Making the Decision to Outsource IT Services

Many organisations see IT outsourcing as a source of significant benefit and cost savings. Here, we set out the issues and describe a process for preparing a structured Business Case.

We focus primarily on the decision to contract out significant components of IT services over an extended time, as opposed to contracting for specific IT deliverables. However, many considerations are relevant to both situations, particularly with respect to contracting for major systems development.

A Structured Approach

The following steps will help you to make the right decision to outsource IT services:

What should we retain?

Before deciding to outsource IT services, you must sort out which functions should be retained for strategic management reasons. Some organisations may wish to consider retaining “core” IT services; these will have to be identified and carefully defined. At 4-consulting, we believe that sufficient resources should be retained in-house to perform the following functions:

	strategic planning for IT services
	monitoring of adherence to key standards including corporate and industry-wide standards for system architecture
	contract and relationship management
	monitoring of project initiatives
	data analysis for MIS/business planning
	These functions could be performed by using a combination of in-house staff, shared services and contracted services.

Human Resource Issues and Communication Plan

Outsourcing has a major impact on the organisation's IT staff. This needs to be addressed at an early stage if outsourcing is seriously being considered. Managing your human resource issues effectively will be a critical success factor in the implementation of outsourcing. Involve your employees from the outset to ensure that these issues are dealt with appropriately. Prepare a communication plan which promotes open and frequent communication about the process to staff and other key stakeholders.

Review of IT Strategy and Plans

Review your organisation's IT strategic plan to confirm that there are strong linkages to the overall business strategy and plans. If you are confident in the quality of your organisation’s IT strategies and plans, you will be able to identify the key initiatives which the IT services area is expected to implement in this planning cycle.

(In some cases, the lack of an effective strategic plan, in conjunction with other problems, may suggest that an external service provider should be brought in to establish an effective plan. This may be followed by a more detailed agreement for the delivery of services).

Performance Review

Complete a performance review of the existing IT services to determine the baseline costs and service levels, and to assess the readiness of these services to support the business direction. You may want to benchmark to determine whether current costs are competitive and whether operational practices are appropriate.

An accurate picture of baseline costs and service levels is critical to completion of a cost-benefit assessment and setting expectations for outsourced service delivery. A review will highlight service areas where performance does not meet industry standards and expectations. It will also highlight areas where the existing resources are unlikely to respond to the challenges posed by the planned business and IT initiatives. This analysis will produce a preliminary view of the services that are potential candidates for outsourcing.

Development of Alternatives

Develop options to address the issues that have emerged from the performance review. Outsourcing may not be the only alternative. For example, unacceptable costs in desktop services may be attributable in large part to inefficient management practices that can be put right fairly quickly. Even if there is a decision to outsource, process improvements which you identify at this stage can be incorporated into the supplier’s contract to deliver more benefits to your organisation.

Alternatives to full outsourcing could include:

	Focused cost reduction initiatives
	Professional skills development for existing staff
	Consolidation of in-house resources in areas of strength
	Focusing of in-house resources on strategic initiatives
	Using shared services

Cost-Benefit Assessment

Once the likely scope for outsourcing has been clarified and the most realistic alternatives have been identified, complete a preliminary analysis of the costs and expected benefits of outsourcing and the alternatives. This should include:

	Estimates of the transitional costs of migration to an outsourcing arrangement
	The ongoing costs of managing the contract
	Costs of providing services that will be retained
	A breakdown of costs by service component if more than one component is a candidate for outsourcing
	Costs and expected benefits to stakeholders
	The potential impact on other departments and stakeholders

This process can assist in clarifying the objectives and expectations for outsourcing, which can later be documented in a Business Case, Statement of Requirements and the eventual Contract, if the decision is made to proceed with outsourcing.

Risk Assessment

Carry out an assessment of the risks involved in outsourcing and the alternative approaches. This should include an outline of how these risks can be managed or avoided during implementation.

Overall Assessment

Prepare a summary analysis presenting the advantages and disadvantages of each alternative. It should integrate the results of the cost-benefit and risk assessments and outline the impact of each approach on key stakeholders. At this point, your organisation should be in a position to make a decision on whether to proceed towards outsourcing as the optimum solution to achieve the objectives identified earlier. In some cases, further information may be required from the market to confirm the availability or pricing of the required services, or to solicit information about available technology and business solutions.

Action Plan

If the decision is to proceed with outsourcing, produce an action plan for securing the necessary resources and implementing the process. If the decision is not to proceed, then the action plan will outline the strategy to address any performance shortfalls in the existing IT services which were identified during the performance review.

Potential Benefits and Risks

The following table gives some indicative benefits and risks of outsourcing:

BENEFITS

RISKS

Organisational

	Greater opportunity to focus on core businesses and areas of strength
	Improved quality in service delivery
	Access to established methodologies and value-added services
	Reduced impact of staff recruitment and retention problems

Organisational

	Loss of management control over strategic resources
	Increased information security and privacy concerns
	Difficulty of managing sides of the relationship between supplier and customer successfully for both. It can be hard to find and retain senior managers and technical staff with the right skills who can be dedicated to managing the relationship

Financial

	Reduced costs arising from economies of scale and expertise. Some organisations claim annual payroll cost savings in the region of 15% - 20%
	Annual cashflow smoothed over the long term as capital costs are converted to operational costs

Financial

	Exposure to increased costs as a result of failure to anticipate change
	Financial losses due to the supplier’s failure to perform

Technical

	Opportunities to acquire current technology that the organisation might not otherwise be able to afford
	Improved access to technical expertise and experience
	Technical and financial risk transferred to specialist, private-sector providers on a shared-risk, shared-reward basis

Technical

	Loss of expertise in the business
	Supplier’s new staff learns about new technology “on the job” and at your expense

Contractual

	Erosion of negotiating position due to dependency on the vendor
	Limited numbers of suppliers can lead to lack of options if the relationship is unsatisfactory
	Changes in ownership or financial viability affecting the vendor's commitment or ability to provide the services

The degree to which the benefits of outsourcing may be realised and the risks avoided or mitigated depends on many factors, including the status of IT services prior to outsourcing, the quality of the implementation, starting with a realistic definition of the objectives, and the robustness of contract conditions and performance criteria.

Summary

The key elements of the decision to outsource IT services are:

	Linking the decision to the business objectives and the IT strategy and plans.
	Analysing the effectiveness of existing IT services to determine the gaps between capabilities and expectations.
	Identifying alternatives, including outsourcing to address the gaps.
	Assessing the costs, benefits and risks of each alternative before making the decision.

4-consulting has worked with a number of large private and public sector organisations on IT Outsourcing assignments. If you would like to more information or you wish to discuss how we can help you, please contact: sandy.pratt@4-consulting.com

Sandy Pratt is a director of 4-consulting, click here to view his profile.

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