Five reasons outsourcing deals fail

Almost two thirds of mid-sized enterprises participating in a recent study by Info-Tech Research Group have outsourced some part of their IT services, and, according to Info-Tech, the trend will catch on as larger outsourcers bring their services down-market to smaller customers.

But more would be successful at it — in both small and medium-sized businesses — if a few major pitfalls could be avoided.

  1. Remove the blinders.Too many outsourcing efforts are driven by the singular desire to save money. This is the absolute wrong way to go, says Carmi Levy, senior research analyst with London, Ont.-based Info-Tech. “Over 50 per cent of outsourcing projects in general, based on our research, are failing to meet expectations because objectives are totally unrealistic. Costs come up that you did not foresee initially,” Levy says. For example, outsourcing your help desk functions might make sense for your organization, but if you just “throw it over the wall,” take the cash and try to forget it exists, how is the outsourcer supposed to know how you want it to work on an ongoing basis?
  2. Cope with scope. The SMB and the outsourcer must agree on which services are to be delivered and exactly how. A detailed service level agreement should be written up that clearly outlines what’s expected. Without an agreement, or with a poorly drafted one, the IT manager or CIO and outsourcer will almost certainly run into conflict. Everyone has a different idea of what constitutes good service — or even accountability. When a problem occurs, it will quickly escalate. You have to know who’s responsible for what.
  3. Don’t do it for the wrong reasons An SMB that just offloads an application that is strategic to its business — such as the development of its Web site — is making a mistake. Over the years, Web sites have evolved from a basic company snapshot to an online application environment that, for some far-flung customers, is the only window into the company they ever see, says Levy. “That’s a pretty strategic asset,” Levy says. Companies that say, “Web site development? I don’t have the skills. It’s costing too much. Over the wall it goes,” are handing over the keys to a strategic business asset. Levy recommends an SMB in this situation do one of two things: Either figure out how to manage the relationship well, or take the money it would have invested in the outsourcer and consider training or recruiting its staff to properly repatriate those functions.
  4. What are you good at — and just how good? Before outsourcing an IT function, ask yourself if it is a core competency of your organization. In other words, are you so good at doing it in-house that it makes little sense to offload it to someone else? If so, hang on to it. Further, are you good enough to sell it to others? Let’s say you’re a financial services organization and your application developers have written great software to manage your operations. Could it easily do the same for other like-minded companies? If the answer is yes, you may have a new source of revenue. If the answer is no, back away. Remember, just because you are able to do something doesn’t mean you should. Make sure it’s cost-effective.
  5. Treasure your customers. Levy says far too many organizations have a willy-nilly approach to outsourcing, often failing to think serious decisions through. The problem with this “immature” approach is that many organizations are outsourcing strategic functions of their business that directly touch your customers. This can quickly compromise the client experience. For example, imagine you bought a computer from a hardware manufacturer who, without much foresight or planning, outsourced its technical support line to a third party to save money. It didn’t set expectations, there is no service level agreement, and nobody is in charge of the customer experience. When your computer malfunctions you call tech support but they don’t have the training to solve your problem. Worse, there is no escalation process in place. It’s a disaster and you’ll never buy from that manufacturer again. “Client-facing entities are strategic, yet mid-sized enterprises continue show a willingness to just outsource them, without considering how this is going to impact the client,” says Levy. “I’m not saying don’t outsource; by no means is outsourcing a bad thing. It can add significant bottom-line value to enterprises of all sizes. But it has to be implemented intelligently and most SMBs are not doing that.”

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