Actually, everything should be clear: The arguments in favor of outsourcing are obvious; after all, service providers and market analysts have been repeating them like a prayer mill for years, and there is no shortage of recommendations for successful implementation. Nevertheless, many surveys reveal a high degree of dissatisfaction with existing outsourcing situations. For us, it is therefore time to clear up the ten most widespread untruths about outsourcing and to point out ways out and solutions for practice.
- Outsourcing saves costs
- Outsourcing brings innovation
- Outsourcing improves service quality
- Outsourcing increases flexibility
- Ousourcing reduces risks
- Outsourcing creates transparency
- Outsourcing brings standardization and process improvements
- Outsourcing accelerates projects
- Outsourcing facilitates the fulfillment of compliance requirements
- Outsourcing does not make you dependent
OUTSOURCING SAVES COSTS
Only rarely does an outsourcer achieve cost effects that the customer itself could not also achieve in the medium to long term. After all, the outsourcer has to make a profit and recoup its acquisition costs. In addition, the customer incurs control and quality assurance costs that, in our experience, are often underestimated. We often see cost comparisons with in-house operations that are “limping” when compared to an outsourcing decision because, for example, the costs of in-house operations have been extrapolated linearly or additional governance efforts have been assumed unrealistically.
But there is another way: To create maximum synergy effects and thus cost savings for the customer, an IT service provider needs freedom. For the customer, this means “letting go” of technology issues, greater acceptance of standards, leaner processes, and governance at a level of higher-level indicators. In the case of longer-term contracts, benchmarking clauses every 2-3 years ensure that the unit costs of IT remain within the normal market range. In addition, promised savings can be tracked with the help of intelligent savings models that are anchored in provider management and continuously reported. It is necessary to include the necessary control models as well as the price or saving models as early as in the outsourcing decision and the corresponding cost simulations in order to arrive at a “realistic” estimate of the cost development.
OUTSOURCING BRINGS INNOVATION
The innovation expected by the customer costs money and thus initially runs counter to the outsourcer’s defined profit targets. Since outsourcing contracts are usually viewed and evaluated in isolation by the IT service provider’s controllers, there is often a standstill after the contract is signed. In addition, outsourcing customers complain that the IT service provider understands too little about the customer’s business to make a real value contribution. Other points of criticism include the inadequate integration of the customer’s IT employees who have been taken over and the lack of “mixing” with the service provider’s competent consultants.
But what actually is innovation? We recommend defining at the start of the contract the areas in which innovation is to be achieved and how this innovation is to be measured and tracked. This can be done, for example, with the help of so-called “transformational outsourcing” agreements with concrete target scenarios and defined measurement points. This includes a technology roadmap over 3-5 years as part of the contract. A key success factor here is the retention of architectural expertise by the customer or, if necessary, the involvement of independent technology consulting in order to be able to objectively assess the degree and growth of innovation.
The essential key is the creation of incentive systems for innovations introduced by the service provider – and is thus in the hands of the customer. And – let’s be honest: is your company prepared to pay additional money for a supposedly positive value contribution in the future? And this is precisely where sustainable agreements and the willingness of both sides to agree on innovation services on the basis of a cost/benefit analysis fail.
OUTSOURCING IMPROVES SERVICE QUALITY
Outsourcing alone will not automatically improve service quality, even if service providers in most cases meet the agreed service levels (SLAs) and thus bring greater transparency to the service. However, measured and “perceived” service quality are often far apart, which is due to the fact that SLAs are agreed on a purely technical basis. In our experience, an overly rigid and “bureaucratic” system of SLAs tends to reduce service quality because the service provider can then easily retreat to formalisms.
Thus, the definition of the “right” key performance indicators and measuring points is of considerable importance – what use is a system availability of 100% if the databases or applications are “hanging” and thus the business process is at a standstill? All SLAs must be carefully aligned with the actual business requirements and compared with the performance “lived” to date. Good communication with internal departments and the identification of the cost implications of overly ambitious SLA requirements will curb overly high expectations. When outsourcing for the first time, it is also important to evaluate the company’s own deficiencies in service quality and communicate them honestly to the service provider in order to achieve step-by-step improvements. A balanced system of soft and hard performance indicators as well as appropriate penalties for poor performance results in higher customer satisfaction and the achievement of quality targets.
OUTSOURCING INCREASES FLEXIBILITY
Contrary to marketing claims, many outsourcing contracts are still far from true “on demand” service concepts and always try to allocate necessary hardware and software investments to the respective contract. As a result, growth beyond a defined corridor during the term of the contract results in new “fixed costs” that the service provider wants to pass on to the customer – either by a one-time payment, a price increase or a contract extension. Downward scalability is also severely restricted for the reasons mentioned and is limited by minimum purchase volumes or remanence costs.
Here, too, it is important for customers to “let go” of technology issues: use and demand virtualization as well as “shared” service concepts and infrastructures from the service provider wherever possible and check thoroughly whether your security policies do not fit these service models after all. For highly standardized infrastructure services, a real alternative is now available on the market in the form of so-called “On Demand”, “Utility” or “Dynamic Computing” models. Such flexible service concepts are supported by the move away from technology-oriented pricing models toward more business-oriented billing.
OUTSOURCING REDUCES RISKS
The assumption of risks must be avoided at all costs, especially for American, listed service providers. In this respect, the service provider will try everything possible, at the latest during contract negotiations, to avoid extended responsibility with consequences that are difficult to assess financially. And while customers are vehemently seeking to shift risks to the IT service provider, few are prepared to share profits fairly.
