Five Things Every CIO Should Know About Outsourcing

If you go by Gartner, many U.S. companies need to seriously rethink their outsourcing strategies. Outsourcing has become so faddish there is a danger that companies may do so compulsively, with little planning or consideration of what it takes to successfully manage contracts, processes and goals.

While the initial driver for outsourcing is cost savings, there’s a lot more success criteria that companies should be looking at. With outsourcing expected to continue growing, effectively managing these relationships has never been more important.

Generally speaking, the pitfalls associated with outsourcing fall into three categories: geographical, infrastructural and operational.

In terms of the geographic location of the outsourcing firm, companies can run into language problems, accent problems, political instability, change in laws and regulations, labor laws and cultural issues. Geography is also a root cause of infrastructural problems that can occur in the form of poor communication infrastructure, disaster recovery capacity, power generation capacity and non-renewable resources availability.

While these setbacks can be overcome by choosing one geographic target over another, it is fundamentally the operational problems that make or break the success of an outsourcing engagement.

Mismanagement on the operations front can make even the most carefully thought-out outsourcing plans go awry. Whether you are re-evaluating your outsourcing strategy, expanding it or considering it for the first time, here are five things every CIO should know about outsourcing.

Evaluate the vendor’s processes. Operational problems start with processes. Consequently, you need to ask a lot of questions about the vendor’s processes, best practices and the levels of quality control in place.

Being SEI or ISO rated is often used as a selection criterion. However, these measures of quality are evolving. The SEI capability maturity models (CMM), for example, has been upgraded in the last few years. So while these ratings are important, it’s more critical that you ask when and how the company was assessed and by whom.

Interview the relationship manager. Too often, companies enter an engagement without fully understanding the processes that will drive the relationship.

It is critically important that you find out in detail how the your organizations will engage with each other, what workflow entails, the points of contact and communication and reporting processes. Interviewing key project personnel eliminates unwanted expectations and surprises. Moreover, it clarifies the overall business goals.

Insist on a risk mitigation plan. Any outsourced services firm that takes its reputation and client satisfaction seriously will not balk at putting a risk mitigation plan in place. In fact, this should be a standard practice but it’s simply not quite the reality today.

Such a plan should address issues from risk identification, risk analysis, risk management, risk resolution and monitoring. The plan should assign tasks and responsibilities to the people involved in the project.

You should also be aware of the techniques that will be used to identify risk factors at the beginning of the project and on an ongoing basis. Techniques may involve risk assessment workshops, brainstorming sessions and interviews at the beginning of each life cycle phase.

Factor in the costs of internal management. There is a tremendous amount of project overhead that is required to manage just one outsourcing relationship. You have to travel, deal with conference calls outside of the usual business hours and double-check the work three or four times over.

Every deliverable needs to be reviewed and cross-checked to make sure the vendor is telling the truth. Because vendors want to get their payments, they often try to deliver as fast as they can and invariably, quality will sometimes suffer.

The time difference can significantly change the rhythm of your business, or at the very least, the team or department responsible for an outsourcing project. This becomes an overhead because people get burned out. Companies need to understand this cost and sufficiently communicate this internally.

Remember, this is a partnership, not a customer-supplier relationship.The most successful outsourcing relationships are those built on a partnership.

Talk to the firm’s other clients to find out how aggressively they have to renegotiate contracts. Companies should look for a partner that meets their needs without looking for excuses to re-price services at every opportunity. Since partnerships foster a sense of respect, trust and responsibility, it is important for you to select companies that have satisfied a similar-sized organization.

Whether outsourcing is done offshore or domestically, it is all about efficiency. That is, creating leaner companies that can focus on their core competency or, as Jack Welch explains it, “Move up the food chain,” and thereby be more competitive in the market.

Taking these five basic things into consideration will help companies get off on the right track with their outsourcing strategy and maintain successful, long-term relationships.

Sashi Reddi is the CEO of AppLabs Technologies, a global IT services firm focused on quality assurance, development and certification solutions.