Outsourcing IT has become ever more widespread over recent years but the benefits of different partners are changing with technology and location. Business Management caught up with Tim Barry, CIBER Inc., to find out what to look for in an IT outsourcing partner and how communication of what you want is key to the relationship.
BM. In what areas of IT has outsourcing become most common and why is this? In what other processes, or perhaps sectors, do you see most untapped potential?
TB. Over the past few years, the trend has been toward IT outsourcing deals that are smaller in size and shorter in duration. Outsourcing has become mainstream and clients are more educated and sophisticated than ever before. They are, therefore, more comfortable managing multiple contracts with multiple vendors. This trend has provided opportunities for a greater number of firms and the market is more competitive than ever. Certain services, such as help desk, desktop support and application maintenance, have become commoditized and most service providers compete in these areas primarily on price. The globalization of the industry has created a need for service providers to develop global delivery models to compete effectively and provide clients with choices. While global delivery models initially were used for services such as call centers, help desk support and simple maintenance functions, more and more providers are leveraging global delivery capabilities for other services such as infrastructure management, network management, and business process outsourcing. CIBER offers those services currently at its offshore center and at its low-cost domestic outsourcing centers in Oklahoma City and Tampa, FL. Many IT outsourcers see business process outsourcing as a natural extension of IT outsourcing and are moving to develop BPO capabilities rapidly.
BM. How would you sum up the key benefits and drawbacks of outsourcing within the IT sector today?
TB. Today, clients leverage outsourcing to afford them the benefits that specialists can provide. It enables them to drive costs down, to focus on their own core competencies, gain access to improved processes and methodologies, provide resource flexibility and to improve service levels to the business community. Furthermore, as outsourcers are specialists in their areas of expertise, they should be able to provide services better, faster and cheaper than their clients.
Some clients have a perception that outsourcing will mean less control over resources and less information on how the services are being performed. At CIBER, we believe that outsourcing actually provides visibility into much more information than most clients track and report on themselves. Any competent outsourcer should be able to provide detailed information about service level performance, resource utilization, quality, throughput, time-to-market and customer satisfaction. This information should actually provide clients with more control over their environments, not less.
BM. What would you like to see happen, either in development of certain technology or perhaps changes in regulations and compliance issues, that would improve the efficacy of outsourcing? For example, are any new technologies helping to strengthen the outsourcing relationship?
TB. As technologies evolve, outsourcers must take advantage of tools and techniques to bring their clients closer to real-time performance and business impact measurement. Clients that have real-time access to information, and use it wisely, can leverage that access to ensure expectations are constantly adjusted over time. Surprises should be a thing of the past if data and information is accurate and readily available. There are a number of tools available today that allow outsourcers to develop web-based dashboards and reporting mechanisms. Of course, the information displayed in these dashboards is only as good as the data collected, so outsourcers need to leverage tools and techniques to ensure data accuracy and integrity. Improvements in communication technologies have allowed global delivery models to become commonplace, and we expect that they will continue to allow better and faster access to information along with easier implementation and administration. Newer, stricter regulation and compliance has created opportunity for outsourcers to provide new services to their clients. New regulations typically necessitate more thorough, accurate and timely reporting that creates demand for new systems and procedures.
Outsourcers also need to become versed in some new accounting rules that govern ‘multi-element projects’. Certain projects that include development efforts followed by longer-term maintenance and support are being scrutinized by new accounting rules that can be a disadvantage to the outsourcer. These new accounting rules put certain restrictions on when service providers can recognize revenue for services delivered. In some cases, revenue recognition for large, up-front development efforts must be spread over the life of the longer term deal, thus delaying revenue and profitability for the outsourcer. This situation not only puts the outsourcer at a disadvantage but also reduces the flexibility they can provide their clients. So, clients and outsourcers alike need to understand the regulations and compliance issues thoroughly and work to develop deals that create value while staying within the rules.
BM. What are some of the common mistakes made by both parties in an outsourcing relationship and what are the potential consequences?
TB. Outsourcing relationships can run into problems on a number of levels and for a number of reasons. Most often, however, it relates to unrealistic expectations on both sides, with clients underestimating the level of effort required to manage the relationship. Some clients feel that once the contract is signed, the outsourcer should be able to manage the environment with little or no direction. But an outsourcer can never know a client’s business as well as the client, and constant communication about business conditions, strategies and end user satisfaction is required to ensure the outsourcer is providing service that is valuable and necessary.
