§ There are a number of advantages that an IT department may derive by outsourcing one or more functions. The most important among these are:
§ Departmental resources previously involved in the function are freed to participate on other projects, including higher priority or value- added work.
§ Costs are fixed and may be less than the department was previously paying.
§ Risk, especially the risk of losing key employees, is transferred to a company whose primary business is recruiting and retaining technical staff. Because outsourcers’
contracts require adherence to specific SLAs, they have a high incentive to provide cross-training that will reduce dependence on a single individual.
An added advantage for some companies is that an outsourcing contract can specify that the supplier offer employment to staff whose jobs are being transferred to the outsourcer. If IT has decided to divest itself of non- core competency functions, it may not have other assignments for the staff currently performing the work.
Transferring employees to the outsourcer provides continued employment for the staff, and reduced risk to both the company and the outsourcer.
Although favored by some IT managers, outsourcing raises concerns for others. The fear cited by most critics is that the IT department will lose control over its business.
This is a valid concern. The simple fact is, when a function is outsourced, IT transfers responsibility for day-to-day operation to the supplier. IT has indeed given up the ability to direct the work at a detailed level. Instead, it relies on the supplier to provide that daily management, and to ensure that service level agreements are met.
If an IT manager is not comfortable with relinquishing task-level control, or if the corporate culture does not support such a change, outsourcing should not be considered.
The second concern is reduced flexibility. Because outsourcing is normally a long-term engagement, bound by contractual terms, it is not designed for day-to-day changes in the scope of work. Instead, it is predicated on the fact that a finite scope of work has been transferred to the service provider, and that the vendor will be held accountable for clearly defined service levels. Although good outsourcing contracts provide for periodic adjustment of service level agreements, they do not lend themselves to frequent changes. If the workload is volatile, outsourcing may be an inappropriate solution.
USE OF STAFF AUGMENTATION AND OUTSOURCING FOR
SPECIFIC FUNCTIONS
Although virtually any IT function could benefit from either staff augmentation or outsourcing under specific circumstances, certain functions are more obvious choices for one type of service provider than the other.
Data Center Operations
If asked to define classic IT outsourcing, many managers would respond with “data center operations.” This has traditionally been the first function that most IT
organizations consider outsourcing, and it is in many respects ideally suited to outsourc ing, because the work is typically not a core competency and the skill is a commodity. It is also one with documented successes and proven cost savings, both of which encourage other companies to consider it.
The reasons why data center outsourcing is often successful at reducing costs include:
§ Tasks are clearly defined and repetitive. In most cases, the company has well-established procedures for the operation. This simplifies the outsourcer’
s
transition time and reduces the impact on end customers.
§ The workload is not volatile and changes in the nature of the work are infrequent. This consistency makes negotiating a contract simpler because there is less need to provide for exceptions. Costs can be clearly identified. A steady-state workload also provides the outsourcer with the incentive to invest in long-term cost-saving changes, a portion of which can be passed through to the company.
§ The work is not company specific and requires no special knowledge of the company’
s business. The generic nature of the function means that there are many potential suppliers, and the company can contract with the lowest-cost provider.
§ Existing costs are normally well-documented. Because many companies have formal chargeback systems for data center costs, potential savings from using a service provider are readily determined.
§ The primary concerns associated with data center outsourcing are:
§ The company may lose control of decisions, such as a change from one mid-range computer supplier to another, or an upgrade to a new version of the operating system, which would have an impact on its staff. A carefully worded contract can reduce this risk by reserving the right to these decisions to the company, or requiring its concurrence before a change can be made.
§ Flexibility of shifting from one platform to another may be reduced by a long-term contract. If a company anticipates a major change in its computing strategy, such as moving from mainframe systems to client/server or Web-based applications, it may not want to outsource data center operations until the change is in place.
While staff augmentation can alleviate temporary shortages of operations staff, it is not used as often as outsourcing because it does not provide the cost savings most IT managers seek from the use of a data center service provider.
Telecommunications Services
The support of a company’
s wide area data and voice networks is similar to data
center operations in that procedures and costs are often clearly defined, the work is a commodity, and there several vendors that can provide the service. This is a second function where outsourcing can be used to reduce costs.
Local Area Network and Desktop Computing Support
Installation and support of LANs and PCs is a function where both staff augmentation and outsourcing can be used successfully, depending on a company’
s maturity level
and objectives. If the IT department has little in- house expertise and wants to develop it, staff augmentation is an effective way to bring in experts who will train existing staff. Similarly, if IT has not developed formal procedures or standardized its methods, it may want to hire a contractor with specialized skills to develop those procedures. Even if the long-term plan is to outsource the function, it is desirable to establish procedures prior to outsourcing. In general, a company whose function is not yet mature should consider staff augmentation rather than outsourcing. Similarly, to increase the odds of successful outsourcing, IT should seek to first stabilize and standardize its function, and then outsource.
For some companies, outsourcing of LAN and PC support has been a less than successful venture. The reasons for the disappointment include:
§ Immature processes or lack of standardization. As noted above, outsourcing contracts are managed by service level agreements (SLAs). If there are no existing SLAs, it is difficult to specify with any precision the work that the outsourcer will be required to perform. This means that measuring success will become subjective, increasing the possibility for dissention between the company and its service provider. In addition, if the processes are not clearly defined, the service provider may have difficulty pricing the engagement.
§ Incomplete due diligence. This is a corollary to immature processes. If the vendor does not completely analyze the company’
s existing function, it may
make inaccurate assumptions about the required staffing level or the current customer satisfaction. This can lead to faulty pricing and another opportunity for disputes. Incomplete due diligence occurs most often when the company seeks to compress the time to develop a contract, and when suppliers overestimate their knowledge of the company’
s function.
§ Unrealistic expectations. A company may outsource a function, hoping that the service provider will resolve all outstanding problems, improve customer satisfaction, and reduce costs. While all of these are possible, it is unlikely that all of them can be achieved in the short term. A more realistic approach, particularly when processes are immature, would be to hire a vendor to implement formal procedures and stabilize the environment as phase one.
Phase two, under a separate contract, could include cost reductions and improved customer satisfaction as its goals. Although the same vendor could
be used for both phases, this is not mandatory. Some outsourcing firms that would be well-suited for phase two may not have the expertise needed for phase one.
§ Loss-leader pricing. Occasionally, a service provider will price an engagement at or below cost as a way of getting the business. From the supplier’
s view,
the loss-leader approach is justified by the anticipation of being awarded additional business in the future. Although loss- leaders occur in both staff augmentation and outsourcing engagements, the long-term nature of outsourcing contracts makes them particularly dangerous. Unless the additional work is guaranteed, it is possible that the vendor’
s expected profit
margins will not be met. This typically results in the vendor reducing staffing levels or substituting less experienced staff to generate a profit. Customer satisfaction rarely rises after such actions.
The concerns associated with outsourcing of LAN and PC support include those shown for data center operations. In addition, pricing may not be accurate if the processes are immature. To improve the likelihood of success, full outsourcing of LAN and PC support should be initiated only after formal procedures have been developed and implemented. Staff augmentation can provide an effective method of developing and implementing such procedures.