Warped expectations lead to outsourcing failures

Companies that look to outsourcing as an opportunity to offload problems are in for a rude awakening.

One of the big reasons outsourcing arrangements fail before they even get off the ground is unrealistic expectations, says Blake Hanna, a partner at Accenture, a Toronto-based outsourcing company.

“”Straighten out your mess before you outsource it,”” advises Hanna. “”If you don’t know the level of performance you’re at now, how will you know how to measure it?””

More than one quarter of outsourcing deals fail in the first year, according to a recent white paper from Toronto-based IT consultancy Compass. Furthermore, half of all companies engaged in outsourcing arrangements seek to renegotiate their contracts, often with other service providers.

Quick fixes are not what companies should be seeking from an outsourcing deal, says Jason Bremner, program manager of outsourcing services at IDC Canada in Toronto.

“”You just transfer a problem to someone else and hope it gets fixed,”” he says.

Hanna admits outsourcing can help companies solve specific challenges, but only if they have a clear map of their objectives upfront. Organizations that are successful with outsourcing, he says, are those that “”turn to outsourcing as a catalyst for change.””

According to a recent study on outsourcing from IDC Canada and Accenture — Outsourcing: Shared Risks and Shared Rewards — the reasons companies outsource some business processes are not the same as they used to be. Not so long ago, companies saw outsourcing as a way of reducing their costs.

Today, however, the study reveals cost has slipped to No. 3 on the list of reasons companies outsource, behind an improved focus on core business (No. 2) and access to skilled resources, which ranks as the most important benefit derived from outsourcing.

In Canada, IT outsourcing is a $5 billion business, according to IDC estimates. The activities companies are considering outsourcing, according to the survey of 177 executives across the country, include IT infrastructure (34 per cent), application development and support (26 per cent), and call centre (18 per cent). Only two per cent of executives surveyed indicated they were considering outsourcing IT security.

A sharper business focus was the strategy behind a 10-year $4-billion deal DuPont inked with Accenture in Jan. 2002 to implement and manage an enterprise resource planning system from SAP. In recent years, the global chemical company has transferred 3,000 IT workers to its two main technology service providers, Accenture and CSC. The IT staff that remains at DuPont — about 1,200 around the world, including about 24 in Canada — are responsible for the stewardship and architecture of the company’s IT operations.

“”It’s really turned the focus on IT from the cost to the value,”” says Maryann Holloway, CIO for Canadian operations. “”The job of IT folks who are left in DuPont is to partner with the business, drive and enable new business models, new ways of being

competitive, and to really have a seat at the table with our business leaders.””

Beyond skilled resources and improvements in business processes, companies want IT partners who share in the risks and rewards of outsourcing scenarios. A willingness to commit to business outcomes is viewed by many executives as the foundation for a strong outsourcing relationship, according to the report. The appetite for splitting the risks and rewards between user and service provider is increasingly prevalent, says Hanna.

“”When you’re using outsourcing to drive change,”” he says, “”companies want partners who are (willing to invest) some skin in the game with us.””

That means having a partner who’s willing to take a hit when something falls off the rails, as often happens.

“”There are always penalties in place,”” says Bremner. “”If it’s a performance-based contract and something goes wrong, they may not get as much money.””

People who have taken the outsourcing path say partners on both ends of the equation need to work on building the relationship rather than engaging in scenarios where they’re pulling out contracts and threatening each other.

“”It’s important the contracts are done and you have a common agreement of the transactional nature, but you really need to work to have a good relationship with your suppliers,”” says Holloway. “”You don’t want to get into a situation where you’re pulling out the contract or nickel-and-diming each other to death.””

Hanna says companies need to find a relationship that is adaptive over time and to do that, they need to strike “”partnering”” types of relationships with service providers.

“”If you’re going to use a contract and service level agreements to beat each other up, I think you miss the opportunity to capitalize on the relationship and take that outsourcing arrangement to achieve the next level of business performance,”” says Hanna.

One of the bigger surprises from the report was that nearly one out of every five companies surveyed said they did not measure the success or failure rate of their outsourcing efforts. Of those that do gauge performance, they do so by comparing the results to historical data rather than industry benchmarks.

Bremner says measuring the value of outsourcing is a concept whose time has come.

“”This really touches on the point of determining value through metrics and measurements, but are companies measuring the right things? Have they established the right baseline metrics?””

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Jim Love, Chief Content Officer, IT World Canada

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