Marc Dowd (Principal, European Client Advisory)
Chris Weston
Chris Weston (Principal, European Client Advisory)

Meeting held on October 28, 2021

What follows is a summary of some of the important points discussed in the meeting. If you would like to take part in future, please let me know.

The meeting started with a general view of outsourcing and why it can be the right solution for organisations. Sometimes leaders outsource to get specific competencies. These can be competencies that are hard to evolve in-house or are not used frequently enough to build or are simply too expensive to acquire.

For organisations that are large or growing quickly, outsourcing can help with scale; for instance, to roll out a major program or major hardware upgrade across the world. Sometimes outsourcing is a step on the road towards a final goal. One of the participating organisations is considering models to outsource in the short term via a joint venture with the knowledge that they will be insourcing that same work later.

That brought us back to the practical note one CIO brought in the consideration of what the goal of outsourcing is — whether you are buying skills or outcomes.

The discussion then moved on to what has changed recently. COVID-19 has shown everyone that remote working can function and has for many made it easier to accept the idea of outsourcing — sending the work to a remote place.

With the shift to the cloud, many of the services that used to be included in big outsourcing deals, such as desktop applications, we now get via SaaS, and so the profile of outsourcing is different. This has benefits and disadvantages. COVID has also increased the prevalence of shadow IT in a lot of organisations, fragmenting outsourcing and making it harder to manage.

Often this takes the form of different departments purchasing their own capacity. AWS was used as an example where if this is not coordinated, it can cause major cost overruns and potential security problems. It was agreed that the IT organisation must provide the needed guardrails to guide the use of external technology services.

Another key element to consider when outsourcing is what your target operating model is. How do you work now and how do you want to work in the future? You want to make sure your outsourcing partner can support that future model. For many companies, the target operating model focuses on platform computing. One of the participants pointed out that to get full value out of platforms you need a lot of skills, either in-house or from outsourcers, and that sometimes as industries follow fashionable software trends these can be hard to acquire.

The cost side of in-house vs. outsourcing can be tricky to calculate. It takes time and experience to figure out the total cost of building your own team and capabilities. This must be balanced against how many times you’re going to get things wrong when you’re doing it on your own vs. what it costs to outsource.

One participant mentioned the need to make sure that the outsourcer is making a profit. You as their client should be able to see where the margin is through open book accounting. A CIO suggested the need to make sure the outsourcer is making a margin so that you know that this is worth it for them going forward. Without this, it is unlikely that they will provide good service and will be a reliable partner over time.

There are many challenges with outsourcing. Organisations have challenges to outsource well; to know how to package up work prior to outsourcing it. As one CIO put it — how to be an intelligent customer of outsourcing.

A participating leader raised an important question: “How many times have your expectations been exceeded by your outsourcing partner?” “Precisely zero” was his conclusion. So, by outsourcing, are you limiting your potential outcomes?

Another challenge to keep in mind is that outsourcing providers themselves can have a hard time finding the needed skills. “They may have a slick presentation and pitch but sometimes the reality is quite a bit different in terms of the capacity and capabilities that they are able to deliver.” The challenge is to get to know them well enough to see to the reality.

One of the best practices is really to focus on the planning of outsourcing. Tech architects are an important part of that planning stage — to set the tech framework in which the outsourcing partner can work. Another is to focus on governance, including service level agreements and key performance indicators. Good metrics can make an outsourcing agreement work for everyone.

One best practice is to be sure to include renegotiation clauses in the outsourcing contract. This goes against the idea of cheaper pricing for long deals. It is important to invoke renegotiation from time to time to get better pricing or higher quality services. This can be more valuable than initial discounts over time.

Another thing to pay attention to is the demarcation of areas of responsibility — what outsourcers are responsible for and what your company is responsible for. Be very clear here.

Bringing all the stakeholders together prior to outsourcing is quite important, whether that’s the legal team HR, IT, or whoever to agree on the desired outcomes of outsourcing and what business outcomes are important for the different stakeholders.

One participant emphasised the importance of the relationship owner for the outsourcing relationship rather than a contract owner. Contracts help when the relationship breaks down, but you are better off not getting to that point.

You want to make sure there is a good relationship. Make sure there is an ongoing conversation so that you don’t only talk when things go wrong. If you only interact with the outsourcer when you need to invoke contractual clauses, this will not lead to successful outcomes for either party.

These points and many more were presented, illustrated, and discussed by the Digital Leaders taking part in the meeting. This summary cannot hope to capture the flow of insights and only gives a sketch of what was important. To get the real insights you should join the community (free) and take part in the meetings so you can experience it first-hand. As a Digital Leader, you can apply to take part by contacting me at mdowd@idc.com.

Sharing