IT Outsourcing: Maximize Flexibility and Control

Executives pondering which parts of their information technology function should be outsourced and which should be kept in-house usually ask themselves, Does the particular IT operation provide a strategic advantage or is it a commodity that does not differentiate us from our competitors? If the operation is a core strategic service, they keep it in-house. If it is a commodity—especially one that a supplier claims to be able to provide for less money than the company’s IT department can—they outsource it. If only the decision were that simple. Between 1991 and 1993, we studied 40 U.S. and European companies that had grappled with the issue of outsourcing IT. Our conclusion: In the great majority of cases, the strategic-versus-commodity approach led to problems and disappointments. To understand the failure of the approach, consider its underlying assumption: that managers can place big bets about their markets, future technologies, and suppliers’ capabilities and motives with a great deal of certainty. They can’t. The world is too turbulent, unpredictable, and complex. Even so, many managers sign five- or ten-year contracts without considering that they often cannot predict how business conditions will change in even two years—let alone what technologies will be available. They turn to outside providers to gain access to the best technology and talent at a low price without taking into account how a provider’s need to maximize its profits will influence the outcome. Many managers feel incapable of understanding—let alone managing—IT. For those reasons, the issue of whether an IT operation is strategic or a commodity is secondary. A company’s overarching objective should be to maximize flexibility and control so that it can pursue different options as it learns more or as its circumstances change. The way to maximize both flexibility and control is to maximize competition. To that end, managers should not make a onetime decision whether to outsource or not. Instead, they should create an environment in which potential suppliers—outside companies as well as internal IT departments—are constantly battling to provide IT services. The explosive growth of the IT industry has enabled companies to create such a competitive environment. In 1989, when Eastman Kodak made its landmark decision to outsource the bulk of its IT operations, there were only a handful of large suppliers from which to choose. Now there are many more. Besides such companies as EDS, Andersen, Computer Sciences Corporation, IBM, and Perot Systems, dozens of niche players now offer specialized services such as mainframe-computer maintenance, applications development, implementation of new technologies, and network management. As a result, organizations have the option of dividing their IT needs into small pieces and awarding them to multiple providers. This approach makes it much less expensive to switch suppliers or to bring a service back in-house if a supplier proves to be disappointing. The managers of many companies have already embraced such a selective approach to outsourcing. But even they are still feeling their way forward. They realize that the conventional strategic-versus-commodity approach is flawed, but they lack a framework to replace it. To create such a framework, we studied sourcing decisions in 40 organizations. Most were large corporations, but some were public-sector organizations. We purposely chose companies competing in a wide variety of industries, including airlines, banking, chemicals, electronics, food manufacturing, petroleum, retailing, and utilities. We sought out both successes and failures so that we could identify the practices that differentiated the former from the latter. Approximately one-quarter of the companies had signed long-term (five- to ten-year) multimillion-dollar contracts providing for the management and delivery of all IT services, and about one-quarter continued to have in-house units provide those services. Approximately half the companies we studied had taken a selective approach, outsourcing such services as data-center operations, telecommunications, applications development, and applications support. We conducted nearly 150 interviews with business executives who had initiated outsourcing evaluations (generally chief executive officers, chief financial officers, or controllers), chief information officers, IT staff members involved in evaluating bids and negotiating contracts, outsourcing consultants, and suppliers’ account managers. In the course of our research, we identified some individual best practices for sourcing IT. No one company, however, had combined all of them into a blueprint that others could use. Equally if not more important, none had constructed an analytical framework explaining why such practices worked. What would such a blueprint and such a framework look like? To show how a company’s decision-making process could evolve from the conventional approach to the one we advocate, we offer the story of Energen, a fictitious petroleum company based in Houston, Texas, that is a composite of many of the organizations in our study. Energen’s senior managers ran up against the limitations of the strategic-versus-commodity approach, came to see that maximizing flexibility and control should drive their sourcing decisions, and then pursued a course that they were able to change along the way. To Outsource or Not to Outsource In 1992, the CEO of Energen began to question the company’s huge