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How to Mitigate the Top 5 Risks of
Outsourcing
© Copyright 2012, Alsbridge, Inc., All Rights Reserved.
The information in this paper is proprietary and confidential property of Alsbridge, Inc. and may not be republished, redistributed,
or modified in any way. The contents of this paper are intended solely for the recipient. To request permission for republishing or
redistribution, contact Alsbridge at info@alsbridge.com or call us at 214-696-6410.
The high level benefits of outsourcing IT
services are fairly well-known within the IT
industry. Even so, many clients do not fully
understand “why” and “how” an
outsourcing relationship can provide these
potential benefits. Those who do understand
the benefits may not understand the risks
that must be managed in order to achieve
those benefits. This white paper is intended
to explain the most common outsourcing
risks so that you can understand them and
mitigate them early in the sourcing process.
Understanding these potential risks will
allow you to make a better informed
sourcing decision.
Rewards
Although the benefits of outsourcing are
fairly well-known, it is worth summarizing
them for reference.
Reduced Cost
Companies that provide IT outsourcing
services function in an increasingly
competitive marketplace. This market
pressure, coupled with the scale of
capabilities, abundance of lower-cost (but
highly skilled) labor and investments in
productivity tools and processes, means a
provider can more than likely deliver
services at a much lower price than you can
do on your own. Additionally, you will
improve your ability to achieve year-over-
year savings, as annual reductions are often
documented in an outsourcing agreement.
Improved Quality
Simply stated, outsourcing providers are
motivated to improve the quality of your
operations. Outsourcing providers have
literally invested billions of dollars to build
the tools and processes they use to deliver
IT services to clients, and they use these
investments to differentiate their ability to
deliver high quality services at market-based
costs. The cost models typically used by
providers will assume some annual
reduction in resources (and therefore costs)
based on the quality improvements they
assume they can make. Additionally, a
market-based outsourcing agreement will
drive adherence to well-defined service
levels, some of which are expected to
improve over time. As the old saying goes,
“what gets measured gets managed.” This
level of formality and the existence of
contractual commitments can drive delivery
improvements quicker and farther than
most organizations can do internally.
Ability to Redeploy Resources
Increasingly this is becoming one of the
more important drivers affecting sourcing
decisions. The challenge many IT
departments face is how to free up some of
their most knowledgeable people to work
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
Contact: info@alsbridge.com or (214) 696-6410
_________________________________________________________________________________________
on initiatives that will truly add value to the
business. Some of these people become
“superstar firefighters” over time, and are
continually pulled into operational issues
which diminish their ability to drive strategic
change. Without a significant event like a
new outsourcing agreement, it can be hard
to overcome the organizational inertia that
keeps these people locked into their current
role. As quality improvements are made and
the provider becomes skilled at addressing
operational issues, these people can be
redeployed into higher value planning,
engineering or development work, and you
get the added benefit that they are still in
the organization “just in case” their skills are
needed. Lastly, using an outsourcing
provider allows you to temporarily procure
specific expertise and apply it where desired
without needing to permanently add staff.
Improved Delivery Capability
Procuring managed services from an
outsourcing provider, if done well and if
structured by a market-based agreement,
encourages a higher level of performance
related to services, service levels, innovation
and process maturity. Creating and
negotiating an outsourcing contract requires
you to spend time articulating the specific
services to be performed and how those
services will be measured. Integrating your
processes with those of another company
requires a higher level of process discipline
and documentation so the overall flow of
work and associated responsibilities are
seamless to the business users and
potentially to end consumers as well.
Innovation comes from explicitly stated
contractual requirements as well as from the
behaviors necessary to continuously
improve the environment so contract
requirements are achieved and the provider
can maintain their profit margin. In fact,
many times the provider wants to move
more quickly than the client, so it
becomes a situation where the client is
throttling the amount of improvement
based on the speed at which the
organization can absorb it.
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
Contact: info@alsbridge.com or (214) 696-6410
_________________________________________________________________________________________
“Many organizations
do not fully understand
“why” and “how”
an outsourcing
relationship can provide
potential benefits.
Those who do
understand the benefits
may not understand the
risks that must be
managed in order to
achieve those benefits.”
