Outsourcing Done Wrong

Some of the Worst Practices that Guarantee your Time and Money Won’t Be Well Spent

An outsourcing project, especially in Information Technology (IT), can be a long and winding road studded with sweet spots and painful pitfalls. There are numerous opportunities to veer off course. At any point, companies can make irreparable errors, including forgetting proper due diligence up front, mid-project cost cutting at the expense of quality, and/or insufficient focus on knowledge transfer and training. These mistakes can ultimately cause delayed completion dates, as well as increased costs and scope creep. If you are eager to bumble your next outsourcing effort, here’s ten things to do (or Don’ts), which will put you on the fast track to failure. I’ll go into the reasons why to do the opposite of each, and we’ll see how to make the most of outsourcing without the mistakes.

Figure 1.1: Painful Pitfalls

1. Don’t evaluate the business case for outsourcing.

Any methodology should include strategic reasons for it. In the case of outsourcing, you may be wishing to improve business focus, gain access to novel capabilities, accelerate reengineering efforts, and share or transfer risks. Before you get started with any outsourcing effort, you should look at your business reasons for it. For example, if you were buying a specific mainframe to be used for five years, you could:

1. Estimate your up-front costs (hardware, software, and one-time costs)
2. Estimate your new operating costs (such as maintenance)
3. Estimate your savings (such as eliminating positions or less overhead)
4. Estimate your increase revenue
5. Calculate cash out (A + B)
6. Calculate cash in (C + D)
7. Calculate net cash flow (F – E)

In this way (see Table 1.1), you can rank different projects, be they current or proposed, and get a solid picture of the best investment for your organization.

Table 1.1: A Simple Business Case

2. Don’t identify all your costs.

Not identifying all the costs is the problem that pops up most often in outsourcing agreements. If you want a successful outcome, do all you can to avoid the following mistakes:

• Having a complex solution versus a simple one.
• Underestimating the project’s scope.
• Underestimating the costs of software and hardware (one time and recurring).
• Underestimating the quantity of software and hardware.
• Underestimating the delivery dates of software and hardware.
• Underestimating licensing and maintenance support coverage (one time and recurring).
• Not considering the inventory of new equipment and the disposal of old equipment.
• Forgetting about supplies and spare parts.
• Forgetting to supply appropriate facilities for the outsourcers.
• Incorrectly expecting free work from one of your main vendors.
• Forgetting about overtime services.
• Losing key resources and undertraining replacements.
• Having key resources working on multiple projects.
• Working with a long-distance outsourcer.
• Having no risk management plan.
• Having no recovery plan.

If you haven’t taken a long look at what it really costs to develop a particular project in-house, as compared to outsourcing it, the supposed savings of sending work to a consultant or overseas service provider may spontaneously combust, leaving you with insufficient funds and an incomplete project.

3. Don’t worry about the big picture for deadlines.

If other projects overlap your planned outsourcing project, are you prepared? Internal project schedules must be coordinated to eliminate any duplicate efforts, unknown dependent activities, out-of-sequence tasks, and payment confusions. Other potential obstacles include special promotions, the opening or closing of facilities, and moratorium dates that conflict with holidays, payroll processing, backup periods, annual disaster recovery (DR) testing, and financial closings.

4. Don’t analyze stakeholder and sponsor commitments.

It happens all too often that stakeholders don’t see eye-to-eye or have different agendas, whether due to interpersonal, geographic, or cultural differences. Perhaps the project’s sponsor isn’t truly committed to the project and hinders progress by not making timely key decisions to keep it moving. Or maybe some client teams and management just don’t like conceding control to outsiders. It’s crucial to research and document all stakeholder needs and their competing obligations before you outsource the project. If you don’t, you’ll run the risk of having it torpedoed mid-course.

5. Don’t write down your conditions of satisfaction.

I have worked on projects that met all the conditions of the contract (as well as being on time and within budget), and they still weren’t considered successful by the client. Why? Because the conditions of satisfaction (COS) weren’t defined or passed on to the outsourcer before the project started. A smart outsourcer knows this, and will help you develop your COS. There are usually some elements of “knowledge transfer” in the COS, and the intent of this is to ensure that intellectual property isn’t lost to the organization at the end of the contract. However, anyone who has been a part of knowledge transfer activities (see Figure 1.2); whether from the outsourcer or client perspective, will know these elements are rarely robust enough to be effective. Recognize that it’s in the outsourcer’s interest to retain knowledge in order to have ongoing revenue in the forms of support work. This is not an easy endeavor, but the client must work on developing processes and accommodating tools to effectively and efficiently collect the transferred knowledge from the outsourcer before they leave.

