IT outsourcing, such as the outsourcing of web app developers, mobile app developers, or the entire infrastructure and various associated services, has evolved from being a popular business strategy into a necessity that enables organizations to stay competitive in the global market by forging powerful alliances with various providers of IT services, known as vendors.
In 2000, the global market size of the outsourcing industry was just $45.6 billion. Last year, the outsourcing industry reached $86 billion, which means that it has almost doubled in size in the last two decades. According to Deloitte’s 2016 Global Outsourcing Survey, most organizations see IT outsourcing as a cost-cutting tool that enables them to focus on their core business, solve capacity issues, enhance service quality, and access valuable intellectual capital, among other things.
The same survey revealed that only 78% percent of organizations all over the world feel positive about their IT outsourcing relationship. This means that approximately every fifth organization that decides to embrace IT outsourcing fails to build a successful relationship with its outsourcing partner, often leading to millions of dollars being wasted and the contract ending up in failure. SMBs especially are at higher risk if things go south because of their limited ability to recover from a large financial loss.
“IT leaders are often well-versed in the latest technologies and service provider offerings,” says Shaun Daly, founding principal of outsourcing consultancy Sourcing Advisory Services. “But many times [need help] crafting a relationship that works over the longer term, where innovation, performance, and technology criteria are constantly changing and must stay in balance.”
To ensure that each and every IT outsourcing relationship is successful, organizations should consider the following 12 practices that are known to help set outsourcing relationships on the right path and keep them there.
Many organizations embrace outsourcing without fully understanding what exactly they want to achieve with it. Without understanding their own drivers and priorities, it’s very difficult for organizations to find the right outsourcing partner and use its unique set of skills, knowledge, and expertise to complement their own core competencies.
When you know exactly why you are outsourcing, what you are outsourcing, and how much you can spend and still achieve cost savings, you should formalize your expectations and make them abundantly clear.
“Early in the process, both teams must have great clarity not just on the project’s objectives, but also on project methodology, deadlines, budgets and more,” advices Paul Brownell from Nearshore Outsourcing. “Leaving these questions unanswered until after the project launches sets both sides up for disappointment and failure.”
Many organizations expect the vendor to perform due diligence, and the result is almost always the same. The vendor discovers that the organization is far more disorganized and unmanageable than expected, setting the IT outsourcing relationship off to a bad start.
To minimize the risk of disruptions and disputes in outsourcing transactions, the customer should always conduct a detailed assessment of its IT assets, talents and deficiencies, and current operating policies and procedures.
“The customer should start its due diligence by investigating those aspects of its business that it intends to outsource,” says Linda L. Rhodes, Partner at Mayer Brown. “In fact, as a customer, the best time to start is before the customer even begins the RFP (Requests for Proposal) and the negotiation process.”
Of course, the vendor will still need to review the customer’s business and the requirements to demonstrate that it understands risk management and doesn’t intend to compromise the relationship with tensions arising from unforeseen complications.
Do you know exactly what you want to build and how to do it? Do you have experience in creating business? Or maybe it is your first time and you only know what problem you would like your app to solve?
Some software houses are focused on producing code and aren’t able to offer much business advice or invent the entire product for you. On the other hand, some agencies specialize in conducting business and user research, and also creating startups. These will often offer professional advice and lead you through the process from start to finish.
Make sure you know what you need before you make a decision and choose a partner who can deliver that.
Think about the experience and know-how of your in-house team – are there any areas where you might have trouble making decisions when it comes to building a product?
If you know what you expect from your product and have the details figured out, find a provider who will follow your directions. Be sure to open your mind, however – listen to your partner’s advice and try to look at your product from a different perspective. This way, you won’t miss out on the opportunity to learn new things and broaden your horizons.
If you feel that you don’t have the right competencies, for example to choose the right technology and architecture for your product; research your providers and see if they can fill that gap. They should be able to offer you professional advice based on their knowledge and experience, and perhaps even make the right decisions for you.
IT outsourcing creates change, which can disrupt the organizational culture, profoundly alter the execution of critical business tasks, and be a major source of disruption for employees. In fact, Punit Bhatia, Partner at Deloitte, cites lack of change management as the number-one cause of outsourcing relationships failing.
“[Expertise in the management of change] helps both partners work together effectively. It ensures that complex changes are made in the most efficient manner. It provides the necessary discipline to maintain progress long after the initial implementation. It generates widespread support for the outsourcing solution. And, most importantly, it helps people in both organizations successfully adapt to a new way of working,” says Louise Fisher, European HR Director at Xerox Global Services.
Change management in outsourcing should run parallel to the outsourcing project itself and ensure that no disruptions to the provided services occur during the implementation of the outsourcing project. It should also strive to maintain or increase employee engagement and productivity, both during and after the project.