Risks
The potential risks of outsourcing are not
nearly as well-understood as the potential
rewards. An important observation is that
many times clients develop risk mitigation
strategies that are almost solely based on
technical risk. Understandably, there are
concerns and issues that need to be worked
through in every outsourcing relationship.
Issues such as connectivity, knowledge
transfer, lack of certain skills, migrating
environments, etc… are important and need
to be addressed, but they are very rarely the
cause of significant conflict. No matter your
specific technical requirements, chances are
the provider has the depth and breadth of
technical knowledge to overcome those
types of issues, although there may be some
that do not get resolved as quickly or cleanly
as expected. Sometimes, there are even
certain specific tasks that the client ends up
retaining because they are so unique and
specialized, but that is the exception and not
the rule. Rather, the bulk of substantial
conflict between clients and providers
during and immediately after transition tend
to fall into one of the following categories.
The good news is that these risks can be
mitigated through careful planning and
execution early in the sourcing process.
Lack of Communication
The importance of a detailed and managed
communications plan cannot be
over-emphasized. This is not just a couple of
executive-level communications describing
what is occurring. This is about ensuring
your retained employees, your non-retained
employees, your employees who are
transferring to the provider, your executives,
your stakeholders, your leadership team and
yes even your potential new provider are
being told what they need to know when
they need to know it. Without a structured
communications plan and process that
explains what is happening and why, there
will be voids that will be filled with
misinformation and a reluctance to change.
This can lead to unplanned employee
turnover, missed transition plans, and a lack
of understanding and buy-in from the
consumers of IT services. Actively pursue
ways to keep your provider informed (even
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
Contact: info@alsbridge.com or (214) 696-6410
_________________________________________________________________________________________
“The potential risks
of outsourcing
not nearly as well-
understood as the
potential rewards.”
during the contract negotiation phase), not
just from a transition perspective but also to
keep them fully apprised of the activities
and objectives of the business. This will
allow them to better understand your
requirements and to deliver the best
solution possible.
Your Inability to Change Behavior
The IT leadership team in place today quite
probably became successful through their
ability to manage specific technology and
people. However, a substantially different
set of skills is required to successfully
manage an outsourcing relationship. Leaders
must learn to manage expectations and
outcomes and let the outsourcing provider
manage how that work gets done. This is
done by managing relationships, governance
processes, status reporting, issue tracking,
prioritizing, service level management, and
process discipline. Unfortunately it can be
difficult for some people to move from one
paradigm to another. If these types of
leaders cannot change but remain in a
position to direct the provider, they become
a source of friction in the relationship and
can keep you from receiving the maximum
value from your outsourcing provider. Make
sure your leaders have the right skills to
manage an outsourcing relationship, or
replace them with ones who do.
Loss of Business Knowledge
At the dawn of the millennium, it was
somewhat common for companies to
outsource virtually all of their services to a
provider, often time only leaving a CIO and a
couple of lieutenants in place to manage the
relationship. Unfortunately, companies
discovered that they had outsourced too
much, and by doing so had lost much of
their “tribal knowledge” so they struggled to
stay aligned to the business. The good news
is that arrangement is rarely used anymore,
and companies now realize they must retain
a sufficient level of strategic resources to
manage the outsourcing relationship,
manage the relationships with the business,
maintain overall accountability for delivery,
and to set overall direction and priorities.
A ls o, a s yo u deve l o p your
transition plans you must address how
knowledge will be transferred to the
provider. In some cases it is primarily done
through the transfer of certain subject
matter experts to the provider, while in
many cases it is really dependent on the
system documentation and training sessions
used to share knowledge with the provider.
As you develop transition plans and design
your retained organization, ensure that you
fully comprehend the need to build and
retain key business knowledge.
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
Contact: info@alsbridge.com or (214) 696-6410
_________________________________________________________________________________________
Unclear Expectations
There are rarely cases where an outsourcing
provider does not and cannot provide the
services they committed to in the
outsourcing agreement. However, there is
always a slight risk that something was not
thoroughly understood and documented
during the negotiation phase, and that for
some reason cannot be adequately
supported in the new contract. What can
you do? As they say, the best
defense is a good offense, and there are
several mechanisms you can design into the
outsourcing agreement to protect yourself in
these cases. For example, make sure to
require a commitment to follow a defined
set of industry standards (e.g., ITIL, CMMi)
so that services are more easily transferrable
to other providers if required. Make sure the
contract is flexible enough to allow for some
change in scope without termination
penalties. Define a strong, market-based
service level agreement that defines
remedies and penalties, and define and
implement a governance process that
ensures delivery and relationship issues are
quickly escalated to the right executive
levels for resolution. From a vendor
management perspective, you may also
want to consider a multi-vendor strategy
that maintains some competitive tension
while also providing you with a “hot backup”
provider in the event that certain services
are not being delivered as expected.
