Poorly conceived plans, unrealistic expectations and badly executed transactions are behind a lot of avoidable outsourcing problems. On many occasions, disappointments on either side can be remedied through re-negotiation, but sometimes the parties cannot be reconciled and the contract is not re-newed. In fact, nearly two thirds of blue-chip organisations have brought some form of outsourced IT service back in house. Lesley Meall, FSN contributing editor looks behind the insourcing trend.
Insourcing – why is it happening?
In 1998 Cable & Wireless decided to outsource its central management systems and duly awarded IBM a 10-year contract worth £1.8bn. In 2003, C&W decided to terminate the contract and bring those systems back in-house. In 2004 JP Morgan killed a $5 billion, seven-year outsourcing agreement covering its data centres, desktop support and network services, then brought everything, including four thousand staff, back into the business just one year into the contract. More recently Diebold, Prudential, Sainsbury and Selfridges have all opted to end outsourcing contracts and bring various IT and infrastructure operations back in-house. It doesn't take a bloodhound to detect the smell of rotting fish: all is not right in the world of outsourcing.
Multi-billion pound contracts linking organisations with ill-conceived or unrealistic expectations are never going to be problem free – and the analyst Gartner suggests that nearly 80 per cent of outsourcing relationships will be renegotiated over the duration of a contract. But what is going so wrong that nearly two-thirds of blue-chip organisations have decided to bring some form of outsourced service back in-house?
It seems that many outsourcing deals are doomed to inevitable failure, by a variety of avoidable mistakes and careless oversights, that can't be eradicated simply by changing service provider. 'I don't think IT outsourcing is always undertaken with the respect it deserves,' says Jonathan Cooper Bagnall, a member of the management group with PA Consulting. As he adds: 'It is not a light-hearted undertaking.' But recent research from PA suggests that organisations are not assessing their plans for multi-million pound outsourcing deals with the same thoroughness as other business activities.
'More time should be spent on getting the business case right, thinking about the people and skills required by the retained organisation and making sure the due diligence process thoroughly investigates the supplier's capabilities,' he says, but these consistently emerge as problem areas when outsourcing arrangements fail.
Outsourcing generates a lot of changes to people and processes, but as Cooper-Bagnall points out, 'when they are putting together the business case fewer than 50 per cent of organisations factor this into their projected costs.' The financial burden of maintaining a retained IT function after the outsourcing deal is another apparent blind spot. 'Finance should be more involved,' he asserts, 'they have a lot of value to add,' particularly during the early stages. 'Some CFOs delegate too much to the IT function, and some CIOs try to stop finance getting too involved,' he says, adding: 'Both functions should recognise that they need to work together.'
Working relationships post-outsourcing are also critical to the success of the arrangement. 'You need to ensure that the business and the service provider put together compatible people,' says Simon Ormston, marketing director for global service delivery with Logica CMG. If you want to get value and benefits from the contract it's not all down to the service provider. 'The retained people have to make the contract work,' he says, so they will need the right set of skills. 'If you have a fantastic contract and a poor retained organisation there is a large chance your outsourcing project will fail,' suggests Cooper Bagnall, 'a mediocre contract and a great retained organisation have a better chance of success,' he says.
While failures in these and many other areas are undoubtedly to blame for the failure of some outsourcing projects, the issue that causes most problems is cost savings – or the lack of them. 'With outsourcing, cost reduction is almost always an expectation,' says Philip Everson, a consulting partner with Deloitte, but it rarely materialises. When the consultancy conducted an outsourcing survey in 2005 it found that anticipated cost savings were the main reason why 70 per cent of organisations outsourced their IT or business processes. It also found that 44 per cent failed to save any money by doing so, while nearly half identified hidden costs as the most common problem when managing outsourcing projects.
So you might expect unrealised costs savings to be the main reason why organisations are reversing their IT outsourcing arrangements, but this is not the case. 'Sometimes the changes are simply evolutionary,' says Everson. The decisions to outsource and insource often happen years apart, with one set of executives enjoying the early benefits of the project, while another set is obliged to pay for it five years down the line, when it no longer looks so impressive. 'Nobody knowingly does a deal that's bad at the time,' he says, 'but things change.'
The decision to insource can also be the result of transitional outsourcing, where IT functions are externalised temporarily. 'You can view IT outsourcing as long term service provision or part of a transformational plan,' says Everson, adding: 'Outsourcing has a lifecycle, and insourcing can be part of that.' Cooper Bagnall agrees. 'There are examples where discontent with the contract has resulted in it coming back in house,' he says, 'but there are times when it makes perfect sense to use a third party to handle your IT, such as when you are replacing legacy systems.'
Less commendably, some organisations have apparently used outsourcing as a way of getting someone else to wash their dirty laundry. 'Outsourcers get asked to do some pretty bloody work,' suggests Everson, such as taking over IT functions at a point when staff reduction is inevitable. 'The outsourcing process can be like a washing machine,' he explains: you can put your IT function in and when it comes out it will have been cleaned up. 'It won't be whiter than white,' he says, 'but it will be a lot less dirty.'
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