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ABC: An Introduction to Outsourcing

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

By Stephanie Overby

PAGE 7

• 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?

What are the "hidden costs" of outsourcing?

The total amount of an outsourcing contract does not accurately represent the amount of money and other resources a company will spend when it sends IT services out to a third party. Depending on what is outsourced and to whom, studies show that an organization will end up spending 10 percent above that figure to set up the deal and manage it over the long haul. That figure goes up exponentially—anywhere from 15 to 65 percent—when the work is sent offshore (see The Hidden Costs of Offshore Outsourcing) and the costs of travel and difficulties of aligning different cultures are added to the mix.

Among the most significant additional expenses associated with outsourcing are: the cost of benchmarking and analysis to determine if outsourcing is the right choice, the cost of investigating and selecting a vendor, the cost of transitioning work and knowledge to the outsourcer, the costs devolving from possible layoffs and their associated HR issues, and ongoing staffing and management of the outsourcing relationship. It’s important to consider these hidden costs when making a business case for outsourcing.

What do I need to know about the transition period?

Vantage Partners calls the transition period—during which a new provider’s delivery team is getting up to speed on the buyer’s business, existing capabilities and processes, expectations and organizational culture—the "the valley of despair." During this period, the new team is trying to integrate transferred employees and assets, begin the process of driving out costs and inefficiencies, while still keeping the lights on. Throughout this period, which can range from several months to a couple of years, productivity very often takes a nosedive.

The problem is, this is also the time when executives on the client side are looking most avidly for the deal’s promised gains; business unit heads and line managers are wondering why IT service levels aren’t improving, and IT workers are wondering what their place is in this new mixed-source environment.

IT leaders looking to the outsourcing contract for help on how to deal with the awkward transition period will be disappointed. The best advice is to anticipate that the transition period will be trying and attempt to manage the business side’s expectations and set up management plans and governance tools to get the organization over the hump.

 

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