investment in information systems. Over the previous three years, almost every division of Energen had reduced costs by 10 % as a result of a major restructuring effort. The glaring exception was IT, whose costs had risen by 20 % . To Richard Andrews, the CEO, most of IT seemed like a commodity service. He began to wonder whether the company really needed to own and operate its huge data centers in Houston, Dallas, and New York; its private telecommunications network; and its 2,000 personal computers. When a company he contacted offered to buy Energen’s IT assets for $ 75 million and claimed that it could provide the same service as Energen’s IT department for 20 % less, Andrews was tempted. Not surprisingly, Donald Peregrine, the vice president of information systems, tried to change Andrews’s mind. He argued that IT was not just an expense: Other departments had been able to cut costs or increase their business because of IT. Andrews conceded that Peregrine had a point and agreed not to make a hasty decision. He assigned John Martin, Energen’s CFO and Peregrine’s boss, to head a task force to explore the company’s outsourcing options. The task force, which included Peregrine and the vice presidents of the major functional areas, decided to start by dividing Energen’s IT operations into two categories: commodity systems and strategic systems. Minimizing costs would be the paramount consideration in deciding whether to outsource the commodities. The commodities that an outside supplier could probably provide as well as and more cheaply than Energen could were the private telecommunications network, the three data centers, support for personal computers, central accounting systems such as payroll, and electronic data interchange. For the strategic systems, maintaining high levels of service would be the priority. Certain activities were too critical to Energen’s business to entrust to an outsider: analyzing seismic data, monitoring quality control in the refineries, and scheduling and tracking oil from the wells, ships, and pipelines. The task force decided to keep those systems in-house for the foreseeable future But as the task force members discussed how to proceed, the shortcomings of tackling IT in this fashion became apparent. For instance, they recognized that there were a variety of unknowns—in terms of both technology and issues facing Energen’s business—that somehow had to be factored into their decisions. For example, it was already clear that client-server technology was replacing mainframes and would change the way Energen deployed personal computers. The last thing Energen wanted was to be stuck with outdated technology. So the task force decided that the company should seek only a two-year outsourcing contract for its personal computers. Another uncertainty was the payroll department. Energen was just beginning to consider whether to outsource the entire department, and Martin, the CFO, thought the company needed to make that decision before it could think about outsourcing the IT system that supported the function. He had not forgotten what had happened several years earlier. Energen had signed a five-year contract with a supplier that would take over a significant piece of the IT system for the company’s warehouses even though there was talk about closing some warehouses. Two years into the contract, Energen’s management did decide to close the warehouses and had to pay the supplier a large fee to terminate the contract. Not wanting to repeat the same mistake, the task force postponed the decision about outsourcing the payroll department’s IT system until the department’s future was clear. The task force also recognized that although an IT system might be a commodity, it could still be too critical to hand over to an outsider. One example was the telecommunications network that connected Energen’s 2,000 gas stations to headquarters. When Energen’s managers had first considered outsourcing the network, seven years earlier, they hadn’t felt confident that any of the existing suppliers would be able to keep the system up and running. But the problems that had prompted the company to consider outsourcing at that time had not gone away. The infrastructure was costly to manage, and Energen had had trouble retaining top-notch people: Several employees had left for more promising careers at communications companies. In the end, the task force agreed that Energen should see if there were now more qualified suppliers out there. The telecommunications discussion sparked a realization: An IT system could be critical but not strategic. That is, a system could be crucially important without differentiating Energen from its competitors. In this light, the task force saw that of the three systems originally labeled strategic, only one—the system for analyzing seismic data—truly was. Although many oil companies that engaged in exploration and production had such systems, the task force thought that Energen’s enabled the company to excel in analyzing reserves. Just because an IT activity is business-critical doesn’t mean that all its elements have to be kept in-house. The task force then realized something else: Just because an IT activity was business-critical or even strategic did not mean that all its elements had to be kept in-house. Take the system for scheduling and tracking oil. It was clearly critical and had to be kept in-house, but did the same apply to a major upgrade of the system’s software? This question was especially pertinent because Energen wanted to update