The seven deadly sins of outsourcing

Outsourcing is a source of stress, struggle and angst for many IT managers, and no wonder: more than half of the outsourcing agreements end up prematurely terminated, according to a study released last year by consulting firm, DiamondCluster International. That leaves a lot of companies far from outsourcing nirvana, but it doesn't have to be that way. We asked IT experts and veterans to talk about the bad decisions and faulty assumptions that can cause your outsourcing project to fall from grace. They came up with seven deadly sins:

1. Feeble governance

Vice: You assume that your organization will automatically fall into a smooth working relationship with your outsourcing vendor. Three months later, you encounter management snafus that seem to have come out of nowhere. One large retailer outsourced a project that was supposed to take six months, but 18 months later, the CIO was still waiting for results. Why? "There was no governance plan other than a target for the end date," says Atul Vashistha, chairman and CEO of consultancy NeoIT. "If they'd had a governance plan with milestones in place, they would have realized early on that targets weren't being met."

Virtue: Before you sign with an outsourcer, nail down an organizational structure, establish methods for keeping tabs on the work being done, and spell out how you will manage the outsourced project on a day-to-day basis. "Your governance system should provide continual feedback to the organization about how the relationship is working, what value you are getting, how you are solving problems that have cropped up," says Michael Corbett, executive director of the International Association of Outsourcing Professionals in New York.

Build the management costs into your budget. The average cost to manage an outsourcing contract is 3 to 6 percent of the size of the contract, according to Julie Giera, an analyst at Forrester Research.

2. Overblown expectations

Vice: You choose an outsourcing company for its ability to meet your primary goal, but later the company falls short in other areas. For example, one of Europe's largest manufacturers was so eager to trim expenses that it negotiated an outsourcing contract purely on cost. As the project progressed, the manufacturer complained that the outsourcer wasn't innovative enough. How bad was it? Less than two years after signing the contract, the manufacturer terminated the agreement -- a move that carried a steep price tag in penalties and legal fees.

Virtue: Don't even approach a service provider until you have prioritized what you expect to achieve by outsourcing. If you're shopping based on cost, you may have to give a little on service level. Keep in mind that a cost-based contract might be appropriate for standard services like infrastructure management but not for specialized skills such as application development. "You don't necessarily want the cheapest brain surgeon," Giera says.

When considering vendors, look beyond the sales pitches. "People select suppliers based on marketing and size rather than a true capability evaluation," says Vashistha. He suggests that you focus on the location where the work will actually be done. Ask the vendor about its resource pool. Are its employees experienced in your industry? Do they have the appropriate technical skills? How much training does the vendor provide? Talk to clients that the vendor has served from that location for at least 12 months.

3. Blindly banishing projects

Vice: You have offshored critical areas of your business to overseas suppliers that are inexperienced in your field or otherwise ill-equipped to handle the task, and customers are up in arms. For example, after Dell outsourced its technical support to offshore providers, the company was inundated with complaints from US-based customers who reported that they couldn't understand the service providers because of their accents. Dell had to move a chunk of its technical support services back home to Texas.

Virtue: Use commonsense and send projects offshore only to countries where your industry is mature. India and the Philippines, for example, while good choices for services like health insurance data entry, are poor choices for jobs that require decision-making related to health insurance, Vashistha says. That's because in-depth knowledge of the field is still scarce in those areas. "Health insurance wasn't prevalent even 10 years ago in those locations," he says.

Keep in mind that offshore projects cost more to manage than projects that are sent to domestic outsourcers. That can make small projects especially costly to send offshore. "A lot of people look at the money they'll save per hour but ignore that they'll probably have a 20 to 25 percent increase in administration costs," says Rich Hoffman, president and CEO of Hyundai Information Services.

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