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If IT outsourcing is mature, why does it fail to live up to expectations?

PA Consulting Group
Financial Times
11 June 2009

IT outsourcing is generally regarded as an accepted business tool given its breadth of adoption across the private and public sector over the past 20 years. However, despite its widespread use, outsourcing can fail to live up to expectations.

The sector is strong, with a stable supplier base and many tier-one international companies of repute and experience in the marketplace. Many client organisations are on their second and third generation of IT outsourcing contracts, while the original trail-blazers have even more experience under their belts.

So this is a mature market within which client organisations believe they will be served well. But problems arise because many clients fail to recognise that they themselves have a fundamental role to play in the performance achieved by the IT outsourcing arrangement.

PA Consulting Group has conducted three international IT outsourcing surveys, over the past seven years (a period considered to reflect outsourcing maturity), to test market reaction and verify trends and hypotheses. What those surveys have shown is that, irrespective of market conditions, there are certain themes and underlying issues within the client’s organisation which fundamentally affect the quality of IT outsourcing performance.

These recurring themes are closely interlinked and are characterised by ineffective governance, exacerbated by immature “retained organisations” [the organisation retained by the client to run the contract] which, in turn, deploy poor quality relationship management techniques.

PA’s 2009 international IT outsourcing survey highlighted improvements in these areas but recorded that more than 30 per cent of respondents still did not know the cost of their retained organisation. Furthermore, only 16 per cent of respondents claimed to deploy a mature management model as part of their outsourcing governance.

The survey shows that incumbent suppliers, driven by the current economic climate, are putting their effort into strengthening the quality of their client relationships and the quality of the service they provide. However, because of the chronic under-investment in their retained organisations and resulting lack of capability, clients are not well placed to respond to these overtures and are missing opportunities to generate more value from the relationship.

Underlying all these issues is the lack of understanding that outsourcing means handing over responsibility to a third party for the delivery of a certain aspect of a business and so it is essential to adopt processes and governance to manage that handover.

This seems obvious, and so it is often considered mundane, hence its lack of recognition within the heady world of negotiation and cutting deals, where machismo is still unfortunately alive and thriving.

Responsibility is often handed over and then subject to the client’s rules and governance both formal and informal. It is the informality of processes and governance that exist to varying degrees within any organisation that can lead to problems.

This informality will have probably grown up over many years; it is not measured or even recognised, but is paid for as part of running the business. Once a third party is introduced into the business mix, the informality of governance and management process is exposed.

The quick phone call to a colleague will no longer suffice; the contractual terms and obligations placed upon the supplier will govern the operation of the supplier but they are unlikely to address client side governance issues which, until outsourcing arrived, were unrecognised and therefore unmanaged.

There is also a popular misconception that the contract with the supplier is sufficient to manage all aspects of the outsourcing arrangement, primarily because the client usually thinks their role is simply to control the supplier.

This misses the fundamental point that applying governance and controls to the client-side interfaces with the supplier is vital to the success of the contract. This is particularly important in terms of control of scope, architectures and priorities, and which usually constitute the areas that are dealt with informally.

What is needed is the application of industry-based service management practice and disciplines, for example, the adoption of the ITIL framework [a set of policies for managing IT], suitably aligned to the client environment, enables good service management practice. These can then provide the backbone for the more formally recognised management controls on an IT service provider.

However, it is one thing to identify the need for such business disciplines, but quite another to find the skills to define and design them and, just as important, the management capability and the will to enforce and operate them.

PA’s surveys have consistently highlighted the level of under-investment made in clients’ retained organisations and a lack of understanding of the importance of effective governance arrangements when dealing with third parties.

In particular, there is little recognition that informal governance arrangements with third parties carry a cost. Equally, few organisations review their formal governance processes to see if they are fit for purpose when interfacing with a third party.

There is also over-reliance on contracts and a failure to focus on the other mechanisms that are essential to successful outsourcing. All these elements require capable and high quality personnel to manage the relationship and, again, there is evidence that organisations do not take account of those resourcing needs when formulating a business case for outsourcing.

The combination of a lack of recognition of the importance of formal governance arrangements; of the need for retained capability in the client organisation; and of effective relationship management determines why clients fail to optimise their outsourcing arrangements.

If this is not addressed, this chronic lack of investment will effectively act as a brake on obtaining greater benefits that can be generated through outsourcing, particularly with regard to innovation and business improvement – where trust and understanding between client and contractor is vital.

PA’s IT outsourcing survey, available by e-mail from: sourcing@paconsulting.com

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