the software and was going to hire an outside developer for the project. Martin argued that although state-of-the-art software was critical, the software itself would not give Energen a competitive edge, because the company’s rivals maintained similar systems. He convinced everyone that Energen would have a better chance of getting the best possible software if the developer was allowed to sell it to other companies. Choosing Suppliers Having decided what to outsource, the task force then turned to the job of choosing suppliers. The first step was designing a process. The group concluded that seeking relatively short contracts was a good idea. It also decided that Energen should solicit separate bids for each service. Adopting this approach would ensure that the company could tap suppliers’ particular strengths and would prevent any one supplier from ending up with too much power. Peregrine, the vice president of information systems, knew of several organizations that had come to regret their decision to outsource large portions of their IT operations to only one or two suppliers. In one instance, a supplier had charged extra for dozens of services that the company had assumed were covered in the base price and had dragged its feet in introducing new technology. The members also agreed that they could not automatically assume that a supplier would outperform their own IT department and decided that the department should be allowed to compete when such doubts arose. Peregrine said the data centers were a case in point. The centers had long been forced to satisfy individual users’ idiosyncratic needs, resulting in inefficient practices. If his department had the authority to institute best practices, it might be able to operate the centers more cheaply than a supplier, which had to earn a profit. Further, he said, until the department found out how inexpensively the centers could be run, it wouldn’t be able to negotiate a good contract with an outside provider. After the task force agreed on the basic approach to outsourcing, teams consisting mostly of IT managers were formed to request proposals for bids for each contract. With their deep technical knowledge, the managers had the clearest understanding of the company’s IT needs. But, fearing that it would be difficult for them to weigh internal and external bids objectively, the task force decided to make the final decisions itself. The company then started negotiating bids. It found a supplier willing to sign a two-year contract for the personal computers; the deal promised to cut Energen’s PC-related costs by 10 % . And when Energen negotiated the contract to develop the scheduling and tracking software, it gave the supplier the copyright in exchange for a discount. The IT department’s bid for the data centers was based on a plan for consolidating the three centers into one, thus cutting costs by 30 % . That bid was lower than both external bids. One outside bidder then proposed a joint venture with Energen’s IT department. Peregrine rejected it. He feared that the combined challenges of consolidating the centers and getting the joint venture on its feet would be overwhelming and that service to Energen would suffer. The department’s bid prevailed. When the task force turned to the telecommunications network, it discovered that there were now qualified providers. Energen awarded a four-year contract for its network to a respected manufacturer of midsize computers that had acquired expertise running its own world-class private telecommunications network. The task force transferred all the employees that had supported Energen’s network to the supplier except for two experts, whom it retained to manage the contract. Because Energen knew what it took to run the network, it was able to hammer out a detailed contract aimed at ensuring that the supplier met Energen’s demanding performance requirements. The supplier would have to pay $ 50,000 the first time network availability fell below 99 % , and the penalties would escalate with each subsequent lapse. In addition, if Energen decided not to renew the contract, the supplier would have to cooperate in making the switch to a new supplier. For example, it would have to furnish copies of all programs, data, and technical documentation and also provide installation assistance. Continuous Learning The process of outsourcing the personal computers and consolidating the data centers went smoothly. But other transitions were rockier. One lesson that Energen learned was that technical people accustomed to running an internal IT operation could not necessarily make the leap to managing an outsourcing contract. For example, the two Energen experts retained to manage the telecommunications contract had difficulty understanding that their job had changed. Instead of actually operating and maintaining the network, they were now responsible for interpreting users’ needs and communicating them to the supplier. When a technical problem arose, the two experts still wanted to solve it themselves rather than just report it to the supplier’s account manager, who argued that technical matters were his domain. Peregrine intervened and recruited one of his data-center managers, who had overseen Energen’s hardware leases. The two experts were retained as consultants. A company will inevitably clash with IT suppliers over how to interpret the service levels spelled out in their contracts. Separately, the company clashed with the telecommunications supplier over the interpretation of the service