Some outsourcing relationships work, some don’t. It’s not a matter of fate. Nor is it just a matter of getting the best price or writing an ironclad contract. In fact, while it’s important to do your homework on costs, squeezing an outsourcing vendor too hard is often counterproductive, and no contract
can ever create the sort of teamwork essential to a really successful outsourcing relationship. Nor are carefully defined penalties much consolation if an outsourcer’s failure to deliver hurts your business.
Ultimately, outsourcing success depends on thinking things through — why are you outsourcing, what are you hoping to accomplish, and whether you’re sure your chosen partner can help you accomplish it — and on soft issues like co-operation, communication and knowing how to manage the relationship.
Based on conversations with CIOs who have made outsourcing work for them, with major outsourcing contractors and with experts on outsourcing, here are six keys to getting better results from your outsourcing deal.
Outsource the right things for the right reasons. When aging in-house printing equipment no longer met its needs, Roots Canada outsourced the printing of logos on its clothing and posters for its stores. But soon Roots concluded buying new in-house equipment and moving most of the work back in-house would cost less. On the other hand, Roots outsources Web hosting and fulfillment and point-of-sale systems support. “”It’s not cost-effective for us to be expert in certain areas,”” says Ilene Elkraim, vice-president of logistics and information technology.
When Bombardier Inc. negotiated an outsourcing contract with CGI Group Inc., the Montreal company handed over only well-defined functions like the help desk and PC support — “”areas where we felt we were in better control than in some others,”” says Jocelyn Gauthier, director of outsourcing governance. Bombardier didn’t outsource the running of its SAP software, because deployment was still under way.
“”There are a lot of outsourcing deals which are done for the wrong reasons,”” says Adam Vereshack, a partner at law firm McCarthy Tetrault LLP and author of a forthcoming book entitled A Practical Guide to Outsourcing Agreements. Saving money is often the reason for outsourcing, Vereshack says, and that’s fine provided you make sure the savings are real. Another good reason for outsourcing is lack of expertise in-house.
Know what you want, and state it clearly at the outset. “”I think you have to get the agreement right,”” says Bob Diakow, director of information systems for the Regional Municipality of Niagara in Ontario “”and that means making sure you know what your expectations are.””
Mark Langlois, Americas executive for business development on IBM’s application outsourcing team, says one common mistake is not being clear whether the goal is transformation or cost savings. If the goal is transformation, don’t evaluate proposals by comparing the cost to what you have now. “”Wanting one and wanting to pay for the other is going to cause problems,”” he says.
Whatever you want, make sure it’s in the request for proposal. Mark Fecenko, Toronto-based partner and national chair of the information technology group at law firm Borden Ladner Gervais LLP, tells of a client who spent six months negotiating an outsourcing agreement before mentioning a requirement for 99.9 per cent uptime. It turned out the vendor had assumed 95 per cent. “”In order to have price proposals that are realistic, you have to have certain information in the RFP,”” Fecenko says.
Do your homework. Richard Houle recently closed his third outsourcing deal, this time as Toronto-based chief information officer for North America and the United Kingdom at engineered products company Weir Services-Peacock, a unit of Weir Group PLC. Before signing the deal with Fusepoint Managed Services Inc. in Mississauga. Ont., Houle asked for and checked the company’s references — and not just the usual happy ones. “”I said tell me about one unhappy customer,”” Houle says. “”I want to talk to them.”” Concluding the customer was probably more to blame for the difficulties than Fusepoint was, Houle signed the deal in July and is happy with the results.
While checking vendors’ credentials is important, so is estimating costs accurately. Many companies fail to consider all outsourcing costs, Vereshack says — especially transitional costs like severance for employees whose jobs disappear and the cost of transferring software licenses.
Design agreements to ensure results, not punish failures. To ensure the outsourcer has skin in the game, agreements often lay out financial penalties for failure to meet service levels. It’s a useful incentive, but when things go wrong, getting money back doesn’t make them right. “”The financial penalty doesn’t help my customer,”” says Mark Ripplinger, senior vice-president and chief information officer at ATB Financial in Calgary, which has a major outsourcing deal with IBM Canada Ltd. “”What I’m looking for beyond financial penalties — and indeed in many cases instead of financial penalties — would be their undertaking to remedy the problem.”” That might mean the outsourcer provides extra services to help put things right.
Agreements should also give you some flexibility to negotiate better performance as technology costs drop. Vereshack suggests building in a clause allowing renegotiation midway through the contract, and suggests providing for a third party to benchmark your costs and service levels against others in your industry as a basis for that renegotiation.
Learn to manage outsourcing relationships. “”What people don’t often realize is that they’re moving away from an employee relationship,”” says Joel Alleyne, chief information officer and chief knowledge officer at Borden Ladner Gervais. “”I find that you’re managing more in terms of deliverables and results, as opposed to what time somebody shows up and when they leave.””
A good contract is important to this kind of results-oriented management, but so is recognizing that an outsourcing relationship requires a different management style.
Maintain communications. Alleyne holds quarterly meetings with outsourcer Bell Canada. “”We get from them a sense of where they’re going, and they get from us a sense of where our business is going and how our needs are evolving.”” Alleyne also uses those meetings to “”talk about what’s working and what’s not working.”” But if problems arise, “”it’s not my style to wait for that quarterly meeting,”” Alleyne says. “”I just pick the phone up and deal with the key account manager.””
“”They’re part of my team,”” Houle says of the Fusepoint staff who work with Weir Services/Peacock. “”We meet every month. I get statistics on a daily basis.””
No agreement can guarantee teamwork. “”You need to evolve from a very definite plan — the contract — to a flexible implementation,”” says Normand Paradis, vice-president of business engineering at CGI. “”I strongly believe that everything is based on people,”” agrees Gauthier. “”We have people who are dedicated to first of all make it work and find solutions.””