Outsourcing Is Not One-Size-Fits-All Solution

Ann All
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12 Trends Shaping the Outsourcing Market

Rather than just seeking the lowest prices, buyers are relying on more sophisticated techniques.

Despite commenters who accuse me of being a "shill for India" because of what they see as my pro-outsourcing bent, I don't think outsourcing is always or even usually the the right way to address a business need. Like clothing that purports to be "one size fits all," outsourcing simply doesn't work for every company, all the time. One of my biggest beefs is companies that see outsourcing as some kind of panacea and don't conduct the kind of analysis they should to determine whether they'll actually lower costs or gain other benefits.


I'm not sure if that was the case with UK insurer Liverpool Victoria (LV), but it sounds like it could have been, based on a recent presentation given by the company's head of IT governance at CA World in Las Vegas. Even if its analysis was sound, the company made another big outsourcing mistake, not retaining enough staff to manage its outsourcing relationships.


Now the company is involved in a large-scale project to bring many of its outsourced IT services back in-house. Having a head of IT governance is a huge step forward for LV, which several years ago employed just two IT staffers to serve a workforce of 2,000. Expecting two staffers to handle outsourcing -- and everything else -- is "probably not the best way of running IT," admitted Steve Lewis, the governance executive.


Since CEO Mike Rogers came on board in 2007, the company has grown to 4,000 employees, now served by an IT staff of 300. As I wrote last summer, companies that insource IT functions are often looking to gain added business agility, which seems to have been the case with Liverpool Victoria. Lewis said bringing some of its IT functions in-house has yielded a more consistent delivery of service operations and better control over the company's technology. Lewis said IT costs have also come down, following renegotiations of deals with technology vendors and elimination of products with high support costs.


LV was seven years into a 10-year contract with EDS when it decided to terminate the agreement early in the spring of 2008. While there's been a move away from those kinds of large, single-supplier deals, they still work well in some instances, such as deals involving highly commoditized IT services where suppliers can provide added efficiencies and economies of scale. In March I passed along some great advice from TPI's Danny Jones, who suggested breaking down large outsourcing contracts into more manageable chunks and building in contract flexibility along the way.


I especially liked Jones' three elements that should be in place for every outsourcing deal, no matter the size:

  • A solid contract with clearly outlined roles, responsibilities and payment structure.
  • A flexible approach to sourcing that lets organizations choose the best supplier when new projects or services are needed.
  • A strong governance model, to ensuring commitments are met and service providers are managed effectively. (Again, in LV's case I suspect this was hard to provide with just two IT staffers)


Some more good outsourcing advice came from Chris Montoya, director of information technology for El Paso (Texas) Electric, whom I interviewed at the Midmarket CIO Forum in March. Like LV, Montoya worked with a single provider and outsourced many of his organization's IT functions. Organizations must be careful to retain ownership of their strategic direction for IT, while outsourcing providers serve as facilitators and contribute best practices, Montoya told me. And carefully review internal processes before turning them over to an outsourcing company. El Paso Electric created swim lane diagrams for every process in the organization and spent time with its provider to answer questions such as when and where handoffs would occur. Said Montoya:

If you throw outsourcing around a bad process, you're going to fail.

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Add Comment      Leave a comment on this blog post
May 18, 2010 9:36 AM Sshah Sshah  says:

Thanks for sharing the post.  I really liked Jones' three elements.  I think many businesses fail in outsourcing because they outsource the problem, not the solution.  Trust is No. 1 for me when it comes to working with an outsourced team.  Communication is second.  If goals and expectations are not set clearly, we'll have more mess than what we originally think as a nice savings from hiring in-house local talent.

May 19, 2010 11:45 AM Lisa Lisa  says:

Thanks for the insightful post, Ann.  I also love the Jones' three elements. Strong client relationships are essential for outsourcing and managed services to operate efficiently. I thought you and your readers might be interested in a great example of how a well-planned, strongly communicated managed services operation worked well. 

When Johnsonville extended its back office management systems throughout its entire operation, the company looked for a way it could provide IT management, without taxing current resources.  Take a look at what we did for them, http://bit.ly/b7jEcY.

Thanks again for the post!

Jun 10, 2010 2:51 PM Marie Marie  says:

Please also remember that we have several outsourcing companies in the US!

Outsourcing still saves money on US wages when you have no HR needs, no benefits to pay, (their company pays those costs), and you are more nimble to hire and fire headcount often with a 30 day out clause. The street never hears you had lay-offs - because you don't.

Many of the Fortune 500 tech companies use US companies for outsourced sales people - even enterprise, retail sales, etc.

The suggestions are true - keep a tight client relationship, communicate needs, and you can scale as your needs change.

Try & buy too, you can often hire your favorites,  which incents everyone to work even harder, and prevents 40k wasted on training someone who wasn't a good fit.


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