CIOs Uncensored: Outsource Success
Many of us IT leaders face a common situation: IT expenses are mounting, operational budgets are shrinking, and the work just keeps getting more complicated. The urge to outsource can be strong, but is it wise? You may have tried it already, maybe at another job, and decided it wasn't worth the hassle. Maybe you're in the middle of a project, using an outsourced development team, that isn't going well. Or maybe you're facing pressure from the board or other executives who believe outsourcing is the solution to all tough IT challenges.
As CIO of Avnet, a $15.7 billion-a-year U.S.-based global technology distribution company, I learned a long time ago that it's people, not hardware or software, who make the difference in the business of IT. Whether you're considering outsourcing, insourcing, offshoring, near-shoring, or even providing outsourcing services with in-house staff, you'll want to pay careful attention to the potential impact of such decisions on your team.
I don't have the answer to what's best for your business, but I can share my outsourcing/insourcing experiences in the form of 10 tips that may help you either start a new project or take a step back and look at what's taking place within your IT environment.
10 HARD-WON OUTSOURCING TIPS
>> 1. Consultants can save you millions. It may seem counterintuitive, but before you select an outsourcing company, outsource the selection of your outsourcing partner. This is particularly important if you're undertaking your first major outsourcing venture. Outsourcing specialists such as TPI and Morgan Chambers (now a part of EquaTerra) can help you develop a comprehensive RFI and/or RFP, identify organizations that best match your requirements and culture, and negotiate contract terms and the scope of work that makes sense for both you and your future partner.
Since independent outsourcing specialists typically influence the short list of vendors invited to bid for a contract, they're influential with outsourcing companies. They know what contractual terms are reasonable and where potential contract traps may lie. They have a strong line of sight on what costs the industry will bear and can save you millions of dollars during the negotiation process simply by identifying areas where proposed costs are exceeding industry norms. I've used consultants in this role extensively over the years, and their costs have been paid back many times over in terms of lower outsource pricing.
>>2. Even if you outsource it, you still own it. While outsourcing relationships are partnerships, the outsourcing partner's priority is always going to be its own business' bottom line--it's up to you to focus on yours. If you don't have a core team of technical people who can provide sanity checks on the solutions put forward, you're setting up both your company and your outsourcing partner for failure. As CIO, you also must maintain ownership of the governance process, prioritizing activities and establishing best practices for your extended organization.
I know that for my team to be successful, I need to help my outsourcing partners be successful. There are some things that outsourcers can't do without you; for example, your help can be vital in giving political air cover when there's an unavoidable system outage or a missed project milestone. It's also vital to give early feedback on how your outsourcer is performing. My experience is that deferred problems rarely get better by themselves.
>> 3. Benchmark first. For me, where benchmarking truly makes a difference in your outsourcing decision is with operational or infrastructure activities. I use three types of benchmarks that, together, provide an accurate assessment of how an IT organization compares to what a third party can provide.
First off, we benchmark against similar companies within our industry. We also conduct cross-regional internal benchmarks. At Avnet, we found that some internal teams were more cost effective than others while providing the same or greater level of service. Finally, we create an affordability benchmark. We look at the cost/service levels provided internally and compare them with what we would receive from a third party.
By benchmarking, we found opportunities to reduce costs in some areas while identifying other areas where we need to invest to improve service levels. Benchmarking led us to determine that Avnet's data center operations exceeded what we could get from an outsourcing company, from a combined cost/service level perspective. As a result, we now offer data center-related IT services to our customers (see "New Service Offsets Fixed Costs").
>> 4. Plan for the end at the beginning. The acid test of any outsourcing contract is how smoothly things go when it ends. Have the hard discussion up front about how the relationship can be terminated, and why. Get it in writing. I think of it as a prenuptial agreement. No one wants to talk about divorce at the start of a marriage, but you never know what could change or impact a relationship in the future, causing it to end. And divorces are rarely amicable.
At one point in my career, I was required to insource a large outsource contract that wasn't working for either party. The company I worked for and the vendor were both grateful for the "prenuptial" agreement that was in place. It provided a reference point that let everyone involved get on with the task of insourcing and looking after our people, rather than scoring negotiation points.
>> 5. They need to make money, too. Remember that your IT outsourcing partner is running a business. If the relationship it entered into with you isn't profitable for the outsourcer, you're either going to receive less service than you expected or be charged for every service change or specification change.