Is your chosen partner headquartered in a different state/country or even continent? Be careful; you might face some troubles connected with time zone difference. Everything depends on the type of partnership you’re looking for.
If you are responsible for making significant decisions and need to direct the outsourced team, you’d like to be able to communicate with them fluently. Picking a partner with whom you’ll have a time overlap of at least 3 hours a day might solve that problem. You may also think about setting up some custom processes and tools that will help you communicate better, for example, chat on Slack instead of writing emails.
If your partner works on auto-pilot, or you outsource the vision of your product or/and decision-making, time zone difference shouldn’t be an issue for you. You’ll probably get periodical updates and take part in occasional product demos.
“Whether it is in preparing business stakeholders for the new way that services will be delivered, or in the careful construction of meaningful contracting components—clients often rush to an outcome and have to face the challenges of the unresolved services and relationship aspects after go-live,” says Clay Calhoun, partner and leader of ISG’s sourcing advisory service. “Focus on getting the contract right, ensuring business stakeholders understand it.”
To build a deal where both parties are happy that they are getting value, you need a team consisting of people who know the organization and are comfortable with disrupting the status quo. Remember that it’s not possible to build a mutually beneficial deal with adversarial negotiations because your end goal is to nurture a long-lasting partnership—not make a short-term profit.
That said, it’s paramount to make the contract as complete and explicit as possible while creating room for future change to support doing future business.
Very often, organizations treat their vendor as if the vendor was just another department, not realizing that the vendor is an expert in its own domain whose capabilities and experience greatly exceed their own.
According to Ryan McGloin, Managing Director at Blocshop, the two main areas where out-of-the-box thinking can be helpful are innovation and IT architecture. “The vendor may have worked on or learned from similar projects in the past, so leverage this to your advantage. Vendors may also be willing to co-invest in new technologies that support their own growth.”
Just because you have your own way of doing things that has been serving you well for a long time doesn’t mean that there’s no room for improvement. Your vendor could be just the right outside force to initiate change and increase your ability to compete in the global market.
As we’ve already explained, organizations often forget that vendors are experts that bring a lot of value to the table and don’t need someone standing over their shoulders and managing their every step. In fact, you should let your vendor handle the “how” part as you simply monitor whether the vendor is delivering the agreed-upon outcomes.
Communication is a much better alternative to direct management if you want a true strategic partner. “Often, customers aren’t candid because they’re afraid [of] disclosing details about how bad their systems are or how difficult the incumbent will be to work with during the transition,” states Rajeev Tyagi, COO of Softtek U.S. and Canada. “But all this does is delay the difficult conversation.”
You can’t expect your vendor to align with your strategy unless you let the vendor in and communicate openly. The consequences of a breach of trust, both intentional and unintentional, should be covered in your contract.
One mistake that many organizations make when it comes to outsourcing is to simply hire the vendor with the lowest price. As with most things in life, you get what you pay for in outsourcing. Remember that we’re discussing the amount of money you pay your strategic partner for its services. If your partner doesn’t make enough money, you can’t expect them to deliver great service—at least not in the long run.
“My advice is to be careful only making decisions based on the lowest price,” says Phil Fersht, CEO of outsourcing analyst firm HfS Research. “[Organizations will] get sucked into years of purgatory with the service provider’s ‘c-team’ if they squeeze them too hard. This is not a new thing either; it’s happened to many customers on many deals which simply failed to deliver any value beyond very operational delivery.”
Of course price will always be an important factor when selecting a provider of IT outsourcing services, but it shouldn’t be the most important one.
To establish a successful IT outsourcing partnership, you need to have the right toolset to support communication and collaboration between your employees and the vendor.
“Communication solutions must be found which are tailored to this special partnership. Because of the uniquely high need for communication, support tools must be chosen which permit communication to remain clear and organized during periods of dynamic change, nurturing transparency and trust,” writes Savyasachi Tumkur, Sales Director at Honeywell Connected Plant, in his conference paper presented at PMI Global Congress 2005.
Today, communication tools that meet the unique requirements of IT outsourcing are readily available, and they include Slack, Asana, Trello, and SharePoint, just to give a few examples. That’s not to say that face-to-face meetings are no longer important, but the global nature of today’s outsourcing has reduced their importance significantly.
Not every IT outsourcing relationship is long-lasting and successful. There are many different reasons why IT outsourcing relationships fail, many of which have been already addressed in this article. In most cases, the blame is on both sides, but organizations sometimes behave as if they were not responsible at all.
Instead of addressing the core issues on their side, organizations simply switch providers, only to quickly run into the same problems. This is something you need to avoid at all costs. Take the time to fully understand your role in a successful outsourcing relationship and ensure that you’re not creating roadblocks that prevent your vendor from delivering the expected service.
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