Most end users regard their outsourcing deals as failures, but this general dissatisfaction is not enough to slow down the momentum in the booming outsourcing market.
"We?re starting to sense a level of unhappiness in outsourcing land," warned Gartner Group research director Rita Terdiman, at the Dataquest Service Trends conference in San Francisco this week. "It won?t lead to a shift away from the trend to outsource - end users need outsourcing too much for that - but the users may fight back with the threat of contract renegotiation."
Terdiman predicted that more than half of the outsourcing deals signed to date will not be considered successful by senior management because they have not delivered the expected increases in IT effectiveness or business value. She cited a survey of 1,400 chief information officers across the globe, conducted by management consultancy Deloitte and Touche, which confirmed the level of dissatisfaction. "The actual benefits of outsourcing fell short of CIO expectations in every region of the world surveyed," she said.
The area where CIOs had expected to see the biggest improvement was in vendor sophistication and expertise, which was named by 60 per cent of those surveyed. But only 35 per cent claimed to have actually achieved this benefit. Similarly, outsourcing had fallen short of expectations in the areas of quality of delivery and cost reduction.
Terdiman warned of storm clouds on the outsourcing horizon as end users become increasingly vocal about their unhappiness. "There now exists a sizeable body of experience about how easy or difficult the management of [an outsourcing] relationship is," she said. "This experience base is not at all reassuring. Indeed, recently the number of complaints expressed by customers has increased dramatically."
But end users have to accept their share of responsibility for the presumed failure of outsourcing deals. Vendors often oversell the deal, she said, adding: "Users allow this to happen and end up with unrealistic expectations regarding the deal. Customers do not yet realise or accept that the management of outsourcing relationships takes more time and effort than they had anticipated when deciding how to structure the deal."
There is a simple conclusion to draw from the experiences of corporations which have outsourced. "The degree of satisfaction reported by users seems to be tied to initial expectations," noted Terdiman. "The more realistic the initial expectations, the more successful the deals."
Before making an outsourcing commitment, end users must ask themselves why they are doing so and make a realistic evaluation of their criteria for success. There are a number of established reasons for outsourcing: to achieve market leadership by enabling companies to focus on core competencies; to gain access to superior IT skills and capabilties; and to optimise IT financial assets.
"There are really a zillion reasons for outsourcing," said Terdiman. "Reducing costs plays a part in the decision, but it is rarely the primary reason. The need to acquire skills is becoming the most pressing issue. Companies just can?t get enough skilled people and this situation is going to get worse. So they turn to outsourcing companies who have the right kind of staff."
Having decided to outsource, companies need to determine how extensive this process will be and examine ways of structuring the deal for maximum efficiency. Terdiman dismissed the notion that outsourcing is an all or nothing activity. "The majority of deals involve outsourcing one or more individual IT functions," she said. "We expect users to selectively outsource additional IT functions or bring certain functions back in-house each year as circumstances dictate."
This opportunistic outsourcing approach is dictated by external events, such as the introduction of Windows 95 and the consequent need for trained staff to manage the upgrade. The Year 2000 conversion issue is a classic example of this phenomenon, said Terdiman, and will result in a flurry of ousourcing deals as companies struggle to meet the deadline with too few skilled personnel at their disposal.
Terdiman identified two models of outsourcing deals : selective and strategic. The selective model is the norm, typically driven by a tactical business need such as a need to downsize or restructure. Such deals are put in place by IT management and are usually between two and five years in duration.
Strategic megadeals are driven by senior business management, cost more than $1 billion, last for anything up to 10 years and are driven by major corporate events, such as re-engineering, mergers or acquisition. Terdiman cited two examples of such megadeals - JP Morgan and DuPont - to illustrate the different ways end users can structure deals to maximise their benefit.
In the case of JP Morgan, the bank has signed a $2 billion, seven-year deal in which Computer Sciences (CSC) is nominally prime contractor, but there are three other companies tied up in the contract as well, each taking responsibility for a particular aspect of the IT infrastructure. Bell Atlantic provides desktop support computing services, Andersen Consulting handles applications development while AT&T manages global network operations.
All four suppliers share a collective responsibility to JP Morgan: if one area falls short, all the suppliers are expected to take the hit, thus incentivising them to work together. There is in practice a fifth partner in this deal, as JP Morgan has elected to play an active role in setting the strategic direction for IT, enabling it to retain tight control over its infrastructure. "JP Morgan sees itself as one of the equal prime contractors," explained Terdiman. "It deals with whoever it wants to and CSC administers the deal."
Over at pharmaceutical conglomerate DuPont, a $4 billion, 10-year deal has been divided between CSC and Andersen Consulting, with the former winning the lion's share of the business. DuPont signed separate agreements with the two companies to provide a specific set of defined services. CSC will carry out 80 per cent of the work, which includes managing DuPont?s global IT infrastructure and handling more than half of the company?s contracted applications work around the world. Andersen?s remaining 20 per cent share centres mainly on industry-specific chemical applications.
A formal mechanism to define how the two suppliers relate to one another in this deal, but DuPont is determined to keep a high level of control. It will retain 1,100 of its 4,200 IT staff inhouse in order to set strategy and manage the suppliers. "DuPont is going to run the deal itself," noted Terdiman. "The two suppliers are equal, but separate as contractors."
But by the turn of the century, Gartner Group expects at least 30 per cent of outsourcing megadeals to involve user-driven, best of breed partnering with one supplier selected as prime contractor. "This approach takes away some of the management headache from the user," explained Terdiman. "But some suppliers don?t want to do that."
Whatever model or approach is adopted, Terdiman was adamant about the need to built service level agreements (SLAs) into the contract. "SLAs are the most powerful mechanism to measure the vendor's performance," she said. "They are the only mechanism the user has to communicate their service expectations to the vendor and then to measure the vendor?s performance."
But she added that there is insufficient priority given to setting up such agreements. "While SLAs are one of the most important aspects of an outsourcing deal, too often little attention is paid to these until late in the transaction," she warned.
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