Simple Successful Outsourcing

CIOs who outsource discrete processes that have well-defined business rules are almost always happy with the outcome.

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You’ve heard the tales of outsourcing gloom and doom and read about the staggering percentages of outsourcing failure. Now consider these three CIOs’ experiences:

A CISR-CIO Study

This is Part 1 of a three-part series about outsourcing strategies and success models, defined in original research by MIT's Center for Information Systems Research and CIO magazine.

Part 2: Working with Offshore Partners Requires CIO Oversight

Part 3: Big Deals, Big Savings and Big Problems  

* Five years ago, a business unit at energy giant Cinergy Corp. outsourced database administration services, with no plan to extend the contract to any other part of the business. But when Cinergy centralized IT two years later, CIO Bennett Gaines called on the outsourcer to provide database administration services enterprisewide. Since then, the outsourcer has proved instrumental in a major technology shift—from data marts to an enterprise data warehouse.

* Four years ago, Summit Information Systems, a software developer for credit unions, outsourced disaster recovery services for its data center, located in central Florida. In 2004, as Florida faced the worst hurricane season in its history, "[the outsourcing vendor] was willing to do whatever it took to keep our systems up and running," says Steve Steinbach, Summit’s vice president of data center operations.

* Three years ago, JM Family Enterprises outsourced all mainframe hardware, software and operations because mainframe usage at the $8.2 billion automotive holding company had leveled off. The outsourcing vendor immediately optimized operations so that critical month-end financial reports landed on the desks of JM Family executives first thing in the morning rather than late in the afternoon, as was the norm. "It was the same hardware. The same data. But they were able to gain efficiencies because they knew how to run a mainframe better than we were ever able to," says Senior VP and CIO Ken Yerves.

What’s this? IT executives who are satisfied with their outsourcing arrangements—even praising their vendors? This might seem strange, as mass indictments of outsourcing have led to misperceptions. In fact, some slices of outsourcing are almost always successful.

Research on Outsourcing

Research from MIT's Center for Information Systems Research (CISR) and CIO examined 90 outsourcing deals in 84 companies to help executives recognize opportunities for long-term benefits from outsourcing relationships. Read Achieving Sustainable Value from Outsourcing by Jeanne W. Ross and Cynthia M. Beath.

Cinergy, Summit and JM Family achieved success by outsourcing well-defined processes that had clear business rules. Jeanne W. Ross, principal research scientist at the Massachusetts Institute of Technology’s Center for Information Systems Research (CISR), calls such outsourcing arrangements "transaction relationships." These are the most straightforward of outsourcing deals. The work is relatively easily defined, and the CIO wants to farm it out for clear reasons: to gain access to specific technology expertise, to deal with variable demand for certain IT services, or to free up internal staff for higher-value work. And in these relationships, vendor and customer needs are usually aligned; what the two parties want coincides more often than not.

In a recent study by CISR and CIO magazine of 90 outsourcing deals at 84 companies, CIOs showed much greater satisfaction with transaction relationships than with any other type of outsourcing. (See Sustainable Value from Outsourcing for a summary of the research findings and the three types of outsourcing arrangements identified.) Nine out of 10 IT executives in the study reported success with their transaction outsourcing. And CIOs who develop satisfactory transaction relationships can reap more rewards than simply saving money or freeing up staff. "Companies excelling at transaction relationships achieve agility because managers focus on processes that distinguish the company, rather than the silly things they must get right but don’t want to bother with," Ross says.

That’s not to say all these stories have happy endings. After all, there is the 10 percent that doesn’t work out. And even successful transaction relationships can create significant problems if you’re not careful, such as application silos and poorly structured enterprise architectures. But CIOs who engage in well-defined and well-managed transaction relationships with outsourcers will, in all probability, gain the sustainable value they’re seeking.

How to Decide What Goes

Choosing which work to outsource and which vendor to send it to are the first decisions any CIO makes in a transaction relationship. But these first steps can be the most critical. The key to success with this kind of outsourcing, says Ross, is making sure that what you send to the vendor is something "extractable"—that is, easily definable, removable or considered noncore. Tasks such as desktop provisioning, business continuity and mainframe processes tend to fall into this category.

In some cases, the categorization of a slice of IT work as extractable is straightforward. Guy de Poerck, CIO of the International Finance Corp. (IFC), an arm of the World Bank, has been outsourcing help desk services to Affiliated Computer Services (ACS) for six years and hasn’t had to give it a second thought. "With help desk, the transaction is pretty simple," says de Poerck. "I know it’s successful because I hear so little about it. I’ve never been confronted with a problem."

But what is easily definable, removable or considered noncore can vary by company. JM Family has a well-defined annual process for categorizing its technology. The process helps it to prioritize IT spending and decide what should be done in-house versus what might be a candidate for outsourcing. Every August, CIO Yerves divides all technology into four categories: emerging, mainstream, contained and retirement. Emerging and mainstream technologies are where the IT department focuses its budget, training and staff. Contained technologies are systems—often legacy systems—that are not growing in usage but that must be kept up and running and are therefore candidates for outsourcing (although internal improvements in efficiency might suffice as well). And retirement systems are, well, on their way out.

