By silicon.com, 22 April 2005 16:10
Outsourcing has often been presented as an opportunity for hard-pressed businesses to save money and get better service by handing all that tricky IT stuff over to the professionals.
So it was interesting to see a survey from consultant Deloitte which suggests many companies haven't got quite what they expected.
Most companies surveyed were disappointed that they hadn't managed to cut either costs or complexity. They were also hit with hidden costs and couldn't free up resources for new projects as they had hoped.
One in four were going so far as to bring operations back in-house.
And from the feedback we've had from readers so far, few of you are surprised – or shedding a tear for the outsourcers.
Recent research suggests it is not just the private sector that can't get outsourcing right, but that the public sector also has issues – especially with the level of trust between suppliers and clients.
Of course, outsourcing remains an inevitability for many companies – the dividing line between in-house staff, contractors and outsourced IT workers continues to blur, with many organisations using a combination of all three to get things done.
Even for those companies where technology is key, not all IT is equal. They might want to outsource the maintenance and save their own staff for development work. Or do it the other way round. So despite the problems with outsourcing, we're not likely to see everything come back in-house very soon.
So why do so many IT outsourcing projects fail to deliver the benefits that companies want?
Perhaps companies need to realise that just because a service is outsourced, it doesn't mean a company can forget everything about it – the relationship has to be managed and modified if the environment changes. If you outsource a problem you don't get rid of it – you just have to manage it at slightly longer range, which can mean a problem worsened.
Cost shouldn't be the only motivation behind outsourcing – especially if it is a service that is vital to your organisation. Would you want your supplier scrimping and cutting corners to make a margin because you've screwed the contract down tight? It might be attractive at first, but what if this means your service levels start to degrade?
But perhaps the important thing to do is understand your needs before you start and then explain it to your supplier. And understand what your suppliers can really deliver.
Of course, none of this is new – as Socrates would say, "Know thyself". Or as ancient Chinese general Sun Tzu would put it: "If you know neither the enemy nor yourself, you will succumb in every battle."
It might not be the newest idea – but it seems that many companies still don't do it. If you can't be honest with yourself about what you expect to get from outsourcing, how can your supplier ever get it right?
Comments
There are 9 comments. Join the discussion
1. Paul Beauchamp
I’ve been involved in many outsourcing projects. However, I am still surprised to find companies are unprepared and outsource for the wrong reasons.
Many companies outsource because they believe that it will result in a better service and lower costs. However, if you outsource a poor service with poor processes, it will remain that way when outsourced. You may initially pay less but you will have the same management problems and a host of new ones - and will you have the management structure and expertise in place to address them after outsourcing?
It must be remembered that the outsourcer has different motives and will care more about compliance to the contract and profit than the actual service delivered, although this does not necessarily mean that they will not provide a better service. You should benefit from economies of scale, additional expertise, up to date facilities and be able to turn the service tap off and on as the need arises. But what company can tie down its requirements for a 10 year deal when a company’s business plan only extends to 5 – the added extras and new requirements make the money and cause the problems.
I recommend undertaking three major tasks before going down the outsourcing route: Identify What You Have, Determine What You Need and Reduce Costs.
The first two tasks help you work out what you could or should be outsourcing, but some IT should not be outsourced at all. The third (and it’s a good process to work through anyway) is to reduce your costs – if you do not, the outsourcer will. But in doing this task you will identify the true cost of your services - and the answer may show you provide an effective service for the price.
2. Joe Whitehead
Sun was a genus. The fact that they still teach philosophy like his to students is proof that some ideas are just too good to die, even if the originator died centuries ago. The idea to know your own weaknesses better then your enemy does or to know things about an enemy that the enemy doesn't even realize the existance of, is very important when dealing with business problems.
3. anonymous
I've seen many examples of outsourcing over the years - perhaps the biggest was BT outsourcing its excellent in-house catering.
And guess what? It never works out quite like the promises made about it.
Common sense should tell us that if it costs a £1 to do something, then it will cost the outsourcer a £1 also. Then he adds his profit. To make it atttractive, he charges 80p, and skimps like mad to get his costs down from £1 to 60p so he makes a profit. This can only happen when the the new provider handles many contracts, and can benefit from economies of scale. In my experience this rarely happens - take the catering I mentioned earlier: It was handled by a central HQ, but the diverse locations served prevented bulk purchase of goods, so the raw materials still cost the same. The labour costs were about similar, so in the end the prices to the customers went up (and the quality went down). Who benefitted? The new supplier, of course. We didn't. BT didn't. But someone signed the contract, just the same.
4. anonymous
Outsourcing the hen-house to the foxes…
I stared off my career in IT working for an outsourcing company, so none of the recent failures has surprised me. Most such deals have involved outsourcing care of the hen-house to the foxes.
To be successful, an outsourcing contract requires the company to know its requirements in detail, be able to articulate them in precise legal language, be able to monitor the work precisely – and – be able to withdraw from the contract quickly, cleanly and cheaply at the first sign of trouble.
That’s hard enough to do if your outsourcer is local and cooperative and the goods or services straightforward and easy to measure e.g. telephone service. It is, in my experience, nearly impossible if the upper management isn’t “hands on”, and the outsourcer is geographically remote and and has a different language and culture distinct -- or if the outsourcer is deliberately non-transparent. Would you say I have just described the situation in all of the recent IT fiascos?
5. John Sullivan
Actually, i was expecting a good historical example.
Look what happened with the Roman Empire. Originally they used their own legions to defend their northern frontier at the Rhine. But eventually they started outsourcing it to the local Barbarians.
A hundred years later, the same barbarians rose up, and overran Rome, and destroyed the empire.
Those who do not learn from the mistakes of history are doomed to repeat them.
6. Michael Grogan
I believe there arre two 'ancient reasons' why outsourcing fails.
One: Greed is not a viable motive for running a business.
Two: Cutting cost should be the last and least important factor in any business decision. Product quality and customer service/satisfaction have to come first.
7. Manju
This article is totally waste. There are no examples of history's bitter lesson from outsourcing as the title mentions. The comments are better than the article itself. I dont no how the editor allows things like this to get printed. Or is the editor itself "outsourced" and the outsourcer is doing this crappy job.
8. Robert Clark
Sun Tzu was actually a genius. Unless you know something new.
9. John Groom
Some of the trouble comes when an organisation that has outsourced its IT, seems to believe that it has also outsourced its responsibilities and obligations for the services that that IT supports.