INFORMATION TECHNOLOGY

Lance B. Eliot, Feature Editor, Eliot & Associates

Common Myths Regarding Outsourcing . . . and the Real Truth

by Lance Eliot, Feature Editor

After working with a number of CIO's (Chief Information Officers) and companies that have either outsourced part of I.S., or have been considering outsourcing of selected I.S. functions, I've accumulated a variety of interesting myths that seem commonly accepted, but fail to prove themselves in actual practice.

Though the following points may seem harsh on outsourcing, I still consider outsourcing a viable option if firms take the right steps to protect themselves and knowingly structure an arrangement that will work for all involved parties.

For each point, I identify the true reality of the situation, and then offer suggestions on how to overcome the problems that underlie the false assumptions of each corresponding myth.

MYTH #1:

Outsourcing will reduce costs, and increase management control.

Reality

Many firms using outsourcing have encountered increased costs and a loss of management control. In such cases, companies frequently rushed into an outsourcing agreement without analyzing their existing costs (prior to outsourcing), allowed the outsourcing vendor to create the terms of the agreement (obviously favoring the vendor), and became mired in lengthy "after the honeymoon" debates about services and expectations.

Making It Work

• Perform an analysis of your current operation and know your existing costs (so you can compare apples to oranges).
• Force the outsourcing vendor to layout their costs, verify it, and include strict financial terms in your agreement.
• Offer your own terms and don't let the vendor slip in loopholes.
• Realize that managing a vendor is different, but not necessarily easier, than managing your own in-house staff.

MYTH #2:

Outsourcing is an all or nothing proposition, everything goes or nothing goes.

Reality

Firms start with the belief that outsourcing requires the complete transferral of a chosen I.S. function to the outsourcing vendor. Actually, firms that have been particularly successful with outsourcing have blended their in-house activities with the outsourced activitiesþleveraging the best of both worlds. Naturally, such a blending requires careful attention to integration issues, but the result can exploit the strengths of each and overcome the weaknesses of each.

Making It Work

• Determine the various components of your I.S. function being considered for outsourcing, rate each component, and weigh the value of each.
• Look closely at the outsourcing vendor, and determine which services they can really handle, and which ones they only think they can handle.
• Arrange a portfolio matrix of services. Indicate assignments.
• Consider how integration between the in-house and outsourcing components should be structured. Don't leave any gaps.

MYTH #3:

Cutting an outsourcing deal is fairly easy, and hesitation denotes fear.

Reality

Outsourcing sure seems attractive. Unfortunately, many firms become so excited by the prospects of outsourcing that they overlook the downsides. And, worse still, any internal hesitation is assumed to be fear of change or similar foot dragging. There may be some of that around, but don't let the smoke screens get you into a half-baked mess. Many firms are now re-negotiating deals that were only vaguely put together at the beginning (placing their firms into a rotten bargaining position).

Making It Work

• Prepare a plan that examines the outsourcing quest, including the relevant trade-offs, risks, rewards, and alternative approaches.
• Don't move overly fast. Be cautious, check numbers, verify references, get additional viewpoints, and work on the details.
• Don't get stuck in "analysis paralysis." Set a reasonable time period for analysis, make sure resources for the analysis are made available, and then swiftly act upon the results.

MYTH #4:

Outsourcing has worked "elsewhere," so it must be applicable here.

Reality

Sadly, many cited examples of outsourcing success are:

• Temporary success stories that will--or already have--fallen apart.
• Irrelevant to the outsourcing situation you actually face right now.
• Contain assumptions and stipulations that you don't know about, or cannot be included in your outsourcing agreement for various reasons.

Making It Work

• It's definitely worth knowing about other outsourcing examples, but get enough information that a valid comparison can be made.
• Ask questions. Is the outsourcing example based upon a strategic area of I.S. performance, or a more generic, vanilla flavored area? Was the operation for external or internal customers? Etc., etc.
• Examples that seemed relevant, but prove to be irrelevant, should be explicitly ruled out of your thinking processes. It's easy to cling to the parts that might seem similar and continue to foster a false belief that "it will work here too".

MYTH #5:

Anyone can forge an outsourcing deal, so we'll just put one together.

Reality

An outsourcing "deal" involves a wide range of expertise, including knowing how to negotiate with an outsourcing vendor, legal savvy to properly word and structure the agreement (working with in-house legal staff), financial skills to make sure the various measures and pricing make sense, technical knowledge to ensure that the services will really be on target, management skills to deal with in-house staff and also manage the vendor, and so on.

Making It Work

• Don't just assign an in-house staff member to consider the outsourcing issue--devote a variety of relevant talents to the task, possibly form a committee, and give the group the top I.S. attention required.
• If it seems useful, obtain outside assistance from a third party. Be careful that any outside assistance doesn't already have bias toward a particular outsourcing vendor or approach.
• Realize that your firm is going to live with the outsourcing deal that gets created. A concerted effort up-front can prevent a draining effort after the deal has begun.

MYTH #6:

If we don't like the outsourcing results, we'll just go back to the way things were.

Reality

Imagine that you've moved your operation into an outsourcing vendor's hands. The staff consist of some in-house personnel (moved into the vendor), and some of the vendor's own people. Over time, some of your ex-employees move or become newly devoted to the vendor. Now, you decide that the deal isn't working and you want to put things back to the way they were. In most instances, you'll have a very rough time going back. And, the vendor may fight you, the termination clause may be confusing, etc. Meanwhile, top notch service is supposed to be taking placeþit may not be.

Making It Work

• Assume that the outsourcing decision is a one-way path. If the vendor tries to soothe you by making it sound easy to withdraw, take a deep breath a look at the one-way sign again.
• Assume that you will eventually need to break the deal. Even though you realize that it is essentially a one-way path, plan for how to get out.
• Include contingencies in the outsourcing agreement. Monitor performance continually. Have escalating schemes to quickly escape when needed. Be ready to invoke the plan.

Conclusion

The preceding list of popular myths about outsourcing can be applied to functional areas beyond the Information Systems function. Practitioners and researchers might wish to review the list, consider their perspective on each myth, and take action accordingly. Outsourcing will continue to grow in popularity, and hopefully the caveats offered here will help keep firms, executives, and researchers aware of the costs and benefits associated with this organizational innovation.