levels outlined in the contract. For example, Energen had assumed that the 99 % availability requirement meant that all nodes on the network had to be up and running 99 % of the time. The supplier, however, interpreted it to mean that the host node had to function 99 % of the time. When links to 20 of its service stations went down, Energen demanded a cash penalty, which the supplier refused to pay. Six months into the contract, Energen discovered that it could pressure the supplier by offering a carrot. Energen had expanded into the Midwest by buying a regional oil company’s service stations in five states. The supplier, which wanted to get the contract for the stations’ network, agreed to renegotiate the service requirements. Energen awarded the new contract to another supplier but told the first supplier that if its performance improved substantially, it might win the contract for the new subsidiary in two years, when that contract came up for renewal. Finally, with the emergence of client-server technology as a cheaper, more flexible alternative to large mainframe operations, Energen eventually decided to outsource the data center. The company was no longer fully utilizing its mainframes, but it didn’t want to invest the time and energy to find outside customers for its excess capacity. Another reason to outsource the data center was to free up the company’s applications experts to develop programs for the client-server networks. It was unreasonable to expect the programmers both to continue supporting the mainframes and to develop client-server applications. Did the company regret not outsourcing the center originally? No. As Peregrine had argued at the time, his department had found the most efficient way to run the center, and the company’s knowledge of the operation enabled it to negotiate a strong contract later. The Case for Selective Outsourcing In confronting whether and how to outsource their IT operations, Energen’s senior managers acknowledged what they knew and what they didn’t or couldn’t know about their business, the course of technology, and the capabilities of outside providers and of the company’s own IT department. Then, with the goal of maximizing flexibility and control, the managers sought bids from many suppliers, let the IT department compete for parts of the business, negotiated short-term contracts, postponed some outsourcing decisions, and retained managerial control of business-critical operations. Finally, they realized that deciding to outsource an IT activity isn’t the end of the manager’s work. The kind of selective-outsourcing approach we describe in the Energen story may seem like common sense. But it represents a significant departure from the conventional approach. To managers who take the conventional path, IT is an uncontrollable cost—a function they feel incapable of understanding, let alone managing. And, to make matters worse, they find it a nightmare to attract and retain people who can take care of it for them. To those managers, entering into a long-term contract with a supplier that purports to have the company’s interests at heart—who wants to be a “strategic partner”—seems like the perfect solution. After all, that expert is relieving them of a headache, is often willing to hire their IT people, is enabling them to take assets off their books, and is even willing to pay them for those assets! The experiences of the 40 companies we studied, however, show that the best alternative to keeping most of IT in-house is not simply to outsource those services. We examined 61 sourcing decisions, which included initial decisions as well as reevaluations and changes in course. Some of the decisions had been made as much as a decade ago. Of the 61 decisions, 14 were to outsource 80 % or more of the company’s IT budget, 15 were to keep 80 % or more of the budget in-house, and 32 were to outsource selectively (operations accounting for 40 % of the companies’ IT budgets, on average). Of the 14 decisions to outsource the bulk of IT, senior managers declared 3 out-and-out failures because the expected cost savings never materialized, contracts couldn’t be changed when business circumstances changed, and suppliers failed to meet the expected service levels. At the time we concluded our study, 9 others seemed to be at risk of failing for some of the same reasons. Only 2 decisions, which involved outsourcing large data centers—typically the operations easiest to outsource—could be called successful. Of the 15 decisions to keep most IT services in-house, 5 failed to produce the anticipated cost reductions or service improvements. The other 10 decisions, which led to savings of up to 54 % , were successful in the eyes of senior managers, but many users thought that they had to pay the price: a drop in service. Of the 32 selective-outsourcing decisions, 20 met top management’s objectives and satisfied most users, too. Only 3 were complete failures. They involved systems-development projects, which are prone to failure whether carried out in-house or by external providers because it’s hard to predict how much such projects will cost and how long they will take. At the time we completed our study, it was too soon to determine the outcomes of the remaining 9 decisions. In our view, the disappointing results of the first two approaches stem from some common management failings. Many managers don’t fully understand how IT serves individual businesses and operations, the true costs and benefits of IT, and the competitiveness of their own IT