Going through this process in August 2002, Yerves and his leadership team categorized mainframe operations in the contained category for the first time. One of the company’s three business units had plans to wean itself from the mainframe. The others continued to employ the services but with no increase in usage. In addition, managing mainframe operations was a fixed cost in the IT budget, even though the company’s usage was variable.

So Yerves began to examine potential outsourcing vendors in early 2003, narrowing the field to two contenders by April. He put together a valuation matrix that explored what the vendors could offer in variable capacity and cost. Variability was important because of the peaks and valleys in the business’s mainframe processing needs. Ultimately Yerves went with IBM.

But settling on the right outsourcer wasn’t the trickiest part for JM Family. As evidenced in the CISR-CIO study, protracted contract negotiations can ruin a transaction outsourcing arrangement. "The concept of a transaction relationship is, in some respects, an oxymoron. Ideally, there is only barely a relationship—much like we’d have at the grocery store with the sales clerk. I find what I want, the clerk rings it up, I pay," Ross says. "If client and vendor engage in protracted negotiations about unique features or special pricing arrangements, they no longer have a simple transaction."

And Yerves had heard horror stories from peers and analysts about disputes over outsourcing contracts. So he sought to circumvent contractual conflicts by streamlining the process. Yerves gathered leaders and lawyers from both the vendor and JM Family and sequestered them in a local hotel. "We gave them 72 hours and said if we can’t get to an agreement by then, we don’t have a deal," he says. And it worked. Before the clock ran out, JM Family and IBM had inked a deal. "We were able to mitigate that early risk" of long or contentious negotiations, he says.

In fact, a mark of good transaction relationships is that contract negotiations are straightforward. The services to be outsourced are extractable, and companies and vendors have similar goals for the arrangement: Make it fast, easy and cheap. "It’s a lot easier to get to success with transactional-type outsourcing [than with other types] if the customers have well-defined requirements," says Mary Lacity, professor of information systems at the University of Missouri. "If the customers know exactly what they want, they can tell the vendor, and the vendor can price [the contract] correctly. The expectations [for the outsourcing arrangement] can then be well defined in the contract."

Learn to Let Go

When it comes to transaction relationships, management is best when it manages least. Client interference with how the vendor performs the process will increase costs and undermine benefits for both parties, according to the CISR-CIO study. But letting go of the day-to-day management can be difficult for CIOs.

Summit’s Steinbach is ultimately responsible for the Florida data center that supports 125 of the company’s 300 customers. It houses 1.2 million bank accounts and processes a million transactions a day. If the data center goes down, Steinbach goes down. In 2001, Steinbach decided it would be easier and cheaper to outsource disaster recovery services. But that left him dependent on an outside organization to keep things running come hell or high water (or high winds). He was confident in his selection of Hewlett-Packard to do the work. But still, "my biggest concern was a lack of control," he says. "If you’re doing it yourself, it seems like you have more control over it, and you feel much more comfortable about it."

So when the transfer to HP took place during the summer of 2002 (a quiet hurricane season in the Atlantic), Steinbach eased his mind through testing. He purchased two extra days of testing beyond the six days included in the deal, and after each test he attended the postmortem, during which HP figured out how to further streamline the backup and disaster recovery processes. It was a learning experience for client and vendor alike. With each test, HP performed better. And after each test, Steinbach loosened his reins a bit more. "I felt it was important to take that extra time the first year to make sure we knew what we were doing," he says. "I became more familiar with how their facilities were laid out and with their staff. And they became more familiar with us and our business."

But 2004—dubbed "hurricane summer" down south—was a test of a different sort. Steinbach declared three emergencies at the data center that year, but by that time he was comfortable with standing back and letting HP handle it. The vendor provided monitoring and remained on standby throughout Hurricane Frances, a Category 4 storm that made landfall close to Summit’s data center. HP even agreed to leave its backup systems on for the remaining months of hurricane season in case more storms hit, without charging Summit more. That solution "saved both parties a lot of time and effort and turned out to be a great plan," Steinbach says.

Steinbach funneled his energy into streamlining processes on the Summit end, such as learning that he needed to declare an emergency to HP sooner in the process rather than waiting and hoping a storm might take a different path. Today, he says, he spends very little time on the relationship with HP. And the more he’s stepped back, the more they’ve stepped up. When the hurricanes started up again early this summer, the vendor was calling him rather than the other way around. "They’re totally in tune with us and what we need now," Steinbach says.

But while transaction relationships tend to be hands-off from a day-to-day management perspective, it can be valuable to revisit these relationships to see what can be improved. And because client and vendor needs and expectations are often in alignment, outsourcers are often amenable to making the arrangement more effective because what they learn may help them serve their entire client base better. Steinbach, for example, has made changes to his contract with HP four times, adding equipment to their backup site or addressing methods of improvement. "They’ve been very flexible with us," he says. "And we weren’t expecting that."

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