SBA

Outsourcing IT, It’s Not Easy

In a previous article I wrote about outsourcing software development, in this one I’ll cover some aspects of outsourcing your IT.  

What do you do if you’re not big enough to employ IT staff? If your IT needs are simple and you’re lucky you have a tech-savvy worker who will do the odd IT tasks alongside his real work, but for many small and medium sized businesses the answer is to engage an external company to supply, configure and maintain your IT - in other words you outsource it. Larger companies commonly also outsource IT, usually in the belief that an external IT company will have more diverse and expert specialists who will be able to deliver IT cheaper than an in-house IT person or team, and sometimes to take advantage of lower labour rates abroad.

The theory sounds good, but there are pitfalls, IT outsourcers are not there to help your business grow, they are there to provide a contracted service at the minimum cost to themselves whilst making a healthy profit. There is therefore a conflict of interests in engaging an external IT supplier, mitigated by a parasitic self-interest; the outsourcer ideally needs for you to survive.

It is perhaps unsurprising then that around two-thirds of companies admit that their past efforts to outsource IT have been unsuccessful in that they either did not renew the contract with their outsourcing provider when it was due, or terminated it prematurely because the mismatch between expectations and provision was just too poor.

The high failure rate of outsourcing doesn’t however mean that it can’t work, one third of IT outsourcing relationships are successful and durable. Those who know me professionally are aware that I generally discourage outsourcing, because it so often fails and I have helped several businesses recover from such failures, but nevertheless I successfully use outsourcers myself - an apparent contradiction, so how do you square the circle and ensure your IT outsourcing is successful?

The first and most important dimension is your own attitude. Repeated surveys have demonstrated that on average around half the value of a business is in the data it holds - without that data you can’t operate the business, with that data somebody else can operate the business without you. If you use a “sophisticated” IT system, such as Customer Relationship Management (CRM), Enterprise Resource Planning (ERP), Production Control, or a mid-range or high-end Finance package then part or all of your business process is dependent on the operation of the system - if it goes down your business stops working. Are you really going to hand over the keys to your business to an outsourcer? If the answer is yes then you have to do it carefully and seriously, keeping the risks in mind.

Are you outsourcing to save money? Forget it; you may save money outsourcing, although it’s rare, but that should never be your motivation - your attitude when outsourcing IT must be that you are going to make your company stronger and better through engaging an external partner who delivers IT better than you can. (If you think you’re going to save money consider that you’re paying for the outsourcer’s premises, equipment, technical staff, service managers, sales people, technical director, managing director, and the MD’s Maserati.)

Remember that outsourcing IT is an uneven relationship, the outsourcer can cripple or kill your business whereas you are probably just one of many of his clients. Do not look for an equitable contract, yes it must be fair - the outsourcer must make his profit, but never equitable, you must retain control.

IT outsourcing relationships are based on contracts between the two parties, which either in the contract or an annex will contain “Service Level Agreements” a.k.a “SLAs” - the promises the outsourcer makes to you about uptime, response time when problems occur, how they will operate your systems etc. In the IT leadership community we have another interpretation of SLAs, we call them “Statements of Limited Ambitions” - they reflect the limited commitment that the outsourcer is making. If the outsourcer says they will respond to a fault in four hours then do not expect a response in two hours - you may be lucky but responding in four hours will be cheaper for the outsourcer (and respond means they start to investigate your problem, not fix it). Negotiating the SLAs is crucial, do you really want your staff being unproductive for four hours because the IT is down? The SLAs must reflect your needs, if the proposed outsourcer can’t meet those needs (affordably) then find another.

Ideally the contract will include automatic pre-arranged penalties for under-performance, for instance the refund of fees for a month in which the outsourcer misses an SLA. Penalties are not and should not be seen as compensation, they are merely an incentive for the outsourcer to try hardest to keep to the agreement, if a failure by the outsourcer costs your business to the extent that compensation is justified then compensation is probably a matter for arbitration or the courts. Do not however expect that compensation through the courts will be realistic, it rarely is. Whilst still on a downbeat note, ensure that the contract specifies what happens and how you get your IT back if you terminate the contract - always consider how you are going to get out if necessary.

Your needs will change, what you believe to be necessary at the beginning of an outsourcing contract will not be true forever, you will need flexibility for change. When selecting an outsourcer you need to consider both how the contract may be changed in the future, and whether the outsourcer can meet your future needs. If you are to grow bigger you will need assurance that the outsourcer can cope with a bigger you, if you plan to expand operations abroad then you will need to choose an outsourcer who understands how to deliver technology remotely etc. When considering your outsourcing needs plan in flexibility for the future. Of course most changes will cost more money so you should be prepared for that extra spending from the outset.

Clearly negotiating an outsourcing contract is tricky, it requires a lot of thought, but if anything it’s the easy bit. The real key to successful outsourcing is the building and maintaining of a relationship once the contract is underway, outsourcing does not reduce management effort. You should have frequent meetings with your outsourcer both to review their recent performance and to discuss your changing needs and business plans for the future. If the outsourcer is to keep up with you they need as much of an insight into the future as you can give them. This is not a task to be delegated, it needs to be at a senior executive level - you should expect to spend as much or more time guiding and directing your IT outsourcer as you would directing an internal IT function; using an outsourcer requires a significant commitment of your management time and you can expect the relationship to fail if you don’t deliver on that commitment.

Using an IT outsourcer will never remove the need for you to think about and decide upon the IT needs for your business, the outsourcer really cannot do that for you. Your IT needs are determined by your evolving business strategy and operations, so it’s up to you to decide what you require. If you don’t know what you require or what is available or possible then you may need to employ an IT expert to decide that for your business, basically running a successful IT outsourcing arrangement requires your business to have some IT leadership skills, whether they are provided by you or a part-time or full-time IT leader.

And finally, using an IT outsourcer generally works best for simple stuff like networking, storage, email, printing, security / anti-virus, backups and PC maintenance. Outsourcing the configuration and support of CRM, ERP etc. is much harder - it can be done but usually the outsourcer will be a specialist so you may well need multiple IT outsourcers, have to manage each of them, and resolve the inevitable finger pointing when something breaks and they blame each other.

So, in short, enter into an outsourcing contract cautiously. Think ahead about your needs, choose carefully, get the contract and SLA’s right, and then commit serious management time to making the relationship work. Your ongoing relationship with your IT outsourcer it is at least as important as the relationship with your biggest customer and you should give it as much or more senior attention. If you do then you will probably fall into the one third of businesses which succeed in outsourcing their IT, if you don’t you will certainly be in the two-thirds that fail.

In a later article I’ll cover some of the technical considerations you may want to consider when selecting IT outsourcers.