Outsourcing – Perfecting partnerships

Outsourcing - Perfecting partnerships

Companies are finding that IT outsourcing is not the problem-freeoption they anticipated. But, says John Handby in this extract from hisforthcoming book, Ahead of the Game, if IT suppliers and users have sharedobjectives, they can enjoy a fruitful relationship.

What does a football team do when its fortunes start to wane? It sacks its manager, puts its failing players into the reserve team and then looks for some new signings. What does a company do when its information technology is failing? It sacks its IT manager and brings in consultants or an outsourcing company. Does the performance of the football team improve? Not always. Is the company suddenly impressed with the contribution of its IT function? Don’t ask.

But outsourcing has become a crucial part of the successful management of IT. My experience has convinced me that consultants and outsourcers are a vital part of the resources mix in delivering appropriate IT capability to the business, but that too few companies have thought the mix through or worked out how to manage consultants and outsourcers effectively.

Over the past few years, there has been much in the computing press about mega outsourcing deals. These deals often feature a major organisation, such as the Inland Revenue or British Aerospace, outsourcing all or most of its IT to one of the big names in IT outsourcing, such as EDS, Computer Science Corporation or Andersen Consulting. However, I sense that the enthusiasm for the mega outsourcing deal is on the wane.

Companies are becoming aware that outsourcing is not quite the route to a problem-free future they thought. Alongside the tales of happy marriages in the press, there have been one or two pieces about marriages that went wrong. Some ended in the divorce courts, others are going through intensive counselling.

It is not too difficult to see why companies find outsourcing such a seemingly attractive option. Many have had years, if not decades, of trying to make their in-house IT departments meet the needs of the business.

Directors and other senior managers have spent years of protracted discussions with guys who seem to talk a completely different language. They have been disappointed so many times on delivery of systems, reliability of performance and adherence to budget. Then along comes somebody from an outsourcing company with a simple message: “I have a way to solve all your problems.” It seems so easy. Hand over the IT function and write a cheque. Indeed, if the outsourcer takes over your equipment, there may even be an initial capital payment coming back the other way.

Harsh fact number one: consultants are much better at structuring outsourcing deals than their clients. It is not difficult to see the reason why.

They are doing it all the time, and they know in detail how outsourcing works. They know where the gaps between the paving stones are. I have come across a number of companies that have stumbled into outsourcing arrangements, imagining they will save money or control their expenditure, only to find the arrangement costing them more – sometimes, much, much more-than they originally envisaged. Which raises harsh fact number two: extricating yourself from an ill-conceived outsourcing deal can be very, very expensive and very, very painful – if, indeed, it is even possible.

Companies are sometimes surprised that the team put in place to manage their contract is not quite what they were led to expect. This brings us to harsh fact number three: unless you are a very substantial customer of a big-league outsourcer, as well as being a good negotiator you may end up being far from their number one priority. It is essential to get the basis of the contract right to ensure that it provides the foundation upon which a good relationship may be built.

A great deal depends on the attitude of the outsourcing or consulting company involved. I have certainly worked with consultants over the years that take an overly legalistic approach to projects. When a problem arises, their first recourse is to the contract. If I know a consultancy has a reputation for working like this, I avoid it. Even if the consultancy I choose seems to have technical skills which are not quite as high as the barrack room lawyers. The benefits of working with a consultant who adopts a true partnership approach – as I describe later-far outweigh a small variation in skill levels.

For the customer, it is key to appreciate that outsourcing is not an alternative to understanding the issues and opportunities that IT presents.

If outsourcing is simply treated as a problem, then harsh fact number four applies: outsourcing a problem does not solve it. It is essential to be clear about the objectives of outsourcing and to fix any problems before it takes place.

Neither should outsourcing be seen as a way to remove the responsibility for IT from the organisation. It is, rather, simply another way to take responsibility for IT. I believe that truth is at the heart of all successful outsourcing arrangements – and despite the lurid headlines of failures and bust-ups there are many successful outsourcing operations. The problem is that sometimes boards, having failed to manage internal operations effectively, believe that outsourcing is a way to place management responsibility elsewhere.

