Outsourcing Definition and Solutions

• What is outsourcing?
• Why outsource?
• ITO, BPO, KPO: What’s the difference?
• What about cloud computing? Is that outsourcing?
• Why is outsourcing so hard?
• How is outsourcing priced?
• What about bundling?
• What is an SLA?
• How long should an outsourcing contract last?
• Should I outsource everything to one vendor? Or should I use a best-of-breed approach?
• How do I decide what outsourcing vendor or vendors to work with?
• Should I get outside help with this decision?
• What's the best location to outsource IT?
• Do you have any tips for outsourcing negotiations?
• What is benchmarking, and when should I do it?
• What are the "hidden costs" of outsourcing?
• What do I need to know about outsourcing's transition period?
• I have an existing contract with an outsourcer. When new work arises, should I give it to my existing provider?
• How important is ongoing relationship management to outsourcing success?
• What if outsourcing doesn’t work out? Can I just bring the work back in-house?
• Can I sue my outsourcer?
• Should I fire my outsourcing vendor?

What about bundling?

Bundling services means paying an IT services provider one price that has more than one IT service or product lumped together. It's usually not a good idea (see Vendor Management: Bundle with Care ). If you agree to the bundling of certain service levels into the price of a product, for example, you must buy that service every time you buy the product—whether you need it or not. Bundling also makes it difficult to understand what you're paying for individual products or services and to benchmark that against market pricing. Itemizing products and services keeps the vendor more accountable and enables the buyer to be able to charge back the usage fees to its various user departments.

What is an SLA?

A service level agreement (SLA) is a contract between an IT services provider and a customer that specifies, usually in measurable terms, what services the vendor will furnish. Service levels are determined at the beginning of any outsourcing relationship and are used to measure and monitor a supplier's performance.

Often, a customer can charge an outsourcing vendor a penalty fee if certain SLAs are not met. Used judiciously, that's an effective way to keep a vendor on the straight and narrow. (See The Good, The Bad, and The Ugly: 10 Tips for Outsourcing Incentives and Penalties that Work.) But no CIO wants to be in the business of penalty charging and collecting. Bad service from an outsourcing vendor, even at a deep discount, is still bad service. It's best to expend that energy finding out why the SLAs are being missed and working to remedy the situation.

As the use of outsourcing has moved further up the IT value chain, some customers find that traditional SLAs are inadequate particularly when looking for innovation from outsourcers or integrating multiple vendors. Some IT leaders are moving away from technical or task-oriented SLAs—uptime, man-hours—to business-oriented SLAs. (See What Matters Most in Outsourcing: Outcomes vs. Tasks .)

How long should an outsourcing contract last?

The prevailing wisdom about how long an outsourcing contract should last has changed over the years. When outsourcing first emerged as a viable option for providing IT services and support, long contracts—as many as 10 years in length—were the norm. As some of those initial deals lost their shine and ended in break-up, clients and vendors began to look at contracts of shorter duration.

So what is the ideal contract term? The answer depends on what's being outsourced and why. A transformational outsourcing deal will require more time to reap benefits for both client and vendor, and therefore must be structured as a longer-term contract. But when outsourcing desktop maintenance or data center support, a shorter relationship may work better. Generally speaking, overly long contracts (more than seven years) are frowned upon unless there is a great deal of flexibility built into the contract.

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