Over and above the COS related to intelligent property, there can be other issues when dealing with local and foreign vendors. The legal system of some countries doesn’t offer intelligent property protection. This disparity allows the vendor to extract the client’s intelligent property and could result in the outsourcer to become a competitor and/or leak the knowledge to others. This has happened many times in the past with U.S. industries (i.e., computers and electronics). Intelligent property and internal technical information must be carefully controlled by the client, so there is not a loss of competitive advantage.

Figure 1.2: Knowledge Transfer

6. Don’t manage your relationship with the outsourcer.

Most companies underestimate their own management requirements when it comes to outsourcing. What is the way around this? Have the outsourcer develop a communications plan at the start of the project to be approved by you. The plan should:

• Describe all stakeholders’ communication needs.
• Define how stakeholders will be kept informed.
• Identify the communication paths between project teams and stakeholders.
• Describe standards used for deliverables and repository information.

Remember, you can’t put an outsourcing agreement in place and then walk away. Make sure that you manage the outsourcers in the same way that you would your own team. Use governance and oversight to keep an eye on what they are doing on your behalf. Track their progress regularly. If something goes wrong, it’s your project that will suffer, so keep a close eye on the work that is going on. This isn’t about micromanaging, but more about making sure that your goals are met. You wouldn’t expect to give someone else a task and hefty salary, and then never check up on them, would you? No! So, don’t do it with third parties either. All outsourcing arrangements should be based on the concept of “trust, but validate.” When working with outsourcers, you should want to build good relationships through communication, shared goals, ideas, and joint proposals. By doing this, you will obtain greater opportunities to see their workmanship and know-how in action. Another benefit of having a good relationship is that you might find the same outsourcers useful again for future projects!

7. Don’t be prepared.

I have worked on outsourcing assignments in which the client wasn’t physically prepared for us (for example, no office space or facilities had been designated). This resulted in a lot of scrambling around. I have also seen clients who didn’t implement a virtual private network to support the requirements of the outsourced project. Furthermore, I have seen clients who didn’t implement the agreed-upon technology changes that were vital to fast progress on the new product. Listen to the “Boy Scouts” and make sure you have your site and your hardware ready for your consultants or an overseas offshore service provider. An element of outsourcing that very few organizations consider is the impact it can have on the client organization’s own processes. Organizations that historically conduct their own projects, or who bring individual contractors into the organization when required, can work with their own internal methodology and not be too concerned about how well aligned the approach is with anyone else. When it comes to outsourcing, that logic doesn’t apply. Not only is there a need to be able to explain the project execution approach to whomever lacks the expertise of how the client operates, but there is likely to be a need for integrating that approach with the vendor’s processes. Even more fundamental, internal processes may not exist for working with a vendor. Evaluate reviews, hand-offs, approvals, etc.

8. Don’t define your responsibilities.

In my experience, the client is always quick to define the outsourcer’s responsibilities, but slow in defining their own, which includes assigning roles. This isn’t just a handoff! The degree of discipline that the client’s leadership exercises can make or break a project. To succeed, you must meet your own schedule commitments (supply appropriate equipment and people). A good tool to use is RACI Charting. This serves as an effective means of analyzing and assigning roles and responsibilities. It correlates functional roles or individuals to their level of participation in an activity by assigning codes for Responsibility, Accountability, and Communication Interfaces. This simple technique can be used any time the span of control for a process needs to be determined or developed. It is a quick means of bringing redundancies and misunderstandings to light, so that better communications can occur.

Steps to complete a RACI chart include:

• Selecting a business process to be analyzed.
• Listing all of the activities associated with that process in the left-hand column of the chart.
• Identifying all functional roles associated with the process and listing them in the top row on the chart.
• Establishing participation for each activity, for all roles, by assigning codes as described below.

R (Responsible) – The individual working on the activity (the doer).

A (Accountable) – The individual with the yes/no authority, approval, or veto power.

(Note: If two or more A’s exist, this could be a sign of problems.)

C (Consult) – The individual who should be consulted prior to action; two-way communication occurs.

I (Inform) – The individual who receives one-way communication and will use the information or take subsequent action.

The following is a simple example of a RACI Chart that depicts what happens when a client with a computer problem outsources its in-house Help Desk to IBM.