It is important to understand that IT is not some troublesome, peripheral activity, such as running the staff canteen or cutting the grass on the corporate campus. It is at the heart of the business. But if that is the case, should it ever be outsourced?

It is true that outsourcing started as a peripheral activity – the office cleaning approach. It developed into areas that provided key support services to non-front-line activities, such as security and catering.

Finally, it started to take over what 20 years ago would have been considered core parts of the business – for example, product research, accountancy or distribution and logistics. If accountancy can be outsourced why not IT?

It can, providing the conditions are right and providing the outsourcing enhances the long-term IT capability of the company.

Given the increasing strategic role of IT, any significant business is going to need a growing rather than declining IT capability. The problem I have with some IT outsourcing deals is that key capabilities get outsourced with them and it can prove to be difficult if not impossible to repatriate them.

For example, I would have considerable difficulty outsourcing where a company relies on a key technology and has built a specialist in-house team which it has nurtured and developed. The strategic positioning and management of that team is vital and should probably stay within the company.

The other side of the coin is where there is a need to develop a key capability. That is an ongoing, and often much greater, problem for thousands of companies in the rapidly changing world of technology as they continue to compete in the marketplace for a defined pool of rare talent. In this case, giving an outsourcer the task of building or providing a specific strategic capability could be a highly effective approach.

It follows from this that a company must maintain its strategic control of IT, no matter how much of the operational function is outsourced.

To lose strategic control of IT is to lose a vital capability of the business. In fact, a survey of outsourcing in the Harvard Business Review, May/June 1995, concluded that a company’s overarching outsourcing objective should be to maximise flexibility and control so that it can pursue options as it learns more or as its circumstances change.

The problem with many of these earlier outsourcing megadeals was that they failed to take account of the increasingly diffuse nature of IT within an organisation and of the huge range of different skills and capabilities that may be needed. The megadeals have thrown the spotlight on both some strengths and weaknesses of outsourcing and the right answer will vary depending on the circumstances.

First, the megadeal does introduce an element of strategic vulnerability connected with the future of the supplier. The IT business is a fast-moving business. Suppliers come and go. Even a deal with one of the giants is no guarantee of stability. General Motors spun off EDS and Andersen Consulting may finally split from the accounting arm of the business.

Important strategic changes such as these invariably have some ripple effect for customers in terms of charging levels, business practices or personnel. Not all changes need be bad, of course. My point is that a megadeal has within it the seeds of a long-term uncertainty that can become unsettling.

The second point is that my experience is that the megadeal tends to lead to an “average” standard emerging over the company’s IT as a whole.

No outsourcing supplier can be excellent at everything. The megadeal tends to provide the vanilla option for all the IT, when what most businesses need is a full run of flavours. But there are, on the other hand, cases where outsourcing has brought a whole new range of skills and expertise to companies, enabling them to compete more effectively.

My approach has been to opt for selective outsourcing where it is possible to go for the best-of-breed supplier in each specific area. For example, at National Power, we had a huge requirement for consultants and outsourcing but rather than opt for one supplier, we selected from a strategic list.

We chose Andersen Consulting to work with us on the IT strategy, PA Consulting to provide management of a major telecoms project, Hoskyns to look after legacy systems and so on. In each case, we were looking for specific strengths and providing the consultants with a very tight brief.

In our particular circumstances at National Power it made sense to have a number of different suppliers each working on discrete projects. Each of the projects had a defined timescale and there were deadlines when the consultants were to be out of the organisation with the work complete.

But whatever the approach, outsourcing can certainly provide major advantages when specific skills are needed quickly and/or there is a major peak of activity to be handled. In either case, there is not the time and it makes little sense to develop such resources in house. Far better to seek these requirements externally.

Each outsourcing partner needs to have clear objectives and a service level agreement that defines what is expected. But while this sets benchmarks for expected achievement it cannot guarantee that they are met or that the user will gain the greatest possible benefit from outsourcing. To do this requires an effective partnership between the user and the outsourcer.

Partnership is one of the most abused words in business English and no more so than in the IT industry. It is used as a political weapon. Partnerships are “good”. So any relationship has to be presented as a “partnership”, especially by the party that stands to gain most from it. Heaven save me from some of the “partnerships” I have seen. They are no more than the cut-and-thrust of ordinary commercial warfare dressed to look like something they are not.