Another common area of missed expectation is in the time and resources required to transition an existing client environment to an outsourced solution. Clients want to leverage an outsourcer to drive cost savings as quickly as possible, of course. But to do it right takes time and resources. Asset transfer, knowledge transfer, development of governance procedures and development of service level measurement and reporting always take longer than either party would like. It is not uncommon for clients to expect cost savings and improvement in service performance immediately. That can put undue pressure on the outsourcer and force them to cut corners and take risks that put both parties in jeopardy. At CIBER, we understand that the most successful outsourcing relationships acknowledge the fact that the benefits of the relationship, both economically and performance-wise, will come in due time. It is always better to do something right, rather than to do it fast.
We have also found that many companies that have had a less-than-ideal initial experience with outsourcing are willing to try it again if the outsourcer can show that it will be done right. We have had many clients sign up for our outsourcing services at our CIBER sites in Oklahoma City and Tampa, FL., because we can demonstrate that we take into account the many other factors that must be considered in choosing whether to outsource, and with whom to partner.
BM. What advice would you give companies when choosing a company and country to outsource to? What should the short- and long-term considerations and expectations be?
TB. In choosing an outsourcing partner, client companies should place a great deal of emphasis on how the two companies’ cultures will mesh. Outsourcing success is rooted primarily in relationships and people rather than in technical competence and cost. A company should consider whether the outsourcer is really interested in how the business operates and understands the industry and business drivers. Are they bringing forward ideas on how IT performance can support improvements in the business, and are they the kind of people your employees would want to work with over the long term? Other considerations include their openness to discussing ways of sharing risk and reward together, and whether they have a delivery model that allows changes in strategy as the business changes. Are they willing to develop a delivery strategy and partnership model that is unique to your situation, or are they simply providing a cookie-cutter solution? These are all important questions that clients should consider when choosing an outsourcer.
When it comes to location, there are a number of factors that can provide insight into where services can be and will be performed. Global delivery models are the norm these days and are accepted as necessary for most service providers. India still leads the way in the application outsourcing community due to the sheer number of highly educated, English-speaking software engineers. China is gaining acceptance rapidly, but will lag for the next few years due to legal, language and infrastructure issues. Near-shore alternatives are still a good choice for clients who are uncomfortable with time zone or distance concerns, but the economics of near-shoring are not as attractive as they were in the past. There is a growing trend toward domestic, low-cost delivery capabilities as companies are looking for ‘made in America’ solutions. These solutions are very attractive to clients that want to leverage the economics and performance benefits of outsourcing but are concerned about the risks of allowing work to be done outside America.
BM. Once a third-party is chosen, how can a company continually monitor and evaluate the ROI of that outsourcing relationship?
TB. There are a number of best practices that can support strong, long-lasting outsourcing relationships. First and foremost, the client must be committed to actively working with the outsourcer to ensure that the services provided are in alignment with the clients’ business drivers. The outsourcer and client must work constantly on managing work intake and prioritization efforts to ensure that the work being performed is providing actual business value. We support the establishment of an Executive Steering Committee, including executive representation from both the client and the outsourcer. The Steering Committee should meet on a quarterly basis (at a minimum) to review project performance and alignment with business conditions and needs. These meetings are not intended primarily to look at past performance, but rather to confirm value in the relationship and guide the teams to optimal performance in the future. Of course, changes in service and direction to meet changing business conditions require contract flexibility. Both parties should strive toward developing contracts that allow changes in resource utilization and service levels that most appropriately provide value to the business. In selecting an outsourcer, clients should try to gauge how flexible an outsourcer might be in handling changes down the road. Many outsourcing relationships have been doomed by one party or another sticking to the ‘letter of the law’ of the contract instead of the spirit of the contract, and not allowing any flexibility.
BM. What do you believe will be the main outsourcing trends in the next five years?
TB. As the outsourcing market evolves over the next five years, outsourcers will need to develop competencies and capabilities that create new differentiation. Past differentiators such as cost savings, technical competency, certification and global delivery models are accepted standards today. As clients become more comfortable leveraging multiple vendors simultaneously, outsourcers will need to differentiate much more on issues that drive tangible business value. Client and vendor partnerships will be forged by tying IT performance directly to business value and business leaders will be closer than ever to technology projects.
Business process outsourcing and IT outsourcing will become more closely aligned and performance will be measured not on technical proficiency alone, but on direct business impacts. Outsourcers will need to specialize much more than they do today, both through specific industry focus and business process knowledge. The industry is already seeing a spike in demand for customer-facing resources such as business analysts, project managers and program managers. Global delivery models are helping to drive tremendous business value for clients, but they will only work if the industry improves in areas such as requirements management, distributed team management and project management.
CIBER has published a white paper that discusses the factors to consider when deciding whether to outsource, and when selecting an outsourcing partner. It’s available at: www.ciber.com/downloads/whitepapers