I was once involved in an outsourcing relationship where I was in the middle of "change-order hell," being asked to approve a constant stream of incremental cost-change orders. When I was asked to pay for the estimating work in support of these change orders, I decided that enough was enough. I sat down with the leader of the outsourcing partner, and we both quickly understood that the real issue was that the outsourcing partner was unable to meet its profit targets on the account. We decided to separate and go our own ways. The partner could make better profits elsewhere, and I could get better service, for less, with other partners.
While push and pull are inevitable in any outsourcing deal, there are ways to keep the relationship in balance. Consider practicing open-book accounting. Ask your partners to disclose their costs, and what profit margin they're trying to achieve. If it's all out on the table, you can build flexibility into the relationship that lets you get the service you need, without causing undo pressure on the partner.
STATE THE OBVIOUS,
>> 6. Service-level agreements can't be too explicit. This is an obvious statement, but I would be remiss in not mentioning statements of work and service-level agreements. The more detailed and measurable they are, the easier it will be to define success. You should also make sure they map to business objectives as well as IT metrics.
I always seek to include an overarching principle into any outsourcing contract: Whether service levels are explicitly defined or not, the services to be provided by the outsourcer must be lower cost and at a better level of service than the existing service. Otherwise, you need to ask yourself--why use this outsourcer?
>> 7. Negotiate based on cost, but decide based on quality and people. In the business of outsourcing, the individuals assigned to your account matter. You are, of course, buying a proven methodology and service, but the quality of people providing that service can make all the difference between success and failure.
For example, in project-based outsourcing relationships, we tend to handpick the team based on resumés, skill sets, and personalities. If the outsourced team will be working within your four walls, you want to make sure you have a cultural fit with your teams. Ask yourself, would I hire these people to work at my company? If not, there may not be a match--even for a short-term project.
Two individuals are critical in setting the relationship's tone: the outsourcer's leader who manages the contract, and the leader you assign to manage the relationship for your company. Take care to ensure that these two people work well together. I've seen failing outsource relationships rescued from imminent termination simply by changing the outsourcing leader; I've seen similar rescues happen by changing the in-house leader.
>> 8. Use an independent company to perform quality assessments. If you've negotiated your contract in good faith, you already should be clear on how you have defined success. By mandating that a third-party perform quality assessments, you're building some healthy tension into the relationship and creating an independent view into the work provided. If you've established bonuses for overperforming, these independent parties can be honest brokers in the evaluation process.
I've used third-party quality assessments in outsource relationships to ensure that, as IT leader, I'm getting an unbiased view of how both the in-house and outsourcing teams are operating together, and to motivate the outsourcing partner to get things right the first time.
>> 9. Be transparent with your team about the process. Nothing is more demoralizing to a team than rumors circulating about outsourcing and the potential for staffing changes. For any outsourcing I've been involved with, I've strived to be as candid and up front with my team as possible. I've also tried to keep them involved in the outsourcing decision process when feasible.
Don't expect all your team to be supportive of outsourcing, but do take time to tell them what you're considering doing, why, and what the potential impact may be on them. If they're brought into the strategy and understand their role in the process, your team can be invaluable in helping outsourcers understand what they're taking on and can help you recognize the gaps in what's being offered versus what's required to run your operations or develop your project.
>> 10. When possible, offshore to yourself. At Avnet, we do business in more than 70 countries, and each office needs IT support. While we will always maintain IT teams within our regional businesses, we're expanding our offshore development centers. Our IT development operations in Bangalore, India, began more than five years ago, and we invested in Shanghai, China, during the past 18 months. We're now creating a development center in Bucharest, Romania, which will give Avnet support for IT development and operations.
The employees in these offshore centers are woven into the fabric of our IT teams. We look to our offshore employees to provide program/application development and database administration support for our entire enterprise. We established clear software development life-cycle processes and extensive project documentation to aid communications across time zones and languages. Our offshore development center employees benefit from the same training, development, and long-term career growth opportunities as all our IT staff.
A balanced IT asset portfolio has a mix of resources--talented IT management and staff at your headquarters, regional teams that support and are closely engaged with local business activities, and offshore development teams that are integrated into the global IT organization. There's a clear role for outsourcing within that portfolio to support specific projects and/or infrastructure activities where the outsourcing partner has a permanent structural cost advantage over in-house service.
For Avnet, that means greater variability in service costs to better match IT supply and demand. This flexible and diversified approach to resource management helps the Avnet IT team fulfill its fundamental mission: helping Avnet succeed in the market.
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