A partnership is something special. A true partnership requires both parties to move some way beyond their role as a buyer or a seller to consider the longer term value of their relationship in a more holistic way. In a true partnership, the parties do not have the same, but shared, objectives.

Those objectives deliver real value to both parties.

The need for users to build partnerships with their suppliers is one of growing significance.

From a user’s perspective, there are several reasons for wanting to build partnerships with IT suppliers. One of these is the need to take cost out of IT operations. As any large purchaser of hardware or software knows, prices quoted by suppliers are very much a moveable feast and vary significantly from one part of the world to another. In the past, suppliers have defended this differential on the basis that it costs them more to address the European as opposed to the US market. But with IT companies, as well as others, developing truly global markets, I believe this argument increasingly falls to the ground. Certainly, I have found that it is possible to negotiate advantageous global prices with major IT suppliers.

But cost is not the only or even the main reason for building partnerships.

In many ways, the question of service levels is of even greater importance.

With IT becoming more pervasive throughout every kind of company and public sector operation, loss of IT or even a critical part of it, can seriously undermine the business’s effectiveness. Moreover, IT systems are becoming more complex, particularly through networking and the interworking of different systems and pieces of software. It is essential, therefore, to ensure that the definition of service levels is carefully undertaken and does not leave any gaps or areas of dispute, either between customer or supplier or different suppliers. It is important that one supplier acts as the prime contractor with clear responsibility for sorting out those difficult service issues which tend to lie at the boundary of any service agreement. The same end-result may be achieved with a strong in-house management team or, alternatively, it can be a good reason for a megadeal with one company!

Finally, partnerships with strategic IT suppliers are important because it is easier for partners to join together in the development of the functionality/capability of the product or service. A partnership built around shared objectives makes it much easier to adopt a flexible approach to changes and enhancements that become desirable in a way that is far more satisfactory for both parties. Also, it is worth observing that if you are a major global company, the chances are that a strategic partnership with a supplier wins you a seat at the top table when the company is consulting its leading customers over issues such as product development, new services and other matters.

But even large companies can find they are small in relationship to their major IT suppliers – IBM, Hewlett Packard, EDS, Microsoft, Oracle and so on. Anything that provides more leverage and influence with the suppliers benefits the user in the long run.

I certainly discovered all these benefits in developing a strategic partnership at Glaxo Wellcome with Hewlett Packard. The background to this was the need to create a global architecture for distributed systems. For various reasons, I wanted the new distributed architecture to be implemented quickly and it seemed obvious to me that strategic relationships with key suppliers would help a lot.

HP had been pitching – with some success – for the company’s business for a long time. But it found the loose confederation of companies tough to work with. It had to win every sale through each individual company.

It was clear that if Glaxo Wellcome incorporated HP equipment, management tools and services into its distributed architecture, it would make life a lot easier for HP. It would reduce the cost of the sale and, we argued successfully with HP, allow the company to provide a larger global discount.

What were perhaps not quite so obvious were the benefits – apart from cost – to Glaxo Wellcome but they were very real. We were able to use the global reach of a major supplier to help us reinforce our strategic intent.

It was an excellent example of corporate IT and the supplier both pulling in the same direction – a true win-win situation.

I guess one way to describe our relationship at Glaxo Wellcome with HP would be “partnership sourcing”. You only have to look at the Japanese motor industry to see how partnership sourcing can deliver a whole raft of benefits ranging from lower cost to improved quality and more reliable deliveries. I think the Glaxo Wellcome/HP relationship demonstrated that it is possible to win the same kind of benefits when a customer builds a sound partnership with an IT supplier.

Step back for a moment and just consider the amount of energy that used to go into a major computer purchase made by competitive tender. You would short-list possible suppliers, itself a potentially time-consuming task, then draw up and issue an invitation to tender (ITT).

From the supplier’s point of view, the ITT would list a yard and a half of specifications, all of which it ought to respond to. On both sides, countless hours were spent in clarifying issues raised in the ITT – not with one but with several potential suppliers.