departments. Many companies do not and probably cannot assess the breadth of a supplier’s capabilities, especially its ability to cope with new technology. And, finally, the belief that suppliers can be strategic partners is usually wishful thinking. Ultimately, a supplier’s need to maximize profits conflicts with a customer’s need for good service, low costs, and the ability to change course. IT contributes to a company’s strategy, and no competent corporate leader would willingly cede control of strategy. Many managers also fail to see that competitiveness does not come from a single decision: choosing one provider, buying one type of hardware, or investing in one particular piece of customized software. Competitiveness comes from the ability to manage change. If we apply that axiom to IT, it means that companies must have the internal capability to stay on top of suppliers’ relative strengths and to scan the horizon for the most useful new technologies. IT, like any major business system, contributes to a company’s strategy, and no competent corporate leader would willingly cede control of strategy. The Sourcing Decision How should a manager approach IT sourcing decisions? A good way to begin is to answer the following questions: Is this system truly strategic? We found that most systems that managers consider strategic actually are not. In the companies we studied, only two systems differentiated the companies from their competitors. Managers often make the mistake of assuming that just because a function is strategic, the IT systems supporting that function are strategic, too. Many managers try to make a system strategic by investing in fancy equipment and customized software. All too often, however, they find that even after they spend lots of money, their systems still don’t differentiate the company from its rivals, especially given the pace at which rivals can develop similar systems of their own. Are we certain that our IT requirements won’t change? The rise of new technology, of course, will change a company’s IT needs. In addition, whenever a company plans to move into a new market or faces potential changes in its existing market, its IT requirements may change. For just that reason, one organization we studied, the United Kingdom’s Royal Mail, decided to postpone outsourcing IT until Parliament voted on whether to privatize the postal service. Even if a system is a commodity, can it be broken off? Many senior executives think of IT as something that can be plugged and unplugged, like an appliance. But most systems are integrated parts of the businesses they support and cannot be so easily separated. Decisions concerning the payroll data center cannot be made independently from those concerning the payroll function. Most IT systems require data from or feed data to other systems and therefore cannot be successfully isolated and handed over to an outside provider. As obvious as it may sound, many managers do not seem to consider that when they make outsourcing decisions. A factory-automation system at one company we studied required data from many functions, including design, inventory control, marketing, and distribution. Because the supplier hired to develop the system did not understand those interfaces, the project took twice as long as predicted and cost twice as much as the budget allowed. Could the internal IT department provide this system more efficiently than an outside provider could? The assumption behind the strategic-versus-commodity approach is that economies of scale, highly skilled people, and superior practices allow external suppliers to provide IT commodities more efficiently than an internal IT department ever could. We found, however, that many IT departments have equally sophisticated technology and adequate economies of scale but aren’t allowed to adopt the best practices that would help them match or beat a supplier’s bid. (None of the companies in our study that outsourced the bulk of their IT operations even let their IT departments compete.) Consider the implications: In awarding such contracts to an outside provider, companies are allowing that provider to figure out how to provide the service more efficiently and pocket the savings. By inviting their IT departments to bid for the contracts, companies accomplish two things. First, they motivate their employees to find ways to provide good service at a lower cost. Of the companies in our study that chose to keep most of their IT services in-house, about half let their IT departments submit bids. Those departments were able to find ways to cut costs by 20 % to 54 % ; not surprisingly, they won the contracts. Second, such companies gain a much deeper understanding of the costs of a given service and the best way to provide it. If they decide to outsource in the future, they will be in a stronger position to evaluate bids and to write a contract that serves their own interests. Do we have the knowledge to outsource an unfamiliar or emerging technology? A company can’t control what it doesn’t understand. Many managers think that because no one in the company has enough technical expertise to assess new technologies, they should hand the job over to an outsider. After all, why devote internal resources to acquiring “esoteric” knowledge? Most of the companies in our study that outsourced emerging technologies experienced disastrous results because they lacked the expertise to negotiate sound contracts and evaluate suppliers’ performances. One alternative is to hire a supplier to team up with a