A Win-win Contract

Why

should you outsource?

Outsourcing is obviously a means to get non-critical work done by talent

outside your organizational pool. Companies outsource for different reasons–depending

on individual requirements. Some outsource for cost savings, others to gain

skills and resources lacking internally, still others outsource in the hope of

gaining a strategic edge over the competition. We can, therefore, sum up five

specific reasons that companies outsource:

• Financial;
• Technical capabilities;
• Market agility;
• Operational excellence; and
• Business expertise.

Factor 1: Financial



The financial area encompasses financial management and cost savings.

Financial management includes economies of scale and IT management abilities

that cannot be achieved internally by end-users attempting to expand their core

competency without adding significant overheads to the IT infrastructure. Key

issues in the decision to outsource also include predictability and cost savings

compared to those that make additional internal investment and talent upgrades.

A case in point is Liberty Mutual Insurance outsourcing its software

application development to DSQ Software. The project is for a period of five

years and is valued at $100 million. Liberty Mutual is looking for a long-term

relationship, as outsourcing would help reduce costs by 50%.

Factor 2: Technical capabilities



Technical capabilities allow a company to enhance existing procedures or

adopt new procedures, formulate strategic direction, and react quickly to

technical evolution.

Transportation.com is an

affiliate of the $3-billion Kansas-based trucking company Yellow.

Transportation.com hired Infosys in 1998 to write logistics management software.

Dan Bentzinger, it’s chief technology officer, says he prefers working with

Infosys over other larger US companies as it helped transportaion.com discover

what it’s customers wanted, with Infosys designing the software accordingly.

He feels Infosys is "good at implementing" ideas.

Factor 3: Market agility



Market agility includes the ability to expand core businesses rapidly and

involves better information management for decision making and expansion to new

geographic markets.

London-based EMI Records outsourced CRM solution and services from Talisma.

EMI wanted to communicate with the fan following of its contracted artists, and

used the package to boost customer database.

Factor 4: Operational excellence



Operational excellence in the form of increased service levels can be

achieved when outsourcers use their asset base and human resources to meet

specified IT objectives. The outsourcer provides access to new skills and

technologies suited to business growth.

The ING Group, the global financial powerhouse headquartered in the

Netherlands, believes in Indian IT expertize. It has signed outsourcing

contracts with three Indian companies, TCS, NIIT and BFL Software, under which

ING companies will outsource projects to these three firms only. ING has

terminated all previously used labor and forwarded all projects to the Indian

companies.

Factor 5: Business expertise



Business expertise includes development of effective solutions to end-user

IT problems and knowledge of the end-user’s business.

EveryD.com is a new online community for

Japanese housewives, providing everything from shopping to banking. EveryD paid

it’s outsourcing service provider $9 million to set it all up–from devising

the business plan to designing the portal to writing the software. According to

EveryD.com’s CFO Shibata Iwao, though the provider selected was not the

cheapest, it had expertize in e-banking and e-tailing at both the front and back

ends.

Whatever the reason, outsourcing has become an acceptable operational

alternative and is being embraced by companies in the US and Europe, also

gaining in popularity in other parts of the world.

Why shouldn’t you outsource?

Not all companies have outsourced, some never will. There are even companies

that have tried outsourcing, but have brought outsourced operations back

in-house, as difficult and costly as this might have been. Poor outsourcer

performance, loss of control and human resource issues are just some factors

that inhibit outsourcing.

Let’s look at some specific reasons that outsourcers have either chosen not

to or end an outsourcing contract and bring a function back in-house:

Inability to develop unique applications



Outsourcers don’t meet the constant evolutionary cycles provided by the

rapid changes to distributive computing environments. As a result, end-users

become averse to outsourcing applications development without a firm commitment

from the outsourcers of meeting future technological requirements.

Lack of value-added cost measurements



End-users find that service level agreements and funding have to be

constantly modified for additional scope of work effort, while initial

contractual measurements are often ill-defined and require clarification.

Loss of corporate IT infrastructure

End-users are concerned about the loss of valuable skill-sets in the event of

outsourcers not meeting their contractual obligations. In addition, end-users do

not want to find themselves trapped in an outsourcing relationship because of

the dependency on outsourcers created by the original decision to outsource.

Cultural barriers



The most successful relationships are those that have open and honest

communication channels in place to deal with sensitive political and human

resources issues. In addition, transitioned workers should be educated on the

culture of their new environment.

Lack of knowledge of the corporate business



In some cases, end-users have expressed concern that the outsourcer did not
possess significant knowledge of corporate business. This can be a big poser as

IT strategy always needs to be cohesive with the overall business plan.

A case in point

In response to changing client requirements, Computer Science Corporation

completely redesigned it’s renewal contract with Fidelity and Guaranty Life

Insurance in 1999. The new agreement, valid till 2013, is estimated to be valued

at $435 million. Services provided include all aspects of policy administration

and related IT infrastructure.

The original 1995 contract was a traditional arrangement, under which CSC

committed to a service-level-agreement and charged a fixed fee per policy. As

the contract matured, the static pricing arrangement no longer suited F&G’s

changing requirements; it wanted to introduce new products and add new user

technologies not included in the original agreement.

Together, CSC and F&G created a new agreement that abandoned service

level aggrements (SLAs) and fixed fees in favor of pricing based on "value

delivered to F&G" with a guaranteed gross margin paid to CSC. The new

model allows F&G the flexibility to be dynamic and change products to suit

the changing environment without straining its contractual relationship with CSC.

This has led to the evolution of new models, with a view to being a win-win

for both the customer and the provider.

Ishan Ranjan is VP,

projects, CMIL. He has also been founder-editor of Voice & Data.