Outsourcing IT headaches is no answer: often the problem that needs fixing is management

Chief Executive, The, May, 2004 by Mark D. Lutchen

Your CIO is proposing to outsource what he considers some IT "headaches," such as maintaining old legacy systems and answering help-desk calls. He points out that these are commodity-like functions that he doesn't have the time or the staffing to handle properly. Plus, he can save money by outsourcing.

You are inclined to agree. After all, these activities are not your company's core competencies. Outsourcing them makes sense, right?

Not necessarily. Research reveals that 50 percent of outsourcing deals end up in relationship divorce. It's often because too many executives see it as a way to simply get rid of an information technology headache. Far too often, the problem they're trying to fix arose as a result of their own ineffective IT management. No matter what technical capabilities you outsource, you can't outsource the management, responsibility and accountability of your IT organization.

For that reason, your CIO's outsourcing strategy may fail unless your company takes the following steps:

* Build or strengthen IT governance processes. Even if you outsource, you still own the operational risk. Your CIO may not realize it, but outsourcing doesn't reduce your management obligation. It intensifies and broadens it. You need to ensure that you have meticulous internal processes for setting service levels and performance metrics as well as for managing the relationship. It's your responsibility--not the outsourcer's--to establish a disciplined governance structure that helps you ensure that the services outsourced are being performed.

* Establish transparency. You need a clear picture of what you're spending and what that's actually delivering to the organization. One problem is "shadow" spending, or the amount that departments and units not directly under the CIO's control spend on technology. If those costs start to show up on your vendor's bills, it will be very difficult to know whether the outside partner is truly delivering on the contract.

And don't wait until the end of the quarter to assess IT performance. Establish processes that allow for continuous "dashboard" reporting, much as a driver controls a car via dashboard controls. Make sure your organization--and not the outsourcing vendor--retains responsibility for collecting, analyzing and acting on key performance metrics.

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If you use cost and performance data up front to establish transparency, you may find outsourcing is not as attractive as you thought. One of my clients, a global consumer products company, decided not to outsource after conducting a rigorous analysis of their total IT spending across all business units. They found that by standardizing and consolidating both their IT infrastructure (PCs, servers, email and networks) and their applications (financial, HR and manufacturing), and by saying 'no' to IT investments that did not provide adequate return on investment, they were able to reduce their spending by nearly 30 percent, without hurting service levels.

* Make sure your management team has the right skills. One of the most misunderstood facts about outsourcing is that it does not eliminate the need within the company for highly competent IT leaders. Job descriptions may change from managing operations to managing provider relationships. But this change does not negate the need for skills in communications, strategic planning and relationship or account management starting at the top of your IT organization. One of the most successful outsourcing relationships I have ever encountered got off to a good start when the CIO directly engaged the CEO of the outsourcing firm to create a set of joint working principles they would both be happy with. These guiding principles helped to establish a working relationship based on trust, clear objectives and a commitment to balance and flexibibility.

The key to success is cleaning up management in-house. Whether you elect to outsource operational IT activities or address them internally, you must retain and actively develop your internal IT management competencies. In other words, you have to manage IT like a business. That's the bottom line.

Mark D. Lutchen leads the Business Risk Management Practice at Pricewaterhouse-Coopers.