After completing a BS in Business Administration (California State University, Fresno) and a MPhil in Development Studies (University of Cape Town), I began my career by founding a boutique socioecono...
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Home > unspun > unspun 25 - Are you asking the right questions? > IT Outsourcing
Drawing on Berkeley’s extensive experience across clients in numerous industries, we have identified a number of key factors for a successful outsourcing relationship.
Clearly defining your sourcing strategy and delivery model first, and then subsequently procuring the services to meet this, is critical. Considerations for your sourcing model should be evaluated for each of the services you are looking to procure, but will include:
A key success factor of an outsourcing deal is that both parties see this as a beneficial, long term relationship. It is important in the longer term to have a partnership, rather than simply handing off a service to be conducted. You are effectively buying a capability for your business. Our experience has shown that large outsource arrangements are typically won at up to 20% below the cost of the delivering the service. That means that once the negotiations are over, and the service is live, the buyer suffers “death by Change Request”, as the provider seeks to recover revenue sacrificed to secure the business. Avoid this by ensuring RFP responses include transparent pricing which demonstrate that a mutually acceptable margin is made by the provider, and that charges scale appropriately for future increase or reduction in the size or pace of change of your business.
Outsourcing in IT has frequently led to a loss of internal capability for many companies. Whilst your provider is responsible for delivering an efficient operational service, you can’t outsource accountability – knowledge retention, and the ability to effectively manage risk, need to remain within your organisation. The ability to nurture and deliver innovation will be limited with a very price- focused IT outsourcing arrangement, particularly where internal capability has been lost as part of the business case for proceeding.
The structure and complexity of the IT services involved will be an important factor and the cost of integration is often under- estimated. Many IT outsourcing arrangements are split into horizontal streams, e.g. application and infrastructure, or by vertical business function. This introduces challenges to ensure clear end to end responsibility. Ultimately you, as buyer, need to ensure integration across multiple vendors and systems. Therefore, your in-house team needs the right skills and governance to ensure that it continues to operate effectively throughout the lifecycle of the deal. You will also need robust operating agreements with your suppliers, and between suppliers, so that the right hand shakes are in place to ensure that the overall service levels committed to the business can be met by IT.
Over the longer term it will be essential to have clearly defined responsibilities for IT architecture, elements of which are commonly overlooked in large scale outsourcing arrangements. This includes management of non-functional requirements such as security, maintenance and system performance. Ensure that you retain sufficient architectural control, but don’t try to replicate the supplier’s team with a shadow team structure that will impact the cost efficiencies that can be achieved – as the buyer you will need to define architectural policies and governance, but the experience of your provider should be utilised for the creation and maintenance of detailed standards and procedures.
In summary, outsourcing should remain an integral part of an organisation’s IT sourcing strategy, however providers’ services and buyer’s objectives have both matured over recent years and new agreements will look and feel very different to those
Summary of changes in outsource characteristics
Based on our extensive experience of different outsourcing arrangements across our clients, Berkeley have developed a 10 minute ‘health check’ tool to assess the strength of your current outsource relationship – you can access the IT Outsourcing Health Check for free from our IT Outsourcing web page at http://www.berkeleypartnership.com/articles/it-outsourcing-consulting.
What does good look like?
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