Key components of a successful outsourcing contract

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IT outsourcing contracts - in which certain IT systems and services are handed, or ‘outsourced', to a third-party specialist to handle - can be tricky beasts. Managed well, they can be highly beneficial in terms of cost savings and efficiency gains. But without due diligence, they can end in disaster.

It's no surprise, then, that they are frequently compared to marriage partnerships: both take hard work; both demand commitment and compromise, and both can easily be sabotaged by misunderstanding and mistrust. But above all, both are exercises in managing expectations.

In fact, a clear set of expectations, laid out in advance, is a determining factor in an outsourcing contract's success or failure, says Piers Harrison, a managed services specialist at Logicalis.

"When outsourcing contracts go wrong, it's often because an organisation isn't exactly sure what it's looking to achieve by passing certain tasks or processes to a third party. In other words, its expectations are unclear - both to itself and to the provider," he says.

That, he adds, makes it impossible for either side to agree on what they're aiming for and as to whether service levels are being met.

What's needed upfront is a meticulous process of information- and data-gathering, to gain a full understanding of what can be achieved and what can't, and which tasks it would be beneficial to outsource and which should be kept in-house.

The key components of this decision framework are:

Describe in visionary terms what value outsourcing will create for the organisation.

Define the objectives of the outsourcing decision in measurable components.

Define the scope of the services to be outsourced, full or partial.

Decide if there is to be one or more suppliers.

Fully understand the impact on all employees, including those that may be transferred to the service provider and those that will stay with the client, as both groups will be affected.

Fully understand how the client's staff will work and communicate with the service provider's staff, from the board, through all levels of management right down to the end-users.

Fully define the starting position in numerical terms: costs, staff, assets, and accommodation utilised to a fair degree of accuracy.

Define how the new regime will be managed and monitored.

Define an effective change and cost control management process.

Fully define the management structure and associated responsibilities between all parties.

Fully define the crisis management and escalation process.

Fully document all the above aspects and record in a formal contract, a service level agreement(s), and relate to all other dependant sub-contracts.

Your Comments and Questions

Piers Harrison, 6 months ago

Re: don't work in IT outsourcing, but from what I've seen, Gary, I think outsourcing can work well. Victoria, you make a very valid point, which is that over the last 5+ years, the focus of managed services has moved away from solely 'cost reduction' to a wider mix of benefits. Controlling costs will always be high on any IT budget holder's list of objectives - and any service provider has to be able to demonstrate value for money - but particularly in light of the increasing complexity of new and emerging technologies, skills and resource augmentation is key. IT stakeholders are faced with increasing demand from their business to provide tools and services which enable higher levels of productivity, collaboration, agility and efficiency. This may involve deploying new technologies, streamlining existing IT processes and developing new skills. It may be neither practical or cost-effective to do these things with in-house resources, and so finding a partner who can support them may be an attractive alternative. What we focus on is that the right partner can act as an extension to a client's own IT organisation, properly integrated from a process perspective into their own IT service delivery and support model.

Piers Harrison, 6 months ago

Re: It does seem like a very time-consuming and complex process. Gary, it can indeed be complex and time-consuming, but that is commensurate with the benefits that can be gained if managed services are scoped, designed and delivered effectively. Further to this, a successful managed service may last for many years, and so represents a significant long-term investment from both parties, which therefore merits careful planning from the outset as with any complex project. It is very much a case of you get out what you put in, and exploring managed services with clients should always be collaborative and consultative, leading to a conclusion and recommendation based upon clear criteria. We should also never be afraid of concluding that - in fact - a managed service may not be the correct approach. Better to do so in the early stages of discussion, than further on once in live service.

Piers Harrison, 6 months ago

Re: Piers, at what stage would you talk about what type of outsourcing contract the customer wants? Amanda, the discussion regarding the type of sourcing the customer would benefit from most, should start from the outset: this conversation should be business-oriented, in other words understanding their IT strategy in the context of their business. We would need to understand their motivations: are they exploring alternative methods of sourcing for tactical reasons (to fix a short-term problem), for strategic reasons (as part of a long-term plan) or for transformational reasons (to use sourcing as part of a fundamental reshaping of their IT or business plan). In parallel, we need to understand their objectives and challenges, which can be categorised into a number of key areas which may include technical (I need access to skills I don't have), commercial (I need to optimise my operational expenditure), competence (I want to focus my in-house resources on strategic tasks) or service quality (I need to improve or optimise the SLA I offer the business). Collectively, this approach ensures we have a clear, rounded understanding of what the shape of the correct sourcing solution would be. This could be out-tasking of non-core tasks (such as 24x7 monitoring), operational management (where Logicalis takes on responsibility for day-to-day IT functions) or outsourcing (complete transfer of IT management processes, possibly also including asset and resource transfer).

Mandy Shaw, 7 months ago

Thanks Victoria. Perhaps we ought also to think about software-as-a-service in this context - this takes outsourcing even further, and offerings like salesforce.com can be both popular with their customers and successful as businesses in their own right. Has anyone had direct experience with this sort of thing?

Victoria Furness, 7 months ago

I don't work in IT outsourcing, but from what I've seen, Gary, I think outsourcing can work well. It's a topic that has, in my opinion, rather unfairly attracted a lot of negative press because, as Piers points out in his article, when both parties have agreed what they expect from the contract and the service is delivered according to the agreement, generally it enables the business to focus on developing its business and long-term strategy, rather than the areas that it doesn't specialise in. More and more, I'm also hearing that businesses find outsourcing is a way for them to gain access to the latest technologies and techniques without having to make a capital investment in the first place. Before, the benefits of outsourcing used to always be cost-related, but now I'm hearing more people talking about the improvements in service delivery it also can bring when managed well too.

Gary Edwards, 7 months ago

It does seem like a very time-consuming and complex process even before the relationship is formed, so would you say that the benefits of outsourcing outweigh the challenges and difficulties of getting it right from the outset? Thanks.

Amanda Smith, 7 months ago

Piers, at what stage would you talk about what type of outsourcing contract the customer wants? I think there's still a lot of confusion around the difference between outsourcing and managed services – not to mention different types of outsourcing: offshore, nearshore, bestsourcing etc - which does little to bolster the general business case for outsourcing, despite the number of success stories that do exist.