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Outsourcing. If you undertake this beast solely for financial savings, you will be disappointed. After a decade and a half of IT finance experience in the consulting, healthcare and entertainment industries, I tend to liken outsourcing to medicine: The skill or portion of your business that you are looking to outsource is the headache, and the act of outsourcing is the aspirin. In many cases, one has to be willing to spend extra money to get rid of the headache. Spending extra money is not always the case, but when it is, it still could be the right decision in the long term.
It is now rare to find a company, of any size, that hasn’t outsourced some portion of their IT functions. This could be as small as an application or as large as the company’s entire IT department. So now you’re considering outsourcing within your own organization…but where to start?
Step 1: Once the CxO has signed off…
Once the CIO and/or CFO (hopefully with inputs from many other departments) has decided to look at the outsourcing option, where does the team – consisting of representation from finance, procurement, legal, operations, the user community and executive leadership – start? As an example, let’s say a company is looking at outsourcing their mainframe environment:
The first thing that needs to be done is to figure out what assets the company has dedicated to its mainframe environment. These assets might include: applications (software), storage, facilities, labor and the actual mainframe equipment. According to my colleague Brian Superczynski’s article, “More bang for your IT buck: Three keys to success”, published on March 15, 2010, well run organizations have accurate asset management, contract management, vendor management, activity based costing and other systems to make this an easy endeavor (my article Lifecycle Management: Knowing what your company owns, how it’s being used, and where it lives, published April 12, 2010, delves into these areas more deeply), if not, there are many small and large consulting companies that can come in and do this assessment. Most small and midsized companies do not have these capabilities in house. Even large companies may want to bring in an outside expert to do this work, as to keep politics out of the decision making process, as much as possible. Once this task is complete, the finance person assigned to this project will build a cost model, showing what the company spends on its mainframe environment.
Secondly, obtaining data on what other companies (similar to your size and/or industry) are spending on their applications, labor, storage, etc., is very valuable. As with asset analysis, there are many companies out there that can provide this information – Gartner Group and Forrester Research are two of the leaders. Make sure to buy only the services that you need. This information can get pricy, but it is definitely needed to make a sound business decision that will affect the company for many years to come. This information, in conjunction with the corporate costs, will show where the negotiations with the outsource provider will take priority. Labor is always high on this priority list, due to the fact that a provider should be able to do the outsourced activity more efficiently.
Step 2: Selecting and engaging outsourced solutions
Upon completion of Step one, the company is now ready to develop a Request For Information (RFI). This task is usually performed by the procurement team, with help from operations, finance and legal. This document is used to gauge the interest of prospective outsource providers. By asking the right questions regarding the providers’ mainframe capabilities, the company looking to outsource can figure out who are the viable candidates, based predominantly on operational viability and sustainability.
Once The RFI has been responded to, hopefully by many outsourcing providers, the company will make some determinations on who they want to bid on the project. What is becoming more and more popular is multiple outsource providers getting pieces of the outsource initiative – known as multi-sourcing – can come into play as well at this juncture. Once the company knows who and how they want to bid on their outsourcing project, a Request For Pricing is developed (RFP). This document, with many parts of the RFI document included, is meant for the vendor community to bid on the wants and needs of the company. These wants and needs can get very complicated, the company looking to outsource may want upgrades to many of their applications and systems, that they cannot do themselves, or they might want equipment upgrades, etc. These needs will add costs to the total vendor bid.
The vendors that choose to participate in this possible outsourcing initiative will respond to the corporate RFI/RFP – a timeframe you specify but usually within 30 to 60 days. Now is when the real nuts and bolts work starts. Everything is a negotiation. The company will need to decide what is a priority and what becomes secondary. Service Level Agreements (SLA’s) must be agreed to, cost structures for outside work, i.e. new functionality, future usage, etc, need to be agreed to, as well as hundreds of seemingly minor points that if not discussed can come back to bite the company. Once all the costs, service levels, etc. are agreed to, a decision can be reached.
Step 3: Reaching the final decision
In order to reach a final decision, a business case must be built. There is no set form in doing this, each company is different. This business case needs to contain the information necessary to sell this undertaking to the decision makers in the corporation. Financial models, growth estimates, industry information, etc all help make the case. What the decision will come down to is where the ‘most bang for the buck’ can be realized. Is the company getting the same services for less money? Are more services provided for more money? Are future costs controlled? The answers to these questions in the business case will lead to a conclusion and facilitate the final decision.
Once the business case is presented, a decision is made. Outsourcing may or may not make sense based upon all of the evidence provided. If outsourcing does not make sense at a particular time, this does not necessarily mean it should not be looked at again in the near future. The business environment or technical needs of the company may have changed, services pricing may have decreased, etc. If outsourcing is the chosen direction, the company needs to put processes and people in place to manage the engagement in a positive way, in most cases this can be done through a reallocation of the labor that has been outsourced. Issues will come up and having process in place will help mitigate them in a way that is beneficial to all involved.
I hope this information is helpful in your organization. Remember that this is a broad outline of the undertaking of an outsourcing relationship. Each company will have different needs, levels of service, etc. Make sure you have or contract the best expertise to provide all the information needed for your company to make the best decision for its business interests. In most cases, outsourcing should only be considered for non-core activities, such as Information Technology, Customer Service, vendor management, etc. Outsourcing can be a huge benefit to an organization on many levels, but should never be taken lightly; always make sure that due diligence has been conducted, sound planning exists, and ultimately that internal monitoring and coverage exists in order to address any issues that may arise. It’s your business – fuel it properly to ensure success