company’s IT staff on the project. Such an arrangement enables the company to learn enough about the new technology that it can negotiate a contract from a position of strength if it does decide to outsource. What pitfalls should we be on the lookout for when hammering out the details of a contract? One of the biggest mistakes companies make is signing suppliers’ standard contracts. Such contracts usually contain details that not even a company’s legal staff can understand or unravel, especially if the company is outsourcing a technology with which it is not familiar. Among those details might be a lot of hidden costs. In their book A Business Guide to IT Outsourcing (Business Intelligence, 1994), Leslie Willcocks and Guy Fitzgerald present the results of a survey they conducted of 76 organizations that had a total of 223 outsourcing contracts. The authors cite hidden costs as the biggest outsourcing problem. The research presented here supports that finding: In virtually every supplier-written contract we studied, we uncovered hidden costs, some adding up to hundreds of thousands—even millions—of dollars. We also have seen numerous instances in which hidden clauses severely limited companies’ options. Managers at one U.S. chemicals company who had signed a contract with an outside supplier for the majority of the company’s IT operations tried to lessen the supplier’s power by inserting a clause into the contract that would allow the company to solicit bids from other providers if it wanted to develop new software. What the managers overlooked, however, was a clause buried deep in the contract stipulating that the supplier would be awarded the support contracts for any systems developed by other companies—a clause that made the option prohibitively expensive to exercise. In addition, many suppliers will try to maximize profits by charging exorbitant fees for services that customers assume are included in the contract, such as personal-computer support, rewiring for office moves, or even simple consultations about which equipment to purchase. But even companies that spell out every imaginable detail in a contract have often been frustrated by the unimaginable. How can we design a contract that minimizes our risks and maximizes our control and flexibility? One way to hedge against uncertainty and change is by creating what we call a measurable partnership, in which the company and the supplier have complementary or shared goals. If a supplier is being hired to develop a new application, for example, the contract might stipulate that the company and the supplier will share any profits that come from selling the application. Another way to maintain control over outsourcing arrangements is to withhold a piece of the business from a supplier and use that potential contract as a carrot, as Energen did with the telecommunications contract for its subsidiary. Or a company can split an IT operation between two suppliers, thus establishing a threat of competition. One way for a company to maintain control over a supplier is to withhold a piece of the business contract as a carrot. A company should also try, whenever possible, to sign short-term contracts. The average total outsourcing contract that we studied was for 8.6 years, but by the third year, most companies complained that the technology provided by their suppliers was already outdated. Short-term contracts are desirable also because they ensure that the prices stipulated will not be out of step with market prices. Consider: A unit of processing power that cost $ 1 million in 1965 costs less than $ 30,000 today. Although a supplier’s bid to discount IT costs by 20 % may sound appealing in year one, the prices in the contract may be well above market prices by year three. What in-house staff do we need to negotiate strong contracts? A negotiating team should be headed by the top IT executive and include a variety of specialists—but not the CEO. Many of the worst contracts we saw were broad agreements negotiated by a CEO with the help of corporate lawyers who were equally unschooled in technical details. Although the CEO should not be involved in actual negotiations, he or she must provide the team with a mandate and thus authority with both internal groups and the supplier. A negotiating team should include the top IT executive and a variety of specialists—but not the CEO. The specialists on the negotiating team should include in-house technical experts with a deep understanding of the company’s IT requirements; an IT outsourcing consultant who can translate those internal requirements into the supplier’s requirements (former employees of some suppliers now offer such services); and a contract lawyer specializing in IT who can detect hidden costs and clauses in contracts. In our research, we found that many companies fail to include one or more of those specialists—usually the IT lawyer or the outsourcing expert—on their negotiating teams. What in-house staff do we need to make sure that we get the most out of our IT contracts? Once a company has decided which services or systems to outsource and has negotiated contracts, it needs another team to serve as contract administrators and service or systems integrators. Some members of this team make sure that suppliers provide the services they are obligated to provide and that all the user’s reasonable needs are satisfied. They challenge suppliers when they seem not to be meeting the terms of the contract, deal with disputes over the contract’s interpretation, and assess