Business Case Not Achieved
Ultimately, the goal of an outsourcing
relationship is to achieve the defined
sourcing objectives while meeting the
business case upon which the decision was
made. Oftentimes, the focus after contract
signature is solely on the technical aspects
of the transition of services, and it becomes
nearly impossible as the months go by to
track performance back to the business
case. Even when the business case is
tracked and managed, it is found that the
original business case was inaccurate or
inadequate, and therefore the actual costs
are higher than expected while the
corresponding overall savings are less than
expected. The best way to mitigate this
situation is to ensure the business case is
thorough, comprehends all expected
investments, savings, and new charges, and
is developed with a level of detail that can
withstand scrutiny from the CFO and board.
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
Contact: info@alsbridge.com or (214) 696-6410
_________________________________________________________________________________________
“Ultimately, the goal of an
outsourcing relationship is
to achieve the defined
sourcing objectives while
meeting the business case
upon which the decision
was made.”
World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO.
Contact: info@alsbridge.com or (214) 696-6410
_________________________________________________________________________________________
It should include assumed ramp up of services, ramp down of retained organization expenses,
one-time costs for transition, legal fees, advisory fees and the like, retaining of certain
resources, appropriate contingencies, expected changes due to growth and scope changes,
COLA impacts, and so on. The business case should be updated periodically and
reported against the baseline business case to identify any significant variances.
Conclusion
While benefits of outsourcing IT services are fairly well-known, many clients do not fully
understand the risks that must be managed in order to achieve these benefits. Prior to
finalizing a decision to outsource, make sure to think about how you will communicate with
key stakeholders, change the behaviors of your leadership team to manage an outsourcing
relationship, retain the required level of business knowledge, clarify and thoroughly
document expectations, and develop and manage a solid business case. By doing so, you will
make a better informed sourcing decision and will be better prepared to realize the benefits
that an outsourcing relationship can provide.

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How to mitigate_the_top_5_risks_of_outsourcing

  • 1. How to Mitigate the Top 5 Risks of Outsourcing © Copyright 2012, Alsbridge, Inc., All Rights Reserved. The information in this paper is proprietary and confidential property of Alsbridge, Inc. and may not be republished, redistributed, or modified in any way. The contents of this paper are intended solely for the recipient. To request permission for republishing or redistribution, contact Alsbridge at info@alsbridge.com or call us at 214-696-6410.
  • 2. The high level benefits of outsourcing IT services are fairly well-known within the IT industry. Even so, many clients do not fully understand “why” and “how” an outsourcing relationship can provide these potential benefits. Those who do understand the benefits may not understand the risks that must be managed in order to achieve those benefits. This white paper is intended to explain the most common outsourcing risks so that you can understand them and mitigate them early in the sourcing process. Understanding these potential risks will allow you to make a better informed sourcing decision. Rewards Although the benefits of outsourcing are fairly well-known, it is worth summarizing them for reference. Reduced Cost Companies that provide IT outsourcing services function in an increasingly competitive marketplace. This market pressure, coupled with the scale of capabilities, abundance of lower-cost (but highly skilled) labor and investments in productivity tools and processes, means a provider can more than likely deliver services at a much lower price than you can do on your own. Additionally, you will improve your ability to achieve year-over- year savings, as annual reductions are often documented in an outsourcing agreement. Improved Quality Simply stated, outsourcing providers are motivated to improve the quality of your operations. Outsourcing providers have literally invested billions of dollars to build the tools and processes they use to deliver IT services to clients, and they use these investments to differentiate their ability to deliver high quality services at market-based costs. The cost models typically used by providers will assume some annual reduction in resources (and therefore costs) based on the quality improvements they assume they can make. Additionally, a market-based outsourcing agreement will drive adherence to well-defined service levels, some of which are expected to improve over time. As the old saying goes, “what gets measured gets managed.” This level of formality and the existence of contractual commitments can drive delivery improvements quicker and farther than most organizations can do internally. Ability to Redeploy Resources Increasingly this is becoming one of the more important drivers affecting sourcing decisions. The challenge many IT departments face is how to free up some of their most knowledgeable people to work World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO. Contact: info@alsbridge.com or (214) 696-6410 _________________________________________________________________________________________
