RayooTech – IT Outsourcing

By Stephanie Overby, CIO

How to Decide What Goes

Choosing which work to outsource and which vendor to send it to are the first decisions any CIO makes in a transaction relationship. But these first steps can be the most critical. The key to success with this kind of outsourcing, says Ross, is making sure that what you send to the vendor is something "extractable"—that is, easily definable, removable or considered noncore. Tasks such as desktop provisioning, business continuity and mainframe processes tend to fall into this category.

In some cases, the categorization of a slice of IT work as extractable is straightforward. Guy de Poerck, CIO of the International Finance Corp. (IFC), an arm of the World Bank, has been outsourcing help desk services to Affiliated Computer Services (ACS) for six years and hasn’t had to give it a second thought. "With help desk, the transaction is pretty simple," says de Poerck. "I know it’s successful because I hear so little about it. I’ve never been confronted with a problem."

But what is easily definable, removable or considered noncore can vary by company. JM Family has a well-defined annual process for categorizing its technology. The process helps it to prioritize IT spending and decide what should be done in-house versus what might be a candidate for outsourcing. Every August, CIO Yerves divides all technology into four categories: emerging, mainstream, contained and retirement. Emerging and mainstream technologies are where the IT department focuses its budget, training and staff. Contained technologies are systems—often legacy systems—that are not growing in usage but that must be kept up and running and are therefore candidates for outsourcing (although internal improvements in efficiency might suffice as well). And retirement systems are, well, on their way out.

Going through this process in August 2002, Yerves and his leadership team categorized mainframe operations in the contained category for the first time. One of the company’s three business units had plans to wean itself from the mainframe. The others continued to employ the services but with no increase in usage. In addition, managing mainframe operations was a fixed cost in the IT budget, even though the company’s usage was variable.

So Yerves began to examine potential outsourcing vendors in early 2003, narrowing the field to two contenders by April. He put together a valuation matrix that explored what the vendors could offer in variable capacity and cost. Variability was important because of the peaks and valleys in the business’s mainframe processing needs. Ultimately Yerves went with IBM.

But settling on the right outsourcer wasn’t the trickiest part for JM Family. As evidenced in the CISR-CIO study, protracted contract negotiations can ruin a transaction outsourcing arrangement. "The concept of a transaction relationship is, in some respects, an oxymoron. Ideally, there is only barely a relationship—much like we’d have at the grocery store with the sales clerk. I find what I want, the clerk rings it up, I pay," Ross says. "If client and vendor engage in protracted negotiations about unique features or special pricing arrangements, they no longer have a simple transaction."

And Yerves had heard horror stories from peers and analysts about disputes over outsourcing contracts. So he sought to circumvent contractual conflicts by streamlining the process. Yerves gathered leaders and lawyers from both the vendor and JM Family and sequestered them in a local hotel. "We gave them 72 hours and said if we can’t get to an agreement by then, we don’t have a deal," he says. And it worked. Before the clock ran out, JM Family and IBM had inked a deal. "We were able to mitigate that early risk" of long or contentious negotiations, he says.

In fact, a mark of good transaction relationships is that contract negotiations are straightforward. The services to be outsourced are extractable, and companies and vendors have similar goals for the arrangement: Make it fast, easy and cheap. "It’s a lot easier to get to success with transactional-type outsourcing [than with other types] if the customers have well-defined requirements," says Mary Lacity, professor of information systems at the University of Missouri. "If the customers know exactly what they want, they can tell the vendor, and the vendor can price [the contract] correctly. The expectations [for the outsourcing arrangement] can then be well defined in the contract."

By Stephanie Overby, CIO

Five years ago, a business unit at energy giant Cinergy Corp. outsourced database administration services, but it had no plan to extend the contract to any other fields of the business. However, two years later when Cinergy centralized IT, CIO Bennett Gaines called upon the outsourcer to provide database administration services enterprisewide. From that time on, the outsourcer has proved to be very important in a major significant shift—from data marts to an enterprise data warehouse.

Four years ago, a software developer for credit unions named Summit Information Systems outsourced disaster recovery services for its data center which is located in central Florida. In 2004, as Florida historically suffered from the worst hurricane season, “[the outsourcing vendor] was willing to do whatever it took to keep our systems up and running,” says Steve Steinbach, Summit’s vice president of data center operations.

