Trust and governance key to good outsourcing

Satisfaction among chief information officers over their outsourcing contracts has dropped over the past few years.

Despite expectations that outsourcing is maturing - with customers and suppliers having a better grasp of how to run a successful relationship - feedback to analyst Gartner has proved the opposite.

More companies are outsourcing for the first time, and to some extent repeating the past mistakes of those that could now be considered outsourcing veterans.

This leads to dissatisfaction, often with the outsourcing relationship considered a failure because companies have viewed it as a cost-cutting exercise, do not invest in new skills for retained staff and fail to properly set or manage expectations.

Gartner vice president of research, Ian Marriott, said: "Companies are trying to bring down the size of the organisation, so they strip out a lot of their technical skills.

"If done right, they replace them with other skills, but a lot don't. People who are used to the old infrastructure are expected to manage sophisticated relationships with service providers."

Companies should train staff in, or employ people with, contract management skills - and before the outsourcing contract is signed. If they are not in place from day one, companies will have a gap between the contract kicking in and the internal team being in place.

"If companies are not prepared to spend five to 10 per cent on managing the deal they will find it is not being controlled properly. You need a balance between control and trust and that needs experience in managing these relationships," said Marriott.

Companies have long heard, and understood, the arguments about identifying core and non-core functions as the basis for outsourcing. Gartner believes decisions fall into four categories:

• Critical, of high business value and well executed internally
• Critical and poorly executed
• Non-critical and of low business value but well executed
• Non-critical and poorly executed

The first, said Marriott, should be a function that gives the company an edge over competitors and therefore is often more likely to continue being run internally. The latter is ripe for outsourcing, but for the middle two, whether to outsource or not is a tougher decision.

Functions such as customer interaction, for instance, are often considered critical, but many companies are now outsourcing these. So outsourcing high-value business areas makes for a tough decision. Call centres are regularly outsourced and, while these are important, they are not so critical that they cannot be run by a third party.

"The piece that's easier are things such as enterprise services, like human resources, pay roll or training," said Marriott.

The view that critical functions should be kept internal is an argument countered by outsourcers, which argue that operations of high business value should be considered for outsourcing.

Bob Fawthrop, managing director of global outsourcing at LogicaCMG, commented: "Companies always talk about the risk of outsourcing, but not the risk of keeping something in-house. How can you guarantee that you will continue to do the high-value well?"

If a company talks business process outsourcing, IT directors must be armed with strong business acumen. In terms of the type of outsourcing, Gartner said business process outsourcing is now growing faster than pure IT infrastructure outsourcing, although it is coming from a lower starting point.

"Four years from now we will see 80 per cent of decisions about IT being taken by the board or business units, because they will be business transformation decisions," predicted Marriott. The IT director will be expected to underpin those decisions and drive supplier relationships.

So how can companies avoid expensive failures when outsourcing? Gartner's advice is simple: lay everything on the table; trust the supplier, ensuring they know of any business changes in plenty of time; and outline to employees what the contract will and - importantly - will not do.

"You need to set the expectations that it will do a, b and c, but someone will think it will also do x, y and z because you didn't tell them it would not," warned Marriott.

"So you must outline what the contract will achieve and what it will not. If you don't, you will have a perceived failure and in that case it will have failed."