Table 1.2: Computer Problem Resolution

Expect the outsourcing company to outline your responsibilities in a contract or statement of work (SOW). If it doesn’t, or does a poor job in defining what it expects of you, look for a firm that knows what it’s doing. When looking at the outsourcer’s contract, look for dangerous words that should be viewed with caution. The bottom line is, are these words or descriptions really achievable? If not, there could be legal problems. For example, words ending in “ly” (fully, completely, and satisfactorily) have different interpretations in a court of law. Other dangerous words could include best efforts, best estimate, and increase, lowest, greatest, earliest, latest, optimum, minimum, and maximum. The last thing you want is to have improper or unrealistic expectations about deliverables.

9. Don’t free up internal resources to work on the new project.

A parsimonious attitude toward personnel will doom your project from the start, but you can’t toss unlimited resources around either. Before the services begin, you need to designate a PM to work with the outsourcer’s PM. Your PM manages many of your responsibilities as a client, acting as a liaison between your team and the outsourcer’s project team. The PM provides data and makes decisions in a timely manner, ensures that the appropriate personnel are available to the outsourcer when needed, participates in project status meetings, helps resolve problems and escalates issues as necessary, and directs the project implementation schedule along with the outsourcer’s PM. Assigning a PM to act as the point person is not all! You may also need to deal with other personnel issues, such as hiring new people or using subcontractors to match required skills for the project, ramping up and rolling off staffing, training and learning curves, planning for holidays and vacations, and choosing personnel to commit to multiple projects. Other things that may pop up are employees resisting the different processes and methods used in your outsourcing program. This is when you especially need senior management’s commitment and support to ease the resistance.

10. Don’t select an outsourcer who understands your business.

Unfortunately, many firms don’t bother spending time and energy to select the best outsourcer, and most come to regret that oversight. This is a big investment decision, and you will have time to live with it during and after the project. First, seek bids from at least two or three outsourcers. Make sure they are qualified, have references, and check out as reliable. Learn about the people the outsourcer’s uses: experience, locations, and subcontractors. Don’t assume anything when reviewing proposals. When in doubt, ask questions. Don’t base your final decision solely on the lowest bidder. And, remember to always get legal counsel before signing anything.

Summary

I have taken the above ten “Don’ts” and converted them into ten questions (with descriptions) for outsourcing success. There are numerous opportunities to veer off course. According to Eric Door, senior research director at the Hackett Group, an Atlanta-based strategic advisory firm, at any point, companies can make irreparable errors, including inadequate due diligence up front, cost cutting at the expense of quality, and insufficient focus on knowledge transfer and training. Use these ten questions (Table 1.3) to help ensure your success. Fill in numbers in the column labeled “Your Project,” and then add them up to get your total and see what it means.

Table 1.3: 10 Questions for Outsourcing Success

As you can see, managing outsourced projects is quite different from managing “in-house” projects. An outsourced scenario requires excellent skills, knowledge, and paying extra attention to detail. Managing outsourcing with care and forethought can build a thriving partnership and help insure future outsourcing projects will be successful. Avoid the mentioned outsourcing mistakes, and your organization will have a greater chance for success.

Before I close, I wanted to point out that outsourcing projects is really about vendor management, and rarely do we ever read anything from the vendor’s point of view when looking at this process. The following are some key points a good vendor will observe and/or do. Don’t forget to evaluate the following points when choosing your next outsourcer partner:

• If the client-vendor relationship didn’t exist before, a Master Service Agreement (MSA) is usually drafted by the vendor to tie the knot of the new partnership. It should be followed by the statement of work (SOW).
• Vendors typically respond to the client’s request for proposal (RFP) by doing research, pricing their work, and presenting a proposal to the client. Good vendors usually try to keep it simple. You don’t want to work with a vendor who tries to solve too many problems or over-complicates the solution. If the vendor does a good job, the client usually comes back for a “Phase 2” to address remaining problems or take a project further. This step usually opens the door for a long-term relationship.
• There is always more than one way to solve a given problem, and you must be aware of this. Each approach will have pros and cons. The vendor should come with corresponding costs and savings tailored to the client’s risk desire and price-to-performance attraction.
• The vendor should be aware that the client’s final decision is made by human beings and not by automated systems. They should also exhibit an understanding that the client’s technology/architecture team (those assessing the vendor’s proposal) may be resistant to change. Unfortunately, this is true of most humans! If the vendor aligns its’ core strengths and values with the client’s underlying needs, they stand a better chance of winning the deal and possibly becoming a real business partner!