Get a grip on outsourcing

How to avoid the pitfalls of badly negotiated contracts

BYLINE: Les Graney

Opinion

UK companies spend 25%-30% of their IT budgets on external services. Yet Gartner estimates that badly-handled relationships cost European businesses [pounds sterling]4bn a year in wastage. Surveys by D&B reveal that 20%-25% of all outsource relationships fail in the initial two-year period and that 50% fail within five years.

Having been involved in outsourcing from its earliest days in the UK with BP, through to last year’s outsourcing of Royal Mail Group’s IT services and now as an IT outsourcing adviser, I have gained insight into many of the pitfalls in this arena.

One hazard for inexperienced users is the complexity of the contract negotiation process. The service provider will have plenty of expertise in the specifics of outsourcing terms and conditions, but the client may have little IT outsourcing experience.

Risk and reward can be skewed in the supplier’s favour and contract terms, which seem reasonable at the time, become minefields for the future.

For example, at one UK telecoms firm an element of the fee was based on server numbers. This meant that server consolidation and commensurate cost savings for the user were discouraged.

At Royal Mail, another insight gained was to steer clear of specifying how a supplier goes about providing a service. If you do you will stifle innovation, incur costs and lose service benefits.

As long as the service provided is delivered to the right quality at the right price, how it is done must always be the supplier’s domain; that is part of the expertise you are engaging the company for.

But probably one of the most complex areas is in specifying, monitoring and managing performance. You must set business-level service goals, not just technical ones. You must also define what aspects to report on, how to measure them and to whom they will be reported.

Determining where the data and other evidence will come from to do this is complex and, of course, you must minimise the delay between actual performance and reporting if issues are to be spotted and resolved before harm is done.

Since my time at Royal Mail, performance definition and service measurement/governance software tools have advanced to the extent that they can add substantial value, especially when both parties share the metrics.

The best products collect data from many thousands of sources and can relate and measure these to a few core business-level objectives. Performance indicators, intelligence and alerts provide early warnings of deviations or potential threats in real time.

IT outsourcing is still a relatively young phenomenon. But as experience builds and with improving processes and the application of powerful tools, astute organisations will bring the risks under control and get to grips with the true benefits.

Les Graney is associate director of Digital Fuel, a provider of service governance products. He was formerly group IT director at Royal Mail

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