Caution on Network Outsourcing

Typical goals for outsourcing include decreased costs, improved flexibility and performance, or elimination of distracting management tasks. Well-designed outsourcing arrangements with a sound governance structure have a reasonable track record of achieving some or all of these goals.

When it comes to developing outsourcing strategies for voice and data networks, however, CIOs should exercise a higher level of selectivity when determining what functions should be handed off to a service provider and what functions kept in-house.

Voice and data transport are typically outsourced when, in the process of taking on management of a data center, an outsourcer assumes responsibility for the selection, installation, purchase (from carriers) and monthly provision of voice services. By contrast, an insourced operation maintains responsibility for defining telecom requirements, negotiating and buying services from the carrier, and managing quality and billing.

Certain telecommunications activities are often successfully outsourced and at costs comparable to best-of-breed performers. These activities include hardware and software maintenance and installs, moves, adds and changes (IMACS) of equipment such as routers, hubs, PBXs and end-user devices (EUDs). The trend to outsource these type of functions is accelerating.

However, in competitive markets, large organizations that outsource telecom transport historically have not reduced unit costs below the levels achieved in-house by average performers, much less below those of top-performing companies. (Large organizations are defined as those with a combined transport spend in excess of $1 million per month.)

This lack of cost effectiveness reflects the fact that few, if any, economies of scale are available to outsourcers that are not equally available to large insourced user organizations.

Costs

Two-thirds of transport cost is represented by the cost of voice transport and of voice and data access. The unit cost of neither of these services is changed by outsourcing, because no access efficiencies are added at the client site by outsourcing, and because voice costs per minute for businesses are readily negotiable to the floor market price without the benefit of an outsourcer’s larger volume.

Moreover, network outsourcing – unlike mainframe and server outsourcing – offers little opportunity to centralize transport and switching hardware and therefore no opportunity to obtain the economies of scale associated with increased equipment scale.

Equipment maintenance cost may be lowered somewhat because of the negotiating strength of the outsourcer, provided that the outsourcer does not simply subcontract it to the existing maintenance provider.

Lastly, personnel unit costs are little impacted by personnel staff size and little increased personnel utilization (productivity) is obtained because of the unchanged, distributive nature of the telecom plant.

Thus, the principal cost difference in the outsourced case are the addition of the vendor’s cost of sales, ongoing customer care, and the vendor’s profits, which may amount to 20 percent to 30 percent of the contract value, all of which is passed onto the buyer.

Compass white papers describe how the outsourcer may bundle costs to provide a first-year cost reduction to the buyer while readily making up that and more in follow-on years. Those white papers describe methods for buyers to avoid this trap when negotiating outsourcing agreements.

Flexibility

Outsourcing rarely increases flexibility for the client organization. Every outsourcer, in fact, seeks to maintain an environment as uniform and unchanging as possible, since stability is a key profit determinant for outsourcing vendors. Changes in topology, architecture and technology must be made as slowly as possible to maintain capital and reduce training and one-time expenses.

Performance

Performance (quality) improvements may be achieved through outsourcing by organizations with relatively static communications requirements, and whose incumbent technical or operational organizations are performing poorly. However, it seems a poor trade-off to pay an outsourcer a 20 percent to 30 percent premium rather than to improve IT performance.

In some instances, a networking organization may be so corrupt or incompetent that it is simpler and less time consuming for senior management to outsource, although this course of action makes re-insourcing in later years problematic, as it requires an unacceptable level of management attention to make the shift.

Management Distraction

Likewise, organizations which attempt to “outsource the problem” find that without adequate internal operational processes and internal management acumen, outsourcing makes an already difficult situation unmanageable and both the business and the outsourcer suffer from the poor operating situation.

Solving The Problem:

The principal difference between governance of an in-house telecom situation and an outsourced one is that the in-sourced environment offers an opportunity for better communications between the end-user departments, and makes is easier to replace under-performers. Unfortunately, most users underestimate the importance and the net value of good governance in either case.

Regardless of whether the network is outsourced or managed in-house, executives faced with an expensive, non-responsive, or poorly performing telecommunications operation should ask themselves three questions:

• Have I set quantitative cost and performance goals for the operation?
• Am I measuring the operation against those goals?
• Have I established a methodology for the using departments to express their needs to the telecom organization and to negotiate a plan to fulfill them? (Governance)

If the answer to any of these questions is unclear, a telecommunications audit that includes people, equipment, and transport should be performed by an independent, objective party. This approach is generally an easier, less expensive, and faster way to fix the problem than handing it off to an outsourcer.

The audit process will deliver short-term value in the form of immediate transport cost reduction. Over the long term, strategic value is gained through increased personnel productivity and improved performance quality. The key is to gauge the objective performance of the organization compared to business norms and best of breed operators.

Carl Pitasi is a senior consultant with Compass America, in Oak Brook, IL. He specializes in network and telecom issues.