Three years ago, as JM Family Enterprises’ mainframe usage at the $8.2 billion automotive holding company had leveled off, it outsourced all mainframe hardware software and operations. The outsourcing vendor optimized operations at once so that critical month-end financial reports landed on the desks of JM Family executives first thing in the morning rather than late in the afternoon, as was the norm. “It was the same hardware, the same data. But they were able to gain efficiencies because they knew how to run a mainframe better than we were ever able to,” says Ken Yerves, Senior VP and CIO.

What does this mean? Why are IT executives not only satisfied with their outsourcing arrangements, but even praising their vendors? This might seem rather strange, for mass indictments of outsourcing have led to misperceptions. As a matter of fact, some slices of outsourcing are almost always successful.

Cinergy, Summit and JM Family all have achieved success by outsourcing well-defined processes which worked complying with clear business rules. Jeanne W. Ross, chief research scientist at the Massachusetts Institute of Technology’s Center for Information Systems Research (CISR), defines such outsourcing arrangements as “transaction relationships.” These are the most straightforward ways of outsourcing deals. The work is rather easily defined, and the reasons why CIO wants to farm it out are clear: to gain access to specific technology expertise, to meet variable demand for certain IT services, or to allow internal staff for higher-value work. And in these relationships, vendor and customer needs are usually complementary, which means that what the two parties demand exceeds more than not.

A recent study done by CISR and CIO magazine of 90 outsourcing deals at 84 companies indicates that CIOs showed much greater satisfaction with transaction relationships compared to any other type of outsourcing. (See Sustainable Value from Outsourcing for a summary of the research findings and the three types of outsourcing arrangements identified.) Nine out of 10 IT executives interviewed in the study said that they had won success with their transaction outsourcing. Besides, CIOs who develop satisfactory transaction relationships can achieve more rewards than simply saving money or freeing up staff. “Companies excelling at transaction relationships achieve agility because managers focus on processes that distinguish the company, rather than the silly things they must get right but don’t want to bother with,” Ross says.

That does not mean that all these stories are the same, with a happy ending like the stories stated above. After all, there are 10% of them that have failed in the outsourcing process. Unless you’re careful, even successful transaction relationships can bring about significant problems, such as application silos and poorly structured enterprise architectures. However, CIOs engaged in well-defined and well-managed transaction relationships with outsourcers will, in all probability, gain the sustainable value they’re seeking.

By Patricia Ensworth

Project management plays an important role in IT outsourcing. The 100 questions listed here will be helpful for CIOs and IT project managers to keep outsourcing initiatives on track.

When confronting the shrink of headcount and revenues during a recession, executives often try to manage operations stable by controlling IT costs. Though they may haven’t used the practice in the past, many midsize companies and government agencies are for the first time considering outsourcing as a necessary industry. For CIOs at these organizations, the future of outsourcing IT can be discouraging as their performance will be evaluated by a totally new set of criteria.

Organizations make outsourcing decisions with the help of a large number of case studies, peer-to-peer war stories, and a great deal of data and consultant advice. But once the decision is made and it’s time to transfer responsibility for corporate IT to the vendor, the CIO is in the uncomfortable position. That seat can grow much more uncomfortable once the CIO realizes that the success of the outsourcing initiative largely relies on the skills, knowledge and creativity of the project managers on the front lines of the engagement.

Project management plays an important role in IT outsourcing. Many organizations now track outsourced labor and expenses in enterprise-wide project management systems. If the IT project managers don’t understand the challenges and success systems which are associated with outsourcing —and how they differ from those associated with in-house development and operations—the CIO’s key performance indicators may unnecessarily turn the wrong color.

The questions listed on the following pages can help CIOs and project managers assure that they can wisely manage their outsourcing projects from the beginning to the end. The 100 frequently asked questions, which were listed on pages two through five, address the organizational, technical, and team leadership issues which every project manager should anticipate and proactively tackle. With project tracking systems, these questions are organized by project lifecycle phase to facilitate alignment. The questions are also classified in terms of the three principal roles a project manager plays: the Entrepreneur, who focuses on senior management’s business priorities; the Technology Partner, who works together with other professionals to achieve the optimization of the solution; and the Team Captain, who exercises supervision over the workers. Furthermore, there are a few questions in a Guru category. Apart from helping guide project managers, the questions can also help CIOs identify the right project manager within their organizations to lead the outsourcing initiative.

The answers to the FAQs will be different in accordance with the type of business, system, team structure, and risks involved. No matter what your software functionality or engineering methodology might be, these critical questions should be asked by the CIO and project manager. They’d better ask early, otherwise they will definitely ask these questions later during the forensic analysis of the dysfunctional engagement.