STRATEGY: Two sides of the story

STRATEGY: Two sides of the story

Stephen Pearson, CIO of KAZ Computer Systems, and Paul Hartigan, chief manager of group technology with the Commonwealth Bank, express their views on the big questions surrounding outsourcing.

Q: Do CIOs find outsourcing more complex than internal IT? Why?Pearson: Any outsourcing deal is likely to become very complex unless a quality SLA (service-level agreement) is agreed upon at the outset. I think that for outsourcing to work, a CIO must be prepared to make a change from being a people manager to being a partner manager.

Hartigan: The IT work itself doesn't change in complexity but some new management roles are necessary to cope with the fact that the IT is now performed by an external company. The CIO's team needs to focus on architectures defining the overall technology and systems plan and have skills in contract management and managing service delivery.

Q: How can service providers assist CIOs in making it easier?Pearson: Here are my four top tips:

1. Ask the client to make commitments too, a ‘reverse SLA' if you like. The internal IT team must have mapped out their business processes and identified what technology is needed to support them before a useful SLA can be agreed on. If you don't know the KPIs (key performance indicators) required to support your own business, you can't expect the provider to second-guess them for you.

2. Be accessible. It's a house rule that our data centre managers know their client CIO personally.

3. Share knowledge. We invite CIOs to executive breakfasts where they hear the outsourcing experiences of other clients. These are real warts-and-all sessions.

4. Above all, be flexible. One size does not fit all and outsourcers need to be able to offer a business model that can accommodate the different needs of both medium and large enterprises.

Hartigan: Every outsourcing arrangement is different and the key to smooth operations is education. With outsourcing we create incredibly complex arrangements but tend not to educate those who have to work with the agreements.

Q: What elements of outsourcing cause CIOs the most frustration?Pearson: Bracket creep, where some outsourcers will try to satisfy the cost reduction criteria by writing SLAs in a way that allows them to keep going back for more money. I suspect that forcing clients to accept a cookie cutter (one size fits all) approach also ranks up there.

Hartigan: Understanding roles is important - within the IT development model and the responsibilities in relation to the service provider.

Q: What are the causes of the pricing confusion? What is your preferred model?Pearson: If cost reduction is the main criterion for outsourcing, then the client needs to understand why their costs are blowing out in the first place. On the other hand, if they want to control fixed costs then that's a different story. Pricing discussions should then focus on providing an agreed level of service at a fixed monthly price. This may not necessarily be at a lower cost but it is predictable.

Hartigan: In our outsourcing we buy services that are a mixture of services and technology. Confusion comes when users compare the price of services with the market price of the technology component. Again, the answer to the confusion is education. In terms of models, we like known prices for future years as this puts the technology risk with the supplier, where it belongs.

Q: Do CIOs prefer good service to good price?Pearson: The CIOs we see successfully managing the transition to outsourcing understand that they are entering a partnership that must be a win-win situation. This means focusing on the total outcome and not just price - after all, it is not hard for an outsourcing company to deliver at a lower price if they cut corners in service.

Hartigan: Service and price are a balance. To save significant amounts of money you have to standardise some services and manage others in a necessarily different way. You cannot control price and have unlimited services, but you must make sure you're getting the necessary services for your business.

Q: What do your think of the idea of lifetime management (weighing the value of a customer over the life-span of the relationship as opposed to the margin off an isolated sale)?Pearson: Few outsourcing agreements are profitable for the provider until you're two or three years in. That means you have to take a long-term view and some flexibility is required on both sides.

Hartigan: A fact of life is that every contract comes to an end for one reason or another and the end needs to be planned at the beginning. Outsourcing really only works in a competitive market and the competition must be maintained. You can't outsource to a monopoly - or outsource creating a monopoly.

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