December 5, 1995
The management of the outsourcing relationship is the coordination of the parent company's internal IS departments and the external vendor, to form a synergy where the whole is greater then the individual parts. The management of the outsourcing vendor or the outsourcing agreement should be treated as a strategic alliance and managed as such. A strategic alliance partner is an organization to complement an area of weakness to give stability in the turbulent world of IS.
This paper will first look at the difficulties of management of the alliances. Then discuss some of the classical tools used in management of the outsourcer. Next, discuss the four managerial areas of management of the alliance.
Outsourcing contracts are usually set for a long period of time which does not necessarily match the dynamic and fast pace world of Information Systems (IS). For example, over the past decade, the cost of connecting to a Local Area Network (LAN) has decreased from $1000 to less then $200. (Minoli, 1995) Also, the processing power of computers increases every year while at the same time the prices are coming down.
Like marriage, however, these outsourcing arrangements are much easier to enter then to sustain or dissolve. (McFarlan, 1995)
In an outsourcing contract, the timing of benefits is different for the client and the outsourcer. The benefits for the customer are clear in first year because: 1) they may receive a one-time capital payment, 2) feel they have transferred their IS problems to another organization and 3) the payments in the first year may resemble the anticipated benefits in the contract. In contrast the situation for the outsourcer is reversed. During the first year they make heavy capital payments in expectancy of flow of payment in the future. At the time when the outsourcer is moving into a positive cash flow then its client may feel the need for new services, may not like the monthly charges, and/or may want to move to a new IS architecture. (McFarlan, 1995)
The outsourcer has to be very careful when using software licenses of their client, because the outsourcing vendor may be responsible for the software licenses for their client. For example, "[National Car Rental Systems Inc.] was being sued for allowing its service vendor to use software licensed to National by Computer Associates; Computer Associates is also taking action against National's outsourcing vendor, Electronic Data Systems." (Minoli, 1995, p.177) This ruling will force outsourcing vendors to closely examine the software licenses of their clients and write disclaimers in the outsourcing contracts.
The printed policy and real world procedures at the client's company can be totally different. For example, when a Hartford CT-based insurance company decided to outsource all its data processing for claims. The vendor requested to see the procedures manual for the processing of claims. The company did not have any written down procedures. For many years the company had been training new employees "on-the-fly" and there were no documentation. (Foxman, 1994)
There are a number of tools which management can use to manage the outsourcing vendor. These tools should be used with care and all actions well planned. The tools are as follows:
Allow the outsourcer to use the client as a reference for future outsourcing contracts. This will be a great aid for the vendor in selling, but without the references, making sales is difficult. (Lowell, 1992) Van Honeycutt, president of Computer Sciences Corporation (CSC), was asked in a 1994 interview, "What are an outsourcer's keys to success?" He responded by saying "First and foremost is maintaining your reputation. Outsourcing is a very small town. CEO's are the most important references, and a failed relationship has an overwhelming negative impact." (McFarlan, 1995)
Ranking of priorities for what work should be done and when. Document the priorities, including critical dates, and walk through them with the vendor to set both groups expectations.
If the vendor has multiple clients with similar concerns then a user group should be setup. The user group will allow clients to help plan and set priories for enhancements and maintenance issues for the vendor.
The vendor and the client have to agree on the structure of communications internally and externally. Who at the client will communicate with the vendor and who from the vendor will communicate with the client? "This geographic and cultural separation, relative infrequency of contract (particularly between client and vendor managers), and multiplicity of agendas within the client company can thoroughly distort unstructured communications." (Lowell, 1992) Also, all significant communications should be documented and shared internally and externally. (Foxman, 1994)
The client company users, managers and IS personnel may conflict with the vendor. An agreed structure for conflict resolution should be in place to solve the conflict, including how and where to escalate them. (Lowell, 1992)
Service standards for the vendor should be defined and agreed upon in concrete terms. For example, response time and scheduled completion times for batch processing. Performance against those standards should be reported to the vendor as well as the client. (Lowell, 1992)
At regular intervals the vendor's performance is to be reviewed and evaluated against the agreed upon service standards. At these reviews the expectations and priorities should be revisited for the coming period and all documentation produced to be shared with internal groups and the vendor. (Lowell, 1992)
Develop a direction for the vendor to follow in order for the client meet its business objectives. This should be well defined, documented and communicated to the vendor as to allow mutual co-ordination. (Lowell, 1992)
Planning for unexpected events, whether they are delayed batch system updates or shutdowns due to fire or earthquake. These kinds of crisis plans should be documented and reviewed as the contract gets updated. (Lowell, 1992)
The ongoing management of the alliance is one of the most important aspects of outsourcing's success. (McFarlan, 1995) The CIO has to be actively planning and assuring IS resources are at the right level and appropriately distributed. There are six critical areas to concentrate on to maintain a successful alliance.
The alliance must continuously adapt to change, because the nature of the technology and external competition is in a state of evolution. As noted in the outsourcing contract with IBM and Eastman Kodak, in the past four years there has been twelve amendments to the original contract. (McFarlan, 1995)
The planning for network architecture must be on a long-term approach of interconnectivity. Networks, standard hardware and/or software conventions, and database accessibility all need customer planning.
The client must have a clear understanding of emerging technologies and how they may be used. The managers must attend vendors seminars and visit firms currently using these technologies. This allows the client firm to understand what is going on in the market and to see if there are any problems or opportunities can be sighted.
Continuous learning should be part of the internal IS department's philosophy because this will aid users to be comfortable in a climate of continuous IS change.
The customer-outsourcer interface is crucial and should not be underestimated. The interaction between the two parties must occur at multiple levels. The lower levels deal with the mechanics and more operational issues while, the IS senior level people identify major issues of policy and the relationship structuring.
When looking at the relationship with the outsources it is important to view the third party as a strategic alliance partner not just a contract. This will help build trust and the feeling that "we are in this together for a long time." For the alliance to be successful and last a long time, both organizations must be winners. If either firm benefits it must not be at the expense of the other firm.
The importance of communication should not be underestimated. The client firm has to make clearly known to the outsources how it can help the client organization reach its strategic objectives. This communication has to filter all the way down the lower level employees doing the actual work as to allow everyone share in the same view.
Corbett, Michael F., "Outsourcing and the new IT executive", Information Systems Management, Vol 11, Fall 1994, pp. 19-22.
Foxman, Noah, "Succeeding In Outsourcing - Cultivate the Outsourcing Relationship", Information Systems Management, Vol 11, Winter 1994, pp. 77-80
Lowell, Mark, "Managing Your Outsourcing Vendor In The Financial Services Industry", Journal of Systems Management, Vol 43, May 1992, pp. 23-36.
McFarlan, F. Warren, Nolan, Richard L., "How to Manage an IT Outsourcing Alliance", Sloan Management Review, Vol 36, Winter 1995, pp. 9-23.
Minoli, D., "Analyzing Outsourcing - Reenginerring Information and Communications Systems", 1995.
Peisch, Richard, "When Outsourcing Goes Awry", Harvard Business Review, May-June 1995, pp. 24-37.