  • 3. on initiatives that will truly add value to the business. Some of these people become “superstar firefighters” over time, and are continually pulled into operational issues which diminish their ability to drive strategic change. Without a significant event like a new outsourcing agreement, it can be hard to overcome the organizational inertia that keeps these people locked into their current role. As quality improvements are made and the provider becomes skilled at addressing operational issues, these people can be redeployed into higher value planning, engineering or development work, and you get the added benefit that they are still in the organization “just in case” their skills are needed. Lastly, using an outsourcing provider allows you to temporarily procure specific expertise and apply it where desired without needing to permanently add staff. Improved Delivery Capability Procuring managed services from an outsourcing provider, if done well and if structured by a market-based agreement, encourages a higher level of performance related to services, service levels, innovation and process maturity. Creating and negotiating an outsourcing contract requires you to spend time articulating the specific services to be performed and how those services will be measured. Integrating your processes with those of another company requires a higher level of process discipline and documentation so the overall flow of work and associated responsibilities are seamless to the business users and potentially to end consumers as well. Innovation comes from explicitly stated contractual requirements as well as from the behaviors necessary to continuously improve the environment so contract requirements are achieved and the provider can maintain their profit margin. In fact, many times the provider wants to move more quickly than the client, so it becomes a situation where the client is throttling the amount of improvement based on the speed at which the organization can absorb it. World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO. Contact: info@alsbridge.com or (214) 696-6410 _________________________________________________________________________________________ “Many organizations do not fully understand “why” and “how” an outsourcing relationship can provide potential benefits. Those who do understand the benefits may not understand the risks that must be managed in order to achieve those benefits.”
  • 4. Risks The potential risks of outsourcing are not nearly as well-understood as the potential rewards. An important observation is that many times clients develop risk mitigation strategies that are almost solely based on technical risk. Understandably, there are concerns and issues that need to be worked through in every outsourcing relationship. Issues such as connectivity, knowledge transfer, lack of certain skills, migrating environments, etc… are important and need to be addressed, but they are very rarely the cause of significant conflict. No matter your specific technical requirements, chances are the provider has the depth and breadth of technical knowledge to overcome those types of issues, although there may be some that do not get resolved as quickly or cleanly as expected. Sometimes, there are even certain specific tasks that the client ends up retaining because they are so unique and specialized, but that is the exception and not the rule. Rather, the bulk of substantial conflict between clients and providers during and immediately after transition tend to fall into one of the following categories. The good news is that these risks can be mitigated through careful planning and execution early in the sourcing process. Lack of Communication The importance of a detailed and managed communications plan cannot be over-emphasized. This is not just a couple of executive-level communications describing what is occurring. This is about ensuring your retained employees, your non-retained employees, your employees who are transferring to the provider, your executives, your stakeholders, your leadership team and yes even your potential new provider are being told what they need to know when they need to know it. Without a structured communications plan and process that explains what is happening and why, there will be voids that will be filled with misinformation and a reluctance to change. This can lead to unplanned employee turnover, missed transition plans, and a lack of understanding and buy-in from the consumers of IT services. Actively pursue ways to keep your provider informed (even World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO. Contact: info@alsbridge.com or (214) 696-6410 _________________________________________________________________________________________ “The potential risks of outsourcing not nearly as well- understood as the potential rewards.”
