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A Future for Outsourcing

Traditional benchmark analyses of outsourcing contracts can be useful exercises to identify problems and view pricing levels in the context of industry and market standards. But most benchmark exercises are inherently limited.

By Geraldine Fox

January 24, 2006 — CSO —

'Governance' Enables Goals and Performance Standards

By Geraldine Fox

Traditional benchmark analyses of outsourcing contracts can be useful exercises to identify problems and view pricing levels in the context of industry and market standards. But most benchmark exercises are inherently limited by their backwards-looking perspectivein other words, they analyze past performance in terms of cost and, in some cases, service issues, and based on that snapshot analysis re-define prices and establish new targets for future performance.

A more effective approach to outsourcing focuses on future goals and requirements and involves a 360 perspective that extends beyond price to address key issues that define the outsourcing relationship. Organizations that take this approach tend to find that the price and quality issues take care of themselves.

A number of basic problems afflict many outsourcing relationships in terms of unfulfilled expectations, high costs, and poor service quality. By examining these problems in the context of a governance-based approach to outsourcing evaluation, it's possible to think of outsourcing not in terms of redress for past shortcomings, but rather in terms of future performance.

Defining "Value"

Too often, client organizations don't recognize the IT and business value contribution that an outsourcer provides. This value can be measured in terms of completed projects that would not have been possible without the outsourcer, or of valuable internal resources that would not have been available. But because "value" is a nebulous concept, it's rarely defined in specific terms, and is therefore rarely tracked and measured.

The way round this problem is to use the governance process to discuss valueby engaging the vendor to define value and to provide examples of how value can be delivered, and by allowing for the client to respond to those definitions. From such a discussion agreement can be reached on what constitutes value, and terms defined for how the delivery of value can be encouraged and compensated.

Organizational Alignment

Compass analyses show that the client organization's retained function is a fundamental source of problematic outsourcing relationships. Specifically, clients frequently underestimate the resources required to manage the relationship (in terms of numbers of people), and the people who are in place frequently don't have the proper skills or training. A typical problem in IT outsourcing has been that IT practitioners from the client organization are tasked with managing the outsourcer. Lacking management skills, they revert to doing what they knowproviding the IT services that the outsourcer is being paid to deliver. The result is duplication of effort and inefficiency.