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ABC: An Introduction to Outsourcing

Everything you need to know to avoid the pitfalls of outsourcing.

By Stephanie Overby

PAGE 5

• What is outsourcing?
• Why outsource?
• ITO, BPO, KPO—what’s the difference?
• Why is outsourcing so hard?
• What about bundling?
• What is an SLA?
• What is the best length for an outsourcing contract?
• Should I outsource everything to one vendor? Or should I use a best-of-breed approach?
• How do I decide what vendor or vendors to work with?
• Can I get outside help with this decision?
• Do you have any tips for negotiations?
• What are the "hidden costs" of outsourcing?
• What do I need to know about the transition period?
• How important is ongoing relationship management to outsourcing success?
• Where’s the best place in the world to outsource IT?
• What if outsourcing doesn’t work out? Can I just bring the work back in?

Should I outsource everything to one vendor? Or should I use a best-of-breed approach?

Several years ago, the megadeal— multi-billion-dollar IT services contracts awarded to one vendor—hit an all-time high, and the IBMs and EDSs of the world couldn’t have been happier. But this wholesale outsourcing approach proved difficult to manage for many companies. Today, although the megadeal is not dead, the trend has turned toward the multi-vendor approach, incorporating the services of several best-of-breed vendors to meet IT demands. And the major IT services players say they’re able to accommodate this change. The highest-profile example of this brand of outsourcing is GM. After years of outsourcing much of its IT to EDS, GM is pursuing what it calls the "third wave" of outsourcing, bringing together a cadre of competing outsourcers to work together.

But the multisourcing approach is itself not without great challenges. According to CIO Senior Writer Susannah Patton, to make sure they are getting the most from their various outsourcers, CIOs need to dedicate staff to oversee each vendor relationship and establish regular reviews of vendor performance with measurement applications such as dashboards or vendor scorecards. In contract negotiations, CIOs need to spell out that vendors should cooperate and refrain from blaming each other, or else risk losing the job. CIOs need to find qualified staff with financial as well as technical skills to help run a project management office or some other body that can track all outsourcing agreements. The whole new set of skills is outlined in Multiple Choice Answers.

How do I decide what vendor or vendors to work with?

Selecting a service provider is a difficult decision. But start by realizing that no one outsourcer is going to be an exact fit for your needs. Trade-offs will be necessary.

To make an informed decision, you need to articulate what you want to gain from the outsourcing relationship and extract from that your most important criteria for a service provider. It’s important to figure this out before soliciting any outsourcers who will undoubtedly come in with their own ideas of what’s best for your organization, based largely on their own capabilities and strengths.

Some examples of the questions you’ll need to consider include:

• What’s more important to you: the total amount of savings an outsourcer can provide you or how quickly they can cut your costs?
• Do you want broad capabilities or expertise in a specific area?
• Do you want low, fixed costs or more variable price options?

Once you define and prioritize your needs, you’ll be better able to decide what trade-offs are worth making.

 

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