TREND TO OUTSOURCING
Eastman Kodak was an early pioneer in the outsourcing movement. In 1989, Kodak contracted with Integrated Systems Solutions Corporation (ISSC), IBM’
s services
branch, to do the computer work that Kodak had been performing at four of its facilities. Then in 1994, Xerox signed a 10- year outsourcing contract for $4.1 billion with Electronic Data Systems Corp. (EDS) to do a major portion of its computer work.
AMTRAK expects to save $100 million over a 10-year period from its outsourcing arrangement.
Those are three examples of the well-publicized movement to outsourcing as a business strategy. It has been estimated that 80 percent of information systems work will be done by contractors by the year 2000.
WHAT TO AND NOT TO OUTSOURCE
Outsourcing has proven effective in accomplishing several goals: to reduce costs, to generate cash, to focus management’
s attention on the organization’
s prime
purposes, to take advantage of an outsider’
s expertise, and to help expand globally.
Functions inappropriate for outsourcing are systems work necessary to monitor the outsourcing vendor, a system that is part of a competitive advantage, and outsourcing that could expose key proprietary and confidential information.
TIPS FOR WORKING WITH THE CONTRACTOR
There are certain steps that can be taken at the beginning to establish a basis for working together constructively and cooperatively. Clear responsibilities for liaison are essential, regular meetings are helpful, and avoiding misunderstandings is important, yet having a mechanism for dispute resolution is essential.
Spirit of Partnership
Outsourcing arrangements work best when there is a basic feeling of trust and cooperation between the client and vendor. Truly, both should be working to accomplish common goals wherein each benefits in its own way. Both sides should gain substantially from the relationship. However, if conflicts dominate the relationship, lawyers probably get involved to protect what they see as their individual side’
s rights, and the original goal of mutual gain and benefit is not achieved.
Liaison Staff
One person should be appointed as chief liaison representative for the client in dealing with the outsourcing vendor on a continuous basis. Liaison individuals should have the authority to act for their employers and should be the normal route of communications between client and vendor, particularly for complaints. Therefore, the liaison person must be knowledgeable about the technology involved, be a diplomat, yet be able to be firm in monitoring and demanding proper performance from the vendor. The liaison officer must also be of unquestioned loyalty to the clients’
interests (many systems technicians may see their best future career opportunities with an outsourcing services firm), yet see that the vendor’
s legitimate
interests are respected.
The outsourcing contractor should be asked to set up a liaison counterpart, and both client and vendor should clearly define their liaison representatives’
responsibilities
and modi operandi.
The liaison function may vary in size and scope depending on the circumstances.
McDonnell Douglas has a group of 15 to 25 employees managing its relationship with Integrated Systems Solutions Corporation (ISSC), IBM’
s services branch, with which
it has a $3 billion outsourcing contract. Hughes Electronics has a staff of 50 to oversee the work of its outsourcer, Computer Systems Corporation (CSC), in its $1.5
billion outsourcing contract covering 7 years, and is pleased with the way the relationship is working out.
Meetings
The spirit of working together can be strengthened by frequent meetings between representatives of the client and vendor on topics of interest to either party or to both. Having such meetings on an ad hoc basis, or perhaps regularly, under the guidance of the liaison representatives can get problems under control before they get out of hand, and foster an understanding of people on both sides about the interests and activities of the other parties, thereby encouraging a friendly and
cooperative relationship and a feeling of participation, which are important factors leading to the success of the relationship.
Avoiding Misunderstandings
The best way to avoid misunderstandings is to have a contract clearly describing the work to be done and the standards of performance expected, and covering all the contingencies that are considered as possible to occur. But even with a well drawn up contract, there will be events that have not been anticipated, or one party may construe a part of the contract to mean something different from the other party’
s
interpretation.
Resolving Conflicts
There are three general approaches to conflict resolution other than legal action, which it is recommended be avoided at all costs. They are:
§ A conflict resolution committee
§ Referring the matter to higher executive levels
§ Arbitration or mediation
The conflict resolution committee should probably be co-chaired by the two liaison representatives, with specialists added based on the nature of the issue, such as whether it is an accounting or technical matter.
If the committee cannot bring the matter to a compromise or other solution, it can be referred up the executive ladder — say to the vice president level, then to the CEOs — to resolve. This process sometimes can settle the matter quickly. However, it often takes valuable executives’
time away from their main functions, time they
would take in researching and negotiating the issue.
Taking the conflict to arbitration or mediation is far superior to court action. Using the established processes of the American Arbitration Association can resolve issues faster, cheaper, and easier than suing, engenders less hostility, and can even be done without attorneys.
MANAGING THE TRANSITION TO OUTSOURCING
Making Detailed Plans
The key to a successful transition is a carefully and thoroughly drawn up plan listing all the events that must take place and their timing, including equipment transfers, data and software transfers, people transfers, and who (client and vendor people) is going to do what. Hopefully, much of the transition process has been spelled out in the contract; but even so, there are further details and dates to be made more specific, such as people’
s names instead of job names, and actual dates instead of
time periods.
The transition is a time for the people on both sides to become acquainted with each other. Full discussion and conversations are encouraged during this period to try to establish working relationships that will help in the continuing operation of the contract. The liaison representatives of the client and the vendor should take the lead in coordinating the design of the transition plans, as they will take a major role in their implementation.
Running Systems in Parallel
Running the old system concurrently and in parallel with the new outsourced approach is the best way to confirm the validity of the new way of processing a system. Sometimes, it may be unduly expensive to run the whole system in parallel, and it may be possible to accomplish the purpose of parallel processing by doing it in part, say putting through 1000 of a total of 10,000 orders, which may be sufficient to verify the correctness of the outsourced process. Of course, some outsourced work is for systems that are new and have never been done before, in which case no parallel operation is possible.
Monitoring and Evaluating Contractor’
s Work
To achieve the client’
s desired results requires, first of all, to clearly define what known facts will be considered satisfactory, then to get feedback on how the actual performance compares to established standards, and finally to motivate the vendor to conform to or exceed the defined expected results.
Establishing Standards and Managing Expectations
All outsourcing contracts should not only define what work will be done by the outsourcing vendor, but what results are expected and how they will be measured.
In order processing, for example, the contract might define the turnaround time from input to output, the maximum percent of errors that would be acceptable, and the cost to the client if the vendor has some control of that. For an outsourced help desk function, the standard might specify the maximum response time, the percent that needs referral to a second technician, and feedback from the users as to their satisfaction with the results.
While these performance standards should be in the contract, as the work gets underway, there may arise additional factors to be considered and adjustments and clarifications that need to be made to keep the standards practical and current. The refinements should be negotiated between the liaison representatives and others concerned, with the agreed new terms put in writing to confirm the agreement and to inform all concerned about them. Since the contracts often run for several years, the changing needs of the client, such as new products and new markets, and changing vendor conditions, such as new hardware or software or location, frequently create the need for revisions to the expectation results.
Performance Reports
It is essential to arrange for some report to be made regularly on each feature of the performance standards so that the outsourcing vendor’
s results requirements will be
measured. Regular and prompt reports should be made by the vendor of items for