make this business changing decision, and did you enter into your agreement from a position of strength? The prospective client’s answer is usually slightly defensive, wondering why I’m questioning that company’s decision-making ability. Which essentially I am – clearly something is amiss. At this point, the wheels are in motion and a serious conversation about how the agreement was entered into can take place. This conversation is meant to figure out what has gone wrong and how it can be fixed.
Here are the main points where an outsourcing agreement can go wrong:
- Is the true cost of IT known and understood?
- Was proper due diligence performed and a business case developed?
- Did you open negotiations to multiple companies so as to get the best deal for your enterprise?
- Are you enforcing the contract?
- Has your company had any changes that would affect your agreement.
If these five questions can be answered, your company will be well ahead of the game and can facilitate changes that will help resolve the issues you may be experiencing. Lets look at these a bit more:
Understanding the true cost of IT
Many companies think they understand the true cost of IT, but most don’t. It’s not just what is in the budget, it’s what isn’t as well. Since every employee is part of the larger family, things are often done in a way that wouldn’t necessarily be the case with an outsource company. For example, IT support staff would likely service a broken computer while they happen to be in that particular location to fix something else; an outsource company won’t (and unless on-site, can’t) do that. There are hundreds of other “off book” examples (an ad-hoc server repair in the datacenter without a ticket being called into the help desk, perhaps) that, once outsourced, will no longer occur. These are true costs of doing business that are challenging to foresee and don’t always get accounted for internally, however with an outsourced vendor these types of activities become chargeable events. In a large organization, this can lead to millions of dollars in additional outsourcing costs.
Performing Due Diligence to get the best deal possible
Knowing the true cost is the first step in the due diligence process. Other things need to occur, including:
- Prioritizing which functions should be run internally and which should be run by experts that can drive costs out of the equation
- An understanding of which parts of the labor force will be affected either by being re-tasked to the outsourced vendor running the operations or being relieved of their positions entirely
- Service levels need to be agreed to internally; and
- Building a business case that supports the initiative, this includes noting all assumptions so as to be able to go back and audit. By doing this, the company knows what is expected and then study the agreement forensically to uncover why the initiative is not proceeding as planned.
Handling Negotiations to Secure the “best” deal possible
Each company has their own process by which they procure goods and services. The key questions to ask here are:
- Were your company’s policies and procedures followed?
- Were RFI’s and RFP’s constructed properly and submitted to all viable vendors?
- Did your company negotiate purely on price, and were factors such as the Service Levels (mentioned above) taken into consideration?
- Did you do research on the providers, talk to their current clients, etc to make sure they were the right fit for your needs?
All of these questions need to be given consideration up front, or you’ll risk the likelihood of compromised service down the road.
Enforcing the agreement with the selected vendor
This is key. Your company, when entering an outsource agreement, must establish a structure to allow for monitoring of the agreement and related SLAs. Is the vendor living up to their end of the agreement? If no, are steps being taken to alleviate the issues? If you are not monitoring your agreement, you are as much at fault as the vendor for any perceived failures. The agreement and the activity associated with it need to be continually monitored, and analyzed.
Knowing the changes in business conditions that might affect your outsourcing agreement
These business conditions can take many forms, and some affect all business – the current downturn in the economy, for example. Perhaps your company may not have grown at the rate assumed in your business case and therefore in your negotiations with your chosen outsource vendor. Other condition changes to consider include mergers and acquisitions, perhaps you are using more computing power then you estimated and did not take into consideration when purchasing another company. Have you come out with an incredible new product that has driven growth within your organization? This is a good affect, but one that may not have been included in the portion of the new products business case that deals with internal costs such as IT, manufacturing and supply chain management. All of these reasons and many others can affect the actual agreement, therefore it’s a must that your agreement be continually monitored as I noted earlier.
Conclusion
Several reasons can result in your company essentially leaving dollars and services on the table with respect to outsourcing. There’s no such thing as too much thought when evaluating an outsourcing initiative. If you need help, there are many experts available to you who can provide guidance and help develop a sound strategy tailored to your organization. Whatever your size or complexity of project, we’re here to help.
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Matthew Carmen launched Datacenter Trust along with Marc Watley in February, 2010 and serves as Co-Founder & COO as well as Managing Partner of their Financial Intelligence practice. Datacenter Trust is a recently-launched consulting and services delivery firm, providing outsourced server hosting, bandwidth, cloud services, and IT financial intelligence and analysis services to growing businesses. Follow Datacenter Trust on Twitter @datacentertrust