Check out our previous article
Under Pressure: Outsourcing IT
Tough times call for tough decisions, not poorly considered ones
"We have to simplify and get back to our core business" is a mantra heard from top management during periods of corporate duress. Long-term studies show that when a turnaround in performance is necessary, executives under pressure tend to simplify otherwise complex decisions and frequently "lock in" on a preferred alternative early in the evaluation process.
When the turnaround committee interviews the CIO, inevitably the question arises: "Since IT really isn't our core business, why don't we simplify our lives and outsource the whole thing?" The CIO's response is key. Poorly considered sourcing decisions have long-lasting consequences. Post-outsourcing dissonance can take the form of disturbing questions: Have we lost control over some elements of our competitive advantage? Have we merely changed problems from managing familiar costs to unfamiliar ones? Why are we charged for every little thing? Are we getting market value services from the partner?
Before you answer that committee, consider these three fundamental aspects of your shared sourcing strategy: First, determine which functions to outsource. The economics of IT are always shifting. Leveraging economies of scale, many service providers are now often able to outperform internal IT departments on cost and quality dimensions for a growing span of services. The key to success is determining the relative proximity of the IT function to organizational mission delivery or competitive advantage. A careful evaluation is needed to determine if proprietary control over certain IT functions is essential to compete. Think strategic contribution before market economics when defining functions that might be outsourced.
Next, determine how to compare the cost of existing internal service levels against those being purchased. This may be challenging, especially if you haven't monitored the internal effort required to support specific IT functions. If you cannot describe in quantitative detail the inputs, service level outputs, and internal effort required to manage an IT function, you are not yet in a responsible position to outsource that function. A poorly described internal scope of work is probably the greatest risk associated with outsourcing, resulting in apples-to-oranges comparisons with the services being offered by vendors. A common error is to understate the internal service offering, in particular the number and variety of ad hoc service requests.
Finally, determine the level of oversight and administration needed to manage the outsourcing relationship. This includes all the incremental personnel time and material expenses required to manage the outsource relationship versus managing the internal IT hierarchy. It includes procurement activities, contract management activities, performance reviews, administering rewards and penalties, and change control activities, among other things. If these transaction costs are not realistically budgeted in the sourcing analysis and then reasonably controlled, any potential productivity gains offered by using an external partner quickly erode.
If the CIO takes control of the process and ensures that these three considerations are addressed, the outsourcing evaluation process can be productive. Are these considerations unique to times of duress? No, not at all, they apply to any sourcing situation anytime- it's just that in times of duress, the likelihood of overlooking them may be greater.
Dr. Warren Ritchie is director of IT governance for Volkswagen of America.