  • 5. during the contract negotiation phase), not just from a transition perspective but also to keep them fully apprised of the activities and objectives of the business. This will allow them to better understand your requirements and to deliver the best solution possible. Your Inability to Change Behavior The IT leadership team in place today quite probably became successful through their ability to manage specific technology and people. However, a substantially different set of skills is required to successfully manage an outsourcing relationship. Leaders must learn to manage expectations and outcomes and let the outsourcing provider manage how that work gets done. This is done by managing relationships, governance processes, status reporting, issue tracking, prioritizing, service level management, and process discipline. Unfortunately it can be difficult for some people to move from one paradigm to another. If these types of leaders cannot change but remain in a position to direct the provider, they become a source of friction in the relationship and can keep you from receiving the maximum value from your outsourcing provider. Make sure your leaders have the right skills to manage an outsourcing relationship, or replace them with ones who do. Loss of Business Knowledge At the dawn of the millennium, it was somewhat common for companies to outsource virtually all of their services to a provider, often time only leaving a CIO and a couple of lieutenants in place to manage the relationship. Unfortunately, companies discovered that they had outsourced too much, and by doing so had lost much of their “tribal knowledge” so they struggled to stay aligned to the business. The good news is that arrangement is rarely used anymore, and companies now realize they must retain a sufficient level of strategic resources to manage the outsourcing relationship, manage the relationships with the business, maintain overall accountability for delivery, and to set overall direction and priorities. A ls o, a s yo u deve l o p your transition plans you must address how knowledge will be transferred to the provider. In some cases it is primarily done through the transfer of certain subject matter experts to the provider, while in many cases it is really dependent on the system documentation and training sessions used to share knowledge with the provider. As you develop transition plans and design your retained organization, ensure that you fully comprehend the need to build and retain key business knowledge. World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO. Contact: info@alsbridge.com or (214) 696-6410 _________________________________________________________________________________________
  • 6. Unclear Expectations There are rarely cases where an outsourcing provider does not and cannot provide the services they committed to in the outsourcing agreement. However, there is always a slight risk that something was not thoroughly understood and documented during the negotiation phase, and that for some reason cannot be adequately supported in the new contract. What can you do? As they say, the best defense is a good offense, and there are several mechanisms you can design into the outsourcing agreement to protect yourself in these cases. For example, make sure to require a commitment to follow a defined set of industry standards (e.g., ITIL, CMMi) so that services are more easily transferrable to other providers if required. Make sure the contract is flexible enough to allow for some change in scope without termination penalties. Define a strong, market-based service level agreement that defines remedies and penalties, and define and implement a governance process that ensures delivery and relationship issues are quickly escalated to the right executive levels for resolution. From a vendor management perspective, you may also want to consider a multi-vendor strategy that maintains some competitive tension while also providing you with a “hot backup” provider in the event that certain services are not being delivered as expected. Business Case Not Achieved Ultimately, the goal of an outsourcing relationship is to achieve the defined sourcing objectives while meeting the business case upon which the decision was made. Oftentimes, the focus after contract signature is solely on the technical aspects of the transition of services, and it becomes nearly impossible as the months go by to track performance back to the business case. Even when the business case is tracked and managed, it is found that the original business case was inaccurate or inadequate, and therefore the actual costs are higher than expected while the corresponding overall savings are less than expected. The best way to mitigate this situation is to ensure the business case is thorough, comprehends all expected investments, savings, and new charges, and is developed with a level of detail that can withstand scrutiny from the CFO and board. World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO. Contact: info@alsbridge.com or (214) 696-6410 _________________________________________________________________________________________ “Ultimately, the goal of an outsourcing relationship is to achieve the defined sourcing objectives while meeting the business case upon which the decision was made.”
  • 7. World-class Sourcing Advisory and Benchmarking for the CIO, CFO and CPO. Contact: info@alsbridge.com or (214) 696-6410 _________________________________________________________________________________________ It should include assumed ramp up of services, ramp down of retained organization expenses, one-time costs for transition, legal fees, advisory fees and the like, retaining of certain resources, appropriate contingencies, expected changes due to growth and scope changes, COLA impacts, and so on. The business case should be updated periodically and reported against the baseline business case to identify any significant variances. Conclusion While benefits of outsourcing IT services are fairly well-known, many clients do not fully understand the risks that must be managed in order to achieve these benefits. Prior to finalizing a decision to outsource, make sure to think about how you will communicate with key stakeholders, change the behaviors of your leadership team to manage an outsourcing relationship, retain the required level of business knowledge, clarify and thoroughly document expectations, and develop and manage a solid business case. By doing so, you will make a better informed sourcing decision and will be better prepared to realize the benefits that an outsourcing relationship can provide.