Possible solutions include joint ventures or gainsharing pricing models with clear rules for gain/risk sharing. Joint rolling planning of IT services and projects enables early reaction to capacity or technology changes. The assumption of all investment and technology risks by the service provider is only realistic in highly standardized environments.
OUTSOURCING CREATES TRANSPARENCY
If there is no transparency at the start of the contract about the services that have been purchased to date and those that will be required in the future, it will not be possible to control service providers and internal service buyers, and thus IT costs and their billing, properly. Service providers also tend to agree on flat rates and service packages from time to time to increase their planning security, which counteracts transparency and benchmarking. Such a basis leads to high billing costs when costs are allocated according to their cause. Business-oriented pricing models also contradict the quest for (cost) transparency if the agreed prices are not comparable on the market.
Two key transparency principles provide a remedy: Price transparency is achieved by drawing up market-comparable service catalogs and baskets of goods as part of the invitation to tender. Appropriate price models ensure that market comparability is maintained. Cost transparency is supported by the introduction of a defined request management and change process with clear cost responsibility. This can also be implemented for a separate service company – without outsourcing; however, the implementation process is much more difficult and takes longer.
OUTSOURCING BRINGS STANDARDIZATION AND PROCESS IMPROVEMENTS
As long as business units as budget owners can undermine IT’s standardization efforts, expected cost targets will not be achieved in outsourcing. “Standardization from the outside” by the service provider does not work for the same reasons and is not desired due to the additional business that can be realized as a result. The governance models (roles and committees) and descriptions of collaboration processes (change, etc.) proposed by the service provider are generic and rarely provide a remedy.
The IT governance organization must be “empowered” to implement the necessary standardizations and process changes in-house, i.e., it must have suitable resources, competencies and tools. It is also helpful if standardization potential has already been evaluated as part of the make-or-buy decision and its implementation has been approved by management with the outsourcing contract. In the transition, the focus on the customer side must then be on the introduction of processes that enable the control of the service provider on the one hand and the management of IT costs on the other. This is where tried-and-tested models and tools come in handy, which require just as professional an introduction on the customer side as the outsourcing process up to the signing of the contract. In current practice, the customer often fails to recognize the potential here and relies too heavily on the service provider. However, the latter has neither the necessary neutrality and assertiveness, nor has the effort been planned into its business case.
OUTSOURCING ACCELERATES PROJECTS
The slow processing of projects is another common annoyance in outsourcing relationships. There are many reasons for this: on the one hand, consultants who are competent in terms of content/expertise and good project managers are rare, even among IT service providers. A lack of knowledge about the customer’s core business and its specific business processes are further expense drivers, and last but not least, expense-driven projects are very high-margin, so that the service provider is easily tempted to drive up the project expense. On the other hand, in our experience, the service provider often gets in its own way and slows down the customer’s project progress through lengthy internal approval and release processes.
Control brings success: A clean internal project/portfolio management with its own project controlling (control and success measurement via business case and key figures) and a professional requirements management with clean project specifications are prerequisites for high project efficiency. Additional control instruments in the direction of the service provider and the specialist department increase the degree of maturity of the collaboration and thus efficiency.
OUTSOURCING FACILITATES THE FULFILLMENT OF COMPLIANCE REQUIREMENTS
No matter how you look at it – the responsibility remains with the customer. Compliance requirements in the sense of SOX, Basel II, BaFin, etc. are only partially covered by the service provider’s usual certifications (ISO 9000 ff; ISO 20000, etc.). On the contrary, external data processing can increase the effort required to meet compliance requirements. Such implementations of “customer-specific” compliance requirements (e.g., retention periods and special security regulations) are naturally paid for separately by the service provider.
So define exactly which compliance requirements (internal/legal) have to be met and have the service provider contractually guarantee the implementation of procedures on topics such as security, quality and risk management so that your auditors are satisfied. Make it clear that the implementation of compliance requirements that apply to several of the service provider’s customers and are therefore not customer-specific are part of the standard scope of services.
OUTSOURCING DOES NOT MAKE YOU DEPENDENT
A big surprise awaits at the end of outsourcing: when the contract is terminated, additional, unplanned costs are incurred by the previous service provider for the provision and transfer of data and, if necessary, for the takeover of customer-specific assets and licenses. Valuable know-how is lost, since access to knowledge DB, operating manuals, incident data, source code documentation, etc. is not regulated by the previous provider. So a contract extension is grudgingly agreed with the existing provider because a change would be too expensive.
In order to maintain the “sourcing capability” – whether to another provider or back in-house – even at the end of the contract, it is important to define detailed transition-out agreements at the beginning of the contract, which specify access to know-how, resources and customer-specific data and, in particular, the costs for support at the end of the contract.
CONCLUSION
Outsourcing projects are not a foregone conclusion – but neither are they a nightmare. From our consulting experience, we know several customer situations that clearly disprove the above-mentioned “lies” with the help of a sourcing strategy aligned with the company’s goals and a powerful IT governance. Outsourcing requires a high degree of maturity of the processes, the organizations and the people involved. Service providers have done a lot here in recent years, at least in some areas of outsourcing. On the customer side, the investment in intellectual property, best practices, continuous improvement and exchange of experience is still very often underestimated.