penalties. This team also decides when users are asking too much or too little of suppliers. (Many users fail to take advantage of the training that suppliers have agreed to provide.) Such teams often save companies money by making managers think twice before insisting on extraordinary services. Contract-management teams require people with deep knowledge of the hired providers, the users, and the contracts. Accordingly, they must include individuals with extensive contract-management skills, technical people with a thorough understanding of the company’s IT requirements, and a systems integrator to ensure that all IT systems provided by external and in-house suppliers work together without gaps or unnecessary overlaps. Although it is probably best if the people filling all three roles are company insiders, we have seen many instances in which technical experts accustomed to providing IT services had difficulty adjusting to their new roles as go-betweens. The best systems integrators are typically middle managers from the IT function who have broad knowledge of IT and the organization. Such a team may need to include as many as 20 people. Few of the companies we studied staffed their teams sufficiently; some had only one person. In addition, many companies underestimated the importance of contract management. Some mistakenly believed that overseeing the contract required little more than assigning someone to review the supplier’s monthly bill. And many assigned a technical expert without considering whether that person could manage the complex relationships involved. In contrast, the companies that got the most out of their contracts were usually those that had assigned a manager with experience in administering leasing or licensing arrangements, some IT knowledge, and a proven ability to manage complex relationships. And the relationships, which span user groups, multiple providers, and the rungs of the corporate hierarchy, certainly are complex. For example, when an employee is added to the computer system, he or she should have to contact only one person—not several suppliers—to have the personal computer and the software installed, to be connected to the local area network, and to be assigned a password for logging on to the mainframe. The contract-management team must guarantee that users receive seamless service. We also found very few companies with systems integrators. Without such people, users inevitably run into gaps between systems that prevent them from sharing information with other businesses or functions. Fed up with the outsourcing contracts, they start using their discretionary funds to build their own solutions. The result is a hodgepodge—and rising costs, which were what sparked top management to explore outsourcing in the first place. What in-house staff do we need to enable us to exploit change? To ensure that they always get the most out of IT, companies need a third team of technical experts to help them stay on top of changing technology, changing business needs, and the changing capabilities of available IT providers (both internal providers and suppliers competing in the marketplace). This team can play a significant role in uncovering business opportunities by helping a company understand new ways to use IT. Very few companies have such a group. But without such teams, companies often pay more than they should because suppliers are constantly trying to sell services or technologies that are not included in the basic contract. One of the team’s missions is to look for gaps between the IT the company has and what it needs. With that goal in mind, the team should constantly benchmark the company’s IT resources and providers, and should help the company decide whether to change course when an IT contract comes up for renewal. Another of the team’s primary responsibilities is to assess emerging technologies. New technologies such as client-servers, object-oriented systems, and multimedia may sound very tempting, but will the company really be able to take advantage of them? The answer is no or not yet in a surprising number of instances. Of course, companies can hire consultants to carry out some of this work, but consultants may have their own agendas. For this reason, we think the team should consist of a core of in-house people who can assess suppliers’ capabilities and determine which new technologies can best be applied to the company’s businesses. Obviously, top management cannot be left out of the loop. All three types of teams must be able to communicate effectively with senior management and command its respect. Without its support, the team negotiating the contracts, for example, cannot hope to overcome the internal resistance from IT personnel and users to changes that threaten their interests or jobs. The team managing the contracts certainly cannot hope to mediate when confrontations between users and providers get out of hand. And the third team has to be privy to top management’s thinking about strategy to know what the company will want or need. The processes that a company uses to manage IT will determine how effectively it controls the IT services it consumes and how quickly it can pursue a different solution when an existing one proves wanting. The companies that excel in developing such processes will end up not merely with superior IT. They will end up with a superior ability to recognize and exploit changes in their markets.

IT Outsourcing: Maximize Flexibility and Control

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