Nine Rules for Successful IT Outsourcing

Are you outsourcing yet? If you’re not, then you’re in the minority. Most

everyone outsources some part of their technology operation for all sorts of

good — and occasionally bad — reasons.

There’s no mystery as to why the IT services industry is clipping along at more

than $1 billion per day in the U.S. alone: More and more companies have

discovered the benefits of outsourcing relative to the recruitment and

maintenance of large internal IT staffs.

In the early years, we all thought outsourcing was about saving money, but then

we discovered the truth: Outsourcing it not only about saving money, it’s about

re-routing money from non-core to core activities.

One of the best arguments for buying a product or service is its alignment

quotient: the extent to which the infrastructure or applications investment

aligns with business strategy. This of course assumes that a business strategy

exists and that the fundamental infrastructure and IT investment recommendations

have been made. It’s now time to decide how to source them.

Assessment of Core Competencies

This step is — when all’s said and done — about whether or not you should

build and maintain a large internal IT staff.

The core competencies drill is critically important to acquisition alignment.

As your business evolves, you need to ask tough questions about maintaining the

in-house activities you’ve supported for all these years. Remember that the

assessment is not just about cost. Here are some questions for deciding what’s

core and what’s not:

  • Does the activity support your “bottom line,” defined in terms of

    profitability and

  • Can the activity be replaced with little or no threat to the bottom


  • Can the activity be replaced with little or no additional cost, but with

    some measurable
    improvement in quality?

  • Are the second-order costs to maintaining the activities measurable, growing

    shrinking (for example, the costs to maintain in-house IT personnel should

    recruiting costs, retention bonuses, and training and education costs, among


  • Does the re-assignment of the activity dramatically reduce “distraction”

    costs, that is,
    permit your organization to focus on other, more valuable activities?

  • Is the outsourcing of certain activities consistent with your vertical

    perspective on core and non-core competencies?

  • You get the idea. The key questions have to do with finding your core business

    purpose and then matching all of the activities to in-house versus outsourced


    Once you’ve determined what makes sense it’s possible to step back and assess

    the kinds of IT products and services that might be outsourced. But just in

    case you think that all roads lead to outsourcing, make sure that you

    objectively assess the impact outsourcing will have on specific business models

    and processes.

    Products & Services Acquisition Options

    The discussion here is about structure and form, not about whether outsourcing

    will play some role in your IT acquisition strategy. We’re assuming that you

    don’t have all of the talent you need in-house and that your appetite to

    continuously recruit, satisfy and (re-train staff is shrinking (at least a


    You have a number of outsourcing options:

  • Combine outside vendors with your own. Sometimes call in-sourcing or

    co-sourcing, this model can be very effective if structured and managed


  • Completely outsource segments of your IT mission, such as data center or

    call center management, but keep others in-house. This option can also be

    effective, especially when there are clearly defined areas that you do well and

    those they you do poorly — and when there’s no ambiguity about what’s core and

    what’s not.

  • Completely outsource everything to vendors who come on-site and manage your

    IT resources (including machines, networks, and people).

  • Completely outsource everything to vendors who “rent” hardware and software

    back to you.

  • Of course there are variations on all of these but the four identify the primary

    outsourcing models you might consider.

    All of these variations require that you:

  • Systematically identify requirements
  • Compare current (so-called baseline) costs with what outsourcers


  • Negotiate with the vendors on price and services
  • Develop clear and unambiguous service level agreements
  • Make sure that management is in place to monitor the results of the


  • Other Outsourcing Articles

    META Report: Offshore Outsourcing Fueled By IT Budget Pressures

    The Roundup: Outsource Your CRM to Save Money

    Dizzying Days for Security Outsourcers

    Outsourcing: The Reluctant Bridegroom

    I strongly suggest that you seek outside help to develop your outsourcing

    strategy. I realize that this may sound absurd: The recommendation is that you

    outsource the work necessary to outsource the work! But the fact is that

    outsourcing has become very complicated and there are now consulting

    organizations that specialize in this kind of work. These consultants have

    experience writing requests for proposals (RFPs), screening the proposals and

    the bids, negotiating contracts, and then managing at least the initial

    implementation phases.

    There are also some rules of thumb you might want to consider:

    1. Above all else, your outsourcing process should be driven by the results of

    your core competency assessment and you skills gap analysis. If you find that

    you really don’t need to be in the data migration business and that you have no

    data migration talent in your shop, but that data migration is an important

    (though non-core) component of what you need to do, then obviously you need to

    outsource data migration (probably as part of some large applications

    modernization process).

    2. Make sure you know what you’re doing. While evolutionary experimentation is

    often a good way to learn about some new process (like outsourcing) it may not

    be prudent. Breaking off pieces of your internal IT shop to give to outsourcers

    to try them out may make abstract sense but in practice may be doomed to

    failure. Why? Because you’re likely to outsource the pieces that are the most

    politically correct while avoiding the really hard decisions about what’s core

    and what’s not.