Outsourcing is IT's double-edged sword

Using consultants and service providers for outsourced IT projects is a double-edged sword for IT professionals in the current economic climate.

While budget constraints and belt-tightening force IT managers to choose timeliness over quality, consultants and service providers handle the same problem by using lesser-skilled, cheaper staff and downgrading support to bump up margins.

Robbie Lehman, finance systems manager of renewable energy firm Hydro Tasmania, concedes he finds himself valuing timeliness over quality. He has been managing multimillion dollar IT outsourcing projects for the past five years, and getting project work done on time sometimes mattered more than ensuring he got top-level skills.

He said negotiating consultants' rates can be a difficult art, which the project manager needs to master to ensure he doesn't get a raw deal once the project is delivered. "If we're cutting the consultants' margins so fine, we can both end up disappointed with the quality of work that's delivered -- at times we've had rates just drift up without any notice," he said.

Lehman has also witnessed IT consulting firms change the mix of consultants on a project "on occasion", in which case he has kept an eye on the quality of work he was getting. His company has in the past "trotted out" underperforming consultants if it needed to.

Before hiring any outsourcer, he said his company always checks references from clients within the same industry.

Also, Lehman believes the more you canvass the market, the better you become at filtering the good from the bad. Good consultants may not necessarily hail from the high end, but some of the best work can come from an independent outfit, he said.

Negotiating "blended" rates for outsourcing is on the rise in the tougher climate as IT consulting companies look to exploit any opportunity to minimise their consultants' time, tap new revenue channels and bump up their margins, according to industry research released this month by Meta.

While blended or average rates for external consulting contracts is nothing new and is useful for comparing costs between different bids, IT market researcher Meta Group warns companies not to accept them without detailed information on resource allocation that pinpoints each consultant by position, experience and assignment on a project.

Meta analyst Maria Schafer suggests the concern for IT managers is that they don't pay a high, blended rate for a project only to have the outsourcer pull a "switcharoo" by bringing in more junior-level consultants for the rest of the project as it suits the outsourcer.

In more overt cases, many lower-level consultants, whom clients rarely see, are offshore workers costing less than $100 an hour, Meta research showed.

It found the problem with accepting blended or day rates without details on resource allocation is that integrators may "bookend" -- assigning three or four senior consultants to a job -- to work closely with clients while heavily staffing the rest of the project with junior consultants. Meta said junior consultants often lacked foresight, simply "documenting the client's 'as is' business methods, putting that in a binder and not documenting the desired future state and the plan to move the organisation to that state."

The cost of service providers switching people at their discretion is that it can downgrade the quality of project skills, according to Schafer. "Clients can end up with less experienced consultants assigned to a project at the consultancy's whim, and if they're paying for people on blended rates this can lead to a vicious cycle," she said.

Most organisations are ignorant of such tactics, focusing too much on getting projects done and not enough on the quality or level of attention from the consultant, she said.

While Schafer believes blended rate bids are perfectly valid, she advises clients to be very clear upfront about what they want from the consulting firm, and for how much. "Customers need to make sure the outsourcer spells out what their rates are, and also what [the client] wants to see and pay for."

Blended rates not accepted

After recently comparing the references of leading CRM service providers, Meta found that while all had successful deployments, most clients said the key to project success was that they refused to accept blended rates. "[Clients] verified the capabilities of every consultant as [they] joined the project. If consultants didn't perform as advertised, they were summarily replaced," analyst Michael Doane said.

Meta recommends companies build into the contract the ability to review personnel and the skills it wants. "Look at each consultant assigned to a job and reject any consultant whom you do not believe is adequate. Successful projects often begin with the client rejecting several consultants until it gets the team it wants," Meta said in a research note.

A simple way in which managers can determine if they're dealing with a good consulting firm is to assess the level of consistency they get from more experienced senior consultants.

"If you're starting a big CRM project on Siebel or ERP project deploying SAP, you want the firm to be specific on how many senior people you're going to get on that project and that you're going to get them on a consistent basis," analyst Maria Schafer said.

"Consistency is the key -- are you going to have the experienced consultants on your project from start to finish?"

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