CIOs may consider IT outsourcing their number one cause of ulcers, but much of the blame can be laid at the feet of dissatisfied customers - not the services providers.
At the IT World Congress in Adelaide, Commonwealth Bank chief David Murray voiced the frustration of not just the business world but a large percentage of the consumer population as well. The whole technology thing is just getting too bloody hard, Murray said. We've got no idea what's going on; the thing never does what the box says it should; it's sucking our coffers dry; and to add insult to injury, we can't just drop the whole stinking lot out the 18th-storey window because we actually need it.
Within hours, the press were all over CBA's IT outsourcing partner EDS, whose managing director, Don Easter, denied that Murray's stab had anything to do specifically with the bank's relationship with EDS. Murray was talking more "conceptually" about the value of IT, said Easter.
Whatever you believe, the perception of technology's ability is intrinsically bundled with how painless (or not) the outsourcing process is. If the outsourcing relationship goes awry, so does the technology solution. According to CBA's chief manager of group technology, Paul Hartigan, too often the reverse is also true because things have not been properly thought through from the outset.
Share risk, secure skills
The concept of outsourcing IT and telecommunication services is relatively new. It evolved in order to allow companies to focus on core competencies rather than be constantly distracted by infrastructure issues.
Today, the rationale in outsourcing is not to cut costs as previously thought, but to share risk and secure specialist skills, which are increasingly in short supply. Stung by the Â‘big bang' approach, growing numbers of information systems (IS) executives are looking to outsource just elements of the data centre equation, while retaining control over key functions such as application development and help desks. Those organisations will use outsourcing vendors to augment internal skills or offload repetitive tasks, such as PC upgrades. In this scenario, cost reduction is increasingly irrelevant - organisations simply want to tap into skills that internal IS departments can't or don't provide for themselves. (One of outsourcing's dirty little secrets is that it also rids a company of many staff by transferring them into the service provider's organisation or by simply making roles redundant.)Nevertheless, the misconception that outsourcing allows an organisation to forget about its IT needs altogether is the source of most headaches for outsourcing suppliers. Providers in this type of account run the risk of not meeting expected outcomes because the customer itself is not clear on the goal. It is also the reason many businesses taking their second and third crack at IT outsourcing are doing only marginally better than the first time around.
"Many agreements fail because companies have not thoroughly analysed their own metrics and goals," says Ed Emig, whose OAO Corporation provides outsourcing for NASA, IBM, EDS and AT&T in the US.
In fact, the Meta Group's Wisam Rafford says some CIOs are still asking if there is a case for outsourcing at all, despite the fact that they see no alternative. But he feels the companies getting the most out of the outsourcing relationship are those who manage it. The provider may be responsible for supplying service against the specs, but that does not mean the client is off the hook in terms of accountability for the performance of the relationship, he says.
Still, ignorance is widespread. When it comes to knowing what applications are running on their networks, 83 out of 250 IT professionals are clueless, according to a recent US survey - which suggests the next best businesses after outsourcing are benchmarking and business consulting. "There's no school to go to to learn how to outsource," says Hartigan. "With outsourcing we create incredibly complex arrangements but tend not to educate those who have to work with the agreements."
Based on a CIO workshop held earlier this year, Rafford says CIOs do not expect service providers to assist in establishing management policy. However, in reality, the better outsourcing houses often do this to protect themselves. Service providers are beginning to look at the long-term or ‘life time' value of customers rather than the dollars reaped from a single sale. "Outsourcing agreements are rarely profitable until the second or third year, so you have to take a long-term view," says Kaz Computer's CIO, Stephen Pearson.
What's more, the outsourcer is being asked to make huge capital investments on behalf of the client in the interest of sharing risk. "When we buy services, the supplier carries the technology risk," says Hartigan. "The provider gives us a fixed forecast price for the term of the agreement and then he is responsible for buying the technology during those years."
It is typically at this point that the interests of the provider and the customer disconnect. Costs threaten to blow out and the outsourcer may be tempted to leave holes in project specifications to establish a buffer zone between itself and the service-level agreement (SLA).
If SLAs are drafted too tightly, outsourcers may find it more cost-affecient to cop the fine than deliver the service in the specified timeframe.
Even with benchmarking in place, Hartigan says it is vital that the two companies have complementary strategies. "If your internal objective is 8 per cent year-on-year productivity improvement, you've got to share that with [the outsourcer] and they've got to build it into the arrangement."
The good news is that while complexity remains the bugbear of IT, the industry is in the problem-solving phase. Education will be key in reducing frustration from a people perspective, with seminars on contract development already surfacing at IDC. Automated technology is also expected to ease the burden.
The solution, according to IBM Global Services' chief executive Bob Elix, is to rely less on human intervention - to the point "where the technology manages itself". But you still need someone who can find their way in the dark when the power is out - we've all seen The Matrix so we know where that AI attitude takes us in the long run.
Things CIOs hate about IT outsourcing
- CIOs feel they are managing more complexity in IT than in the general outsourcing arena, primarily because there is no single contractor that can provide an overall solution.
- The pricing structure is unclear so CIOs can't measure quotes against the going market rate.
- Converting business requirements into IT requirements is difficult, as is ensuring that the two are aligned.
- Too often the outcome falls well short of the promise, which affects the return on investment. This includes fantastic expectations established by vendors that haven't been curbed by the provider.
When it comes to IT outsourcing CIOs want:
- To buy services not technologies.
- A known price for services for the full term of the contract, with built-in productivity improvements - and without the surprises associated with major capital investment.
- A partner and a relationship that compliment their strategic direction.
- Service levels aligned to business needs.