ITOutsourcing (ITO) 2016We often hear about IT Outsourcing (ITO) agreements that failed to meet the expected business outcomes.  In fact, failed provider-client relationships usually tend to get more press then successful ones and this unfortunately promotes a belief with some people that outsourcing does not work. The reality is that failure to realize anticipated value from an ITO agreement is often the result of improperly set expectations and requirements between both the provider and the customer and poor governance throughout the life of the contract.  What follows are some of the common causes of ITO value realization failure and how they can be addressed.

 

What to outsource?

Only outsource what can justifiably and quantifiably be done better and/or at a lower cost by a service provider. The idea is not to arbitrarily get rid of all IT functions but rather, to refocus IT resources on activities that matter to the business.

Not just about cost reduction

Some customers’ ITO plans put too much emphasis on IT cost reduction and not enough on business outcomes. Cost of service is definitely an important factor in outsourcing but when it becomes the sole source of focus, organizations often end up only with the “same mess for less”. In addition, true IT costs are not always fully taken into consideration and limited to direct operating costs leaving items such cost of errors and cost of controls unaccounted thus skewing the Total Cost of Ownership for IT.  This leads to skewed IT Total Cost of Ownership and savings falling short of expectations.

Measurable Performance

Contracts are sometimes filled with terms or service attributes that cannot easily be measured or quantified.  While terms like “best of breed”, enterprise class, strategic and innovation all sound good, they are also very subjective and difficult to quantify. Make sure service agreements are based on measurable performance items.

Realistic Service Levels

How do expected provider service levels compare to current service levels? Internal service level agreements (SLA’s) or objectives are not always clearly defined prior to outsourcing and are negotiated without formal requirements and impact analysis. Negotiated service levels must be attainable and must also measure what matters to the business.

Very much like business continuity planning, the criticality and resumption of business processes should not be defined without a proper impact analysis.

Risk

One of the advantages of ITO is the transfer of some of the operational IT risk to third party.  However, it does not mean all risks are eliminated and does not relieve a company from due diligence around risk identification, assessment and mitigation. Like car insurance is no remedy to distracted driving, organizations must keep risk management a priority. Outsourcing can bring other risks such as loss of IP, non-performance, provider business failure, etc. that must still be managed and mitigated.

Governance

Although listed last, governance, or more specifically the absence of it, is the most frequent cause of ITO agreement failure. Contracts are in place for reference and should be used as last resort for conflicts that cannot be resolved otherwise.  The old adage “an ounce of prevention is worth a pound of cure” really applies here. Strong and effective governance from both the client and provider side will prevent issues from escalating to a point that can jeopardize the relationship irreparably. Governance must be applied in a spirit of partnership and in the best interest for both parties.

None of the items discussed above are overly complex and with the right amount of planning, can all be addressed. If a single item should be highlighted as the most important to remember, it is that agreements cannot be successful if they lean too much in favor of one party.  Both client and service provided must get value from the relationship for sustained success.

Learn more about the Economics of IT.