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ABC: An Introduction to Outsourcing

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

By Stephanie Overby

PAGE 8

• 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?

How important is ongoing relationship management to outsourcing success?

The success or failure of an outsourcing deal is unknown on the day the contract is inked. Getting the contract right is necessary, but not sufficient for a good outcome. One study found that customers said at least 15 percent of their total outsourcing contract value is at stake when it comes to getting vendor management right. A highly collaborative relationship based on effective contract management and trust can add value to an outsourcing relationship. An acrimonious relationship, however, can detract significantly from the value of the arrangement, the positives degraded by the greater need for monitoring and auditing. In that environment, conflicts frequently escalate and projects don’t get done.

In their book, "Multisourcing," Gartner analysts Linda Cohen and Abbie Young point out that successful outsourcing is built on "a network of relationships not transactions," and outsourcing governance is the single most important factor in determining the success of an outsourcing deal. But many companies still haven’t internalized that truth. Gartner found that fewer than 30 percent of enterprises will have formal sourcing strategies and appropriate governance in place. In a 2004 survey of 130 CIOs, 42 percent said they were dissatisfied with their outsourcing relationships, according to outsourcing advisory company EquaTerra, primarily due to poorly developed, underbudgeted and undersourced governance models.

Where’s the best place in the world to outsource IT?

You’d probably expect to hear that India is the best place to send work. And indeed, India remains the locus for offshore outsourcing. But again, it depends on what you’re outsourcing, why, and your in-house capabilities for managing the relationship.

In fact, the best place in the globe in terms of people skills and availability for IT services remains the United States, according to A.T. Kearney Global Services Location Index 2005. The index contains some other eye-opening stats. Top financial structures to support outsourcing? Philippines and Ghana. Best IT services business environment? Singapore.

India and China (to a lesser degree) still dominate for IT services in the Asian region, although turnover in India and intellectual property issues in China (and rising wages in both locations) remain significant concerns. Central and Eastern Europe are attractive destinations, but costs are rising there, too. Offshoring is actually increasing in Africa and the Middle East, but political instability poses ongoing challenges there.

The easy answer is that there is no easy answer about what geographical location is best for outsourcing. For a more detailed look at outsourcing around the globe, check out CIO’s Buyers Guide to Offshore Outsourcing. The most important thing to understand is that offshore outsourcing is a big decision that can have lasting ramifications for an organization—negative or positive. The decision about where to outsource should be one of the last in the outsourcing decision- making tree. Figure out what your outsourcing requirements are first.

 

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