The pros and cons of outsourcing

Realizing value from your outsourcing arrangements is a matter of partnering with your vendor, creating a well drafted, fair and flexible contract and a certain amount of commitment — both on the part of management and the vendor to make the relationship work.

Technology vendors and their customers gathered in Toronto earlier this week to hear from those with extensive experience in creating IT outsourcing deals at a breakfast meeting sponsored by the Centre for Outsourcing Research & Education. Lawyers, consultants and scientists discussed the impact outsourcing can have on company’s financial statements, as well as some of the biggest mistakes companies make when drafting outsourcing agreements, particularly when contracting for what they want today, without consideration for the fact that by noon tomorrow those wants and needs will change. They also heard about the different ways vendor and client relationships break down and the pitfalls of going with the cheapest offer or playing hardball to get lower quotes from service providers.

“Focusing on getting a cheap deal at the front end, you’re short sheeting the bed a little,” says Valerie Adamo, vice president of business technology and chief information officer at the Workers Safety and Insurance Board of Ontario. “You need to make a deal that is fair up front and works for both of you.” Otherwise, she says it will be a lot more difficult to re-open negotiations and leverage the relationship in the future as your technology needs change.

“If you grind your vendor into the ground, they’ll find a way to get you back,” agrees Adam Vereshack, partner in the technology, communications and intellectual property group at McCarthy Tetrault. If a company wants to obsessively measure service levels, for example, the vendor can in turn slack in areas like preventive maintenance that weren’t covered in the contract or aren’t being monitored.

Vereshack says there are two ways companies use and handle their outsourcing contracts, one is to manage them to death, the other is to put them away and never look at them again once they’re created. Still, if they’ve been created properly in the first place, both Vereshack and Adamo say the resulting relationship almost means companies never need to look at them again.

With all of the complexities associated with creating good outsourcing relationships, and the fact that the “best ways” to achieve value vary dramatically from deal to deal, companies might well wonder if they should begin the process in the first place, particularly when they hear stories about bad deals and failed arrangements that result in poor coordination, loss of control, reduced service quality, reduced response times, as well as increased costs and time spent supervising the contract. In addition, some companies might find themselves locked into an arrangement that makes it difficult to change vendors.

To determine the actual business impact of outsourcing and help executives make decisions in this area, IBM Global Services commissioned a study of 56 companies to find common characteristics and follow their financials to determine the long term impact outsourcing infrastructure had on a company’s financial performance.

Using a strict statistical approach to select companies, then following up to study their financial statements over a number of years, the study found that IT outsourcing was “clearly a part of an effective management strategy that the companies in the study used to achieve positive results.” IBM scientists who conducted the study say one of the most interesting findings uncovered indicates that larger the outsourcing contract, the more likely the improvement in bottom line results.

Overall, companies not only showed significant operational improvements within two years of engaging their vendors, almost two thirds of the companies studied outperformed their peers in two to three years after IT outsourcing commenced.

“We were surprised by the strong and consistent results,” says Aleksandra Mojsilovic, senior scientist at IBM’s T.J. Watson Research Centre. Although the companies had different reasons for choosing to pursue their different outsourcing deals — some wanted to focus more strictly on their core competencies while others were trying to control costs and correct declining cash flow trends, she says there is a relationship and a correlation between the decision to outsource and a company’s financial performance. “IT outsourcing is a common denominator.”

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com