Needless to say, I have seen many responses to ITTs that were half completed and lacked sometimes essential information. Not only is the process time-consuming, it is competitive in an unhelpful way. It introduces a combative relationship between the suppliers and the purchaser.

Moreover, the conflict between the potential suppliers, with accusation, claim, and counter-claim, perfected by IBM as the original inventor of the FUD approach (spreading fear, uncertainty and doubt about the opposition) – obscures the critical issues.

In my view, this approach is very dated and largely counter-productive although I accept that in a limited number of circumstances there may be a case for it and that many public authorities are constrained by rules to follow it. But, however they are selected there is a real case for users not beating up their suppliers in the age-old way but rather seeking to build working partnerships with them.

The purpose of partnership is to involve everybody. Indeed, one spin-off benefit of this was that it was possible for these individual companies within Glaxo Wellcome to call on HP around the world for their special requirements, knowing that they had the power of a major global strategic relationship behind them. So there was something in this for the operating companies as well.

One important aspect I have learnt about building partnerships is the huge benefit to be gained from treating supplier staff as human beings with normal aspirations rather than as opponents there to be screwed into the ground as hard as possible. A whole new psychology can be introduced into the relationship in motivating such people to achieve the customer’s mission.

Which brings me to another key point about a partnership relationship.

If you want your supplier to share your goals and help achieve them – as we did at Glaxo Wellcome – you have to be open about what the goals are.

No hidden agendas. You have to learn not to spend your time scoring points. In a partnership, a problem for your supplier is a problem for you as well and you need to bend your own efforts to help resolve it.

Naturally, you expect the same commitment when the position is reversed.

This does not mean that you adopt an uncommercial relationship. A partnership is just as much a commercial relationship as any other. Yet the critical difference is that you conduct the relationship on an open book basis.

You are open about the costs on your side and you expect your supplier to be equally open about his costs and margins. You appreciate that the supplier needs to make a respectable profit and the relationship will prosper in the long run if he does so. But in a partnership relationship, the margin must be accepted as reasonable by both sides.

Attitudes must change on the part of the supplier, too. It must also change the habits of a lifetime and learn that there is another way of being successful. The supplier must devote much more effort to understanding the business dimension it is operating in. It has to make a real effort to understand the customer’s goals, to ensure that its own people identify with those goals and then to strive with the customer to reach them.

Building a partnership requires effort on both sides. For example, I recall at Glaxo Wellcome that we invited HP people to join us at periodic offsite briefings about future IT plans. Similarly, they invited us to some of their account planning meetings. On one occasion early in the relationship, HP invited me to address a meeting of account managers from around the world on the subject of what we were seeking to achieve with our IT strategy. It was a valuable meeting and did much to develop the relationship.

I have said that a partnership is especially important for outsourcing arrangements. Why should this be so? The nature of outsourcing is such that the buyer relies more heavily on the supplier to deliver an end-to-end service. The failure of an outsourcing arrangement – and some have failed – can create severe difficulties. But, equally, a poorly functioning outsourcing arrangement is both a frustrating and a debilitating relationship to be in. It results in an IT service that is often not much better than and sometimes worse than the in-house service that existed before. The outsourcer too often takes refuge in the small print of the contract to cover deficiencies in service or to avoid responding to requests from the client.

Outsourcing IT is often about change management. A driving force behind management’s desire to outsource IT can be the desire to change the contribution that information technology is making to the business. Management takes the view that the in-house IT operation is unable to make the necessary changes – both in terms of attitudes and behaviours as well as skills – that are necessary in order to deliver the capability the business needs to move forward. Outsourcing seems the way ahead. But if the outsourcing supplier does not share the customer’s vision – if the outsourcer does not see itself as an agent of change – the arrangement is unlikely to deliver all, if any, of the benefits the customer originally had in mind.

Of course, a true partnership, adopting the principles I have discussed above, can overcome many of these difficulties. Outsourcing is not an easy option nor a bed of roses. It is simply another option. You have to work at it.

John Handby is a strategic IT consultant who has been IT director of the Post Office Corporation, National Power and Glaxo Wellcome during his career. His forthcoming book, Ahead of the Game – real-life experience winning competitive advantage with information technology, is published by Management Books 2000 at #12.99, telephone 01285 760722.

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