Seven Keys to Successful IT Outsourcing

Fact: A huge percentage of outsourcing relationships fail. CFOs are good at writing contracts, but that contract is only the starting point for a s...
Martha HellerMarch 28, 2013

When my executive-search firm is asked to recruit a new CIO, we always ask the senior leadership team what went wrong with the old one. High among the litany of complaints are the following:  Our IT outsourcing relationship is a mess. We’re not getting the service we need. No one is managing the vendor. Our costs are way out of control.

These days, with technology fully integrated into your business, IT outsourcing is no longer the CIO’s challenge alone. He or she may get the boot for making a bad situation worse, but everyone in the company suffers when the outsourcing relationship goes awry. That’s why CFOs need to become more involved, earlier on. Unfortunately, when CFOs think about outsourcing, they tend to focus on the contract: SLAs, cost models, additional resource charges, reduced resource charges, gain sharing (in which a formula is devised for dividing up revenue from future improvements or innovations), and the like. All this is important, but there’s a much wider array of issues to consider when working with an outsourcer, and CFOs need to keep them in mind. 

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  1. Out of sight is not out of mind. After my firm recruits the new CIO, with a mandate to ride in on a white horse and fix the outsourcing problem, I check in with him or her periodically.  “They didn’t just outsource support,” the new CIO will say a few months into the job. “They outsourced their whole IT strategy.” Some companies believe that in outsourcing, they can hand over the IT reins to their new business partner. But before you know it, the outsourcer is running the show and making decisions about service levels, purchasing, and staffing that are aligned beautifully with the outsourcer’s business, but not yours. In order to keep your business’s needs primary, you have to retain control over major IT decisions.
  2. You cannot outsource a mess. If your CIO does not have a handle on the priorities, costs, structure, strategy, and competencies of her organization, you are not ready to outsource. What you have is a hot mess. Some companies make the mistake of handing that mess to the outsourcer in the hope that it will figure it out. It won’t. Your outsourcer is not at your strategy meetings; your outsourcer does not know your company’s culture or the skill sets of your people. Sort out the mess first, and then hand over the right pieces to someone else.
  3. Consider culture when selecting your partner. It’s lovely that your outsourcer has a good track record on security, can flex on staff when necessary, and is giving you a good deal. But are is it an effective communicator? Does it get along with your people?  When an outsourcing relationship is going well, your outsourcer’s staff is integrated with your own. Accordingly, its people have to be compatible with your people.
  4. Build up your vendor-management chops. When CFOs think of vendor management, they focus on contract negotiation and ensuring that the right service-level agreements are in place. Those are critical elements in the discipline of vendor management, but they’re only the beginning. You need a team of IT managers who have been elbow-deep delivering IT so that they know what service levels you require. But these hands-on professionals must now be comfortable with not touching the technology themselves. IT managers can be awfully controlling; for them, putting delivery in an outsourcer’s hands can be difficult. Companies often assume that outsourcing means reducing IT head count. That may be true, but the heads that remain need different skill sets than the traditional internal IT staff. Take a look at your IT people. Will they be good at communicating, at managing relationships? Because that’s what they’re going to have to do.
  5. Resist the master-slave model.  Some organizations are so focused on reducing costs that they try to squeeze their outsourcer for every penny, then they feel good about all the pennies they’ve squeezed. But that good feeling vanishes when the outsourcer no longer values the relationship and delivers shoddy service at a bargain-basement price. Go ahead and push for competitive price points, but remember that for an outsourcing partner to be invested in your company’s success, for it to staff your work with its best people, it needs to know it is getting a fair deal.
  6. Don’t make assumptions about core versus commodity. Any good executive knows that you should hand over your company’s commodity services to an outsourcer: why run your own help desk or payroll systems or e-mail? There are plenty of outsourcers that can do that better than you can. But be sure to hold on to your core processes, the things that your company does better than anyone else.  At some companies, for example, supporting remote workers makes them happy, but it is not a competitive differentiator. At other companies, providing a seamless way to work at home can be exactly that in terms of productivity as well as employee recruitment and retention.  (Time will tell if Marissa Mayer mistook core for commodity when she ordered Yahoo’s remote workers back to the office.)
  7. Get the buy-in. Finally, be sure that all of your company’s leaders have bought into the decision to outsource. When someone else begins to manage the work you used to do in-house, the change can be dramatic on many levels. Your leaders have to own the decision to outsource, and they have to sell that decision to the organization throughout the length of the relationship.

Your IT organization is facing a dizzying array of new demands. From mobility to Big Data to product development to enterprise resource planning, that embattled team is being pulled from one project to another. Of course you should outsource some of that work and let it focus on what makes your company great. But with a huge percentage of outsourcing agreements considered failures, you must understand that outsourcing is anything but an easy fix.  A little forethought can help you avoid creating a new mess while you try to deal with the old one.

Martha Heller is president of Heller Search Associatesa CIO and senior IT executive recruiting firm, and a contributing editor to CIO magazine. Her new book, The CIO Paradox, has just been published. Follow Martha on twitter: @marthaheller.