Despite the apparent financial and operational benefits, the decision to outsource remains a difficult one; a fact underlined by a recent prediction from analyst Gartner that half of all IT outsourcing deals will either fail or be prematurely terminated by 2008.

There are many reasons why outsourcing deals fail, but as Andrew Smith, director at management consultancy, Qedis, points out: ‘An often overlooked facet in migrating services to a specialist outsourcer is the people component, much to the peril and likely success of the new contract.’

Outsourcing has a dramatic impact on all involved. The National Outsourcing Association (NOA) says mishandling people issues is one of the biggest causes of disasters and damage to reputations. The first question any chief information officer (CIO) should ask, therefore, is how outsourcing affects their employees.

While an outsourced service may prove a great asset, if staff oppose the decision so violently as to affect the organisation’s work and reputation, it is bound to have an impact on the outcome of the project. In 2003, Bank of Ireland staff went on strike over a proposed $600m (£340m) outsourcing deal with HP, leading to seven months of negotiations with unions.

‘You have to consider whether this is a journey people want to go on at all levels of the business,’ says David Barker, partner at law firm Pinsent Masons.

‘The CIO should consider if and how they can handle staff issues long before any contract is signed, and even before the decision to outsource is made.’

Once that decision has been made, it is critical that employees are aware of what is happening. CIOs must not make the mistake of thinking they know how people feel: employees need to understand the business reason for the outsourcing decision, but most importantly, lines of communication need to remain open.

Rumour and suspicion will make staff feel resentful and uncomfortable, says the NOA, so they need to be kept fully aware of what is happening and feel able to ask about any queries they have.

‘It is vital to keep employees in the loop,’ says Barker.

Even in an outsourcing situation where everything runs smoothly and everyone keeps their jobs or moves on to better ones, there will still be a degree of uncertainty and doubt in the air.

People are suddenly faced with the prospect of joining a company they have not chosen to join, says Peter Skyte, national officer at IT trade union Amicus. ‘It is understandable that they are going to feel apprehensive.’

A process of due diligence must be used to ensure that the service provider is a good match for the customer. Matching the company culture of the supplier and user is crucial. Even if employees’ jobs are safe, they still need to work in an environment in which they are happy.

‘You need to be able to tell those people who are being outsourced that they are going somewhere that will ultimately be a better home for them in the long term,’ says Barker.

Historically, an employee’s sense of achievement – and perhaps financial reward – was bound up in the success of their business, says Paul Mason, managing director of retail IT consultant Paul Mason Consulting. ‘But after outsourcing, the former employer is now a client, and success is measured in different ways,’ he says.

Mason says outsourced employees often find it difficult to become one step removed from the business, with a feeling of having ‘two masters’, when they move to an outsourcing provider.

According to Forrester Research, the successful integration of IT employees requires training and education sessions, where the outsourcer can present career and transition plans. Typical questions that need to be asked include: Is there a budget to support the process? Are there dedicated people to manage the incoming employees? And is there a process for evaluating new employee skills and planning education requirements?

This is an area that still demands a lot of attention, says Qedis’ Smith. ‘Little work is done to ascertain, execute and communicate how new staff members will be integrated into the new organisation,’ he says.

Those who are outsourced often enjoy greater career opportunities in a service company where their skills are likely to be more highly valued. But that may not always be to the direct benefit of the CIO, says Amicus’ Skyte.

‘Outsourcing providers typically move people from contract to contract, so the CIO should bear in mind that the best people working on the contract may not always continue working on the contract when they are outsourced,’ he says.

But if those people are to be positive ambassadors for their original company, it is important they are supported fully at every step, he says.

Outsourcing will also have an effect on staff that remain at the company. Their concerns and expectations will be as equally as valid as those who are being outsourced or those who may lose their jobs.

An outsourcing transition can take six months to a year to complete, says Will Gosling, change management consultant at Deloitte. And it can have a dramatic impact on performance and divert a lot of people’s attention, irrespective of whether they are outsourced or not.

‘You need to be very clear about what is going to happen,’ he says.

Successfully managing people through an outsourcing process often requires a mindset adjustment for IT leaders. ‘Good CIOs need to get themselves into a position where they are not just providing an internal service, but also providing strategic thinking about the way a business grows and develops,’ says Pinsent Masons’ Barker.

That means focusing on people. ‘It is vital to put people and relationships at the heart of any outsourcing programme,’ says David Craig, managing director of outsourcing specialist DAV Management.

From a management perspective, the initial outsourcing process can make or break the career of a CIO. ‘Get it right, and your business will be a streamlined, competitive monster,’ says Barker. ‘But get it wrong, and you can lose your job’.

Case Study: Roger Murphy, Xansa - A manager who outsourced staff – and then was outsourced himself

Senior manager Roger Murphy transferred to IT service provider Xansa from BT when the telecoms company carried out an outsourcing deal in July 2002. ‘I was part of a management team being outsourced,’ says Murphy. ‘There was a change in board-level management and I learned through the management chain fairly early on about the possibility of outsourcing.’ Murphy’s initial reaction was: why? ‘Just to be told that it is happening is not terribly helpful,’ he says.

As a senior manager, Murphy became personally involved in the deal process. Knowing first-hand how important it was to keep people informed, Murphy was able to ensure that his staff were kept in the loop. ‘We did roadshows to tell people what was going on, and we had monthly briefings. If there was something to tell people, we told them,’ he says. ‘People react far better to being told something – even if it is bad news – than they do if they are left to harbour suspicion.’

Murphy was positive overall about the deal, but he did have a few minor misgivings about the process. ‘It might have been helpful to understand more about Xansa’s business model than we first did,’ he says. ‘There was a fair amount of concern with people going on the web, seeing that Xansa had a large presence in India, and thinking: “there go our jobs”. In fact, that wasn’t the reality, so it would have helped had someone explained that in more detail.’

It comes down to the simple matter of keeping people informed. ‘Don’t tell people what they don’t need to know, but tell them what they do need to know,’ says Murphy. ‘There is always a danger that CIOs tend to forget the human side. You just have to treat people with dignity and respect.’

Case Study: Terri Ferneaux, Fujitsu - An employee who was outsourced from a bank to a technology firm

IT service delivery manager Terri Ferneaux was outsourced from Lloyds TSB to Fujitsu Services under a £170m, five-year contract to manage desktop technology across the bank’s UK operations.

A series of formal face-to-face announcements were made once the decision had been confirmed, when Ferneaux first learned that she would be outsourced.

‘The process was relatively painless, however, and because our senior manager, who was someone well respected within the area, had been involved in the selection process, we were kept as informed as possible throughout,’ she says. ‘Having said that, being made to leave a company for whom I had worked for 20 years was scary. My sense of security was definitely dented.’

Ferneaux was aware from colleagues who had already been through a similar process that it was likely, once the contract had run its course, that she would be outsourced again. ‘This is a concern when you have as many years service in a company as I and some of my colleagues have,’ she says.

Throughout the process, Ferneaux received email and face-to-face updates on progress regarding negotiations, and had a number of meetings with the Fujitsu team, which went some way to easing her worries.

‘Update meetings and “get to know you” sessions were held to give us a chance to ask any questions directly to the guys involved in the contract negotiations,’ she says. ‘An email address was also issued to raise queries through, and this, along with the fact that our own management was also being transferred over, addressed many of the concerns I and my colleagues had.’

Having been through the process, Ferneaux’s advice for CIOs is to keep staff as informed as possible. ‘If staff feel they are being kept in the dark, the rumour mill starts to fill the information gap, making life more difficult for all concerned,’ she says.