Outsourcing
some of the IT Portfolio remains a direction that the majority of companies
will continue to invest in as part of their overall smartsourcing or
strategic sourcing strategy. Clearly the service and support function
(Help Desk Level-1, Desktop Level-2 and Network Administration) of the
IT Portfolio along with application development and network operations
remain the most popular components to outsource. More companies are
pursuing multi-sourcing and selective sourcing arrangements rather than
the big multi-year and multi-million dollar deals. In the past year
alone, almost 50% of the companies that were contracted for outsourcing
services have prematurely ended their arrangement. Forty-three percent
of those companies have actually brought the work back in-house leaving
the question whether these companies had a business-driven sourcing
strategy, completed a readiness, competency assessment identifying real
internal costs, service levels and risks. You want to avoid the exercise
of “back-sourcing” at all costs – mainly because of
the costs and the disruption of services, business impact and timeframe
necessary to get the resources, technology and processes back where
they need to be to properly service the business.
When
BankOne and JP Morgan Chase merged operations, a core competency/strategic
sourcing analysis was done. In looking at areas within IT in terms of
cost/benefit, innovation and competitive advantage, a decision was made
to exit the long-term Outsourcing arrangement it had with IBM. The JP
Morgan Chase’s Exit for convenience from the IBM contract after
its merger with BankOne is a learning experience for all companies no
matter whether you are considering outsourcing or considering exiting
from your current outsourcing contract. It highlights the importance
of doing the internal cost analysis, aligning sourcing strategies with
business objectives and making the right business decisions for the
right reasons.
In
September 2006, Supportindustry.com and McGarahan & Associates conducted
a survey on the state of IT Outsourcing. Impressively, 93.30% of respondents
said they would outsource again and 94.10% said they would recommend
outsourcing. 62.50% of these companies spend less than 10% of their
IT budget on Outsourcing and predominately outsource or will outsource
in the next 6 months Help Desk (Level-1) services and Server maintenance,
monitoring and support. 82.30% of our respondents have less than 5 years
experience with outsourcing but half have instituted the best practice
of IT governance over the Outsourcing arrangement and 62.50% are using
a penalty clause attached to their SLA with their outsourcing vendor.
88.20% of the companies that responded ranked their overall satisfaction
with their outsourcing vendor as Very Good or Good. This was similar
to the overall performance rating they gave to the internal staff before
they outsourced. 27.8% and 33.3% respectively stated improved service
levels and cost reduction as the main benefits to outsourcing.
Remember,
these can only be a benefit if you baseline measure those operational
performance and financial metrics and work to establish and report on
service levels that continuously challenge the cost/performance ratio.
It’s also a priority to ensure that your outsourcing vendors commit
to targeted reduction and deflection of call type volume that allows
their resources to be redeployed to handle those changes in scope work
orders that you current pay for – without charge.
33.30%
of the respondents outsourced to reduce costs yet 33.30% find outsourcing
to be more expensive and a surprising 44.40% are not sure. These numbers
are concerning given that Cost Reduction of these services have traditionally
been the main driver to outsource outweighing improved service levels
and not a core competency. Upon further investigation, many organizations
are finding the majority of these cost overruns to be caused by increased
management overhead, vendor profit margin and increased scope/change
orders. Service levels are also under pressure when faced with the reality
of the high turnover problem experienced by outsourcing vendors and
their subcontractors.
This
also impacts the quality of the customer experience and the resolution
being applied and managed by the Level-1 Help Desk. What most customers
should realize or manage is that fact that reduced call volume to the
outsourced vendor is damaging if nothing proactively (applied solutions)
is being done to eliminate the root cause of these incidents/problems
as documented in the Case Management system. The root causes and category
types used to classify incidents/problems like password reset, how to,
break/fix, requests, etc. and the associated call volume should be a
focused reporting priority from a baseline and ongoing perspective to
prove the impact of the applied long-term solution.
You
can easily save money outsourcing, but if your customers are not being
serviced and it starts to affect productivity and have business impact
– then the cost savings is not what it appears to be on paper.
The most important metrics in managing an outsourced relationship seem
to support the need for a Balanced Scorecard approach to reporting the
efficiencies and effectiveness of the Outsourcing vender. These metrics
illustrate the importance of measuring both the short and long-term
financial impact, customer satisfaction, getting results and quality.
An
IT balanced scorecard changes the way the IT organization is managed.
It reinforces accountability for results, changes behavior, and focuses
attention on areas that drive value. The balanced scorecard is one tool
for performance measurement and management. The Kaplan and Norton model
provides a holistic approach to Performance Measurement by supplementing
the traditional financial measures:
-
Financial
Perspective — Is the company creating value for its
shareholders?
-
Customer Perspective — How is the company
performing from the perspective of those who purchase the company’s
products or services?
-
Internal
Business Process — How is the company managing its
internal business processes to meet its client’s expectations?
Is throughput improving?
-
Innovation
and Learning Perspective — Is the company improving
its ability to innovate, improve, and learn?
It
incorporates both leading and lagging indicators. The emphasis is on
balance across multiple dimensions of performance; ensuring that good
performance in one area is not offset by poor performance elsewhere.
It is the strategy that drives the choice of performance measures.
In
recent experiences, McGarahan & Associates has seen the following
trends that are starting to surface at companies that are single-sourcing
a majority of their IT service and support components.
1.
In Control – The
customer is in the driver’s seat as they are much more aware,
educated, prepared and demanding in terms of what they want and what
they want to pay for it.
2.
Don’t Outsource a Mess -
The customer has finally realized that outsourcing
a ‘mess’ doesn’t work. In order to outsource something
successfully, you must know what you are outsourcing in terms of work,
internal costs and best practices. Only when you have a measurably successful
service can you negotiate the terms of the contract so that everyone
goes into the relationship knowing expectations and capabilities.
3.
Reduced Margins - The
vendor is under a great deal of pressure from the customer to lower
their prices given the lower cost options of offshoring. Although over
50% of our respondents have no plans to offshore, the financial pressure
continues on IT services and all lower cost options must be investigated
and considered. The savvy customer knows the cost structure of the outsourcer
and will continue to pressure the outsourcer to reduce the price which
in turn pressures the vendor to reduce operational costs to keep profit
margins from falling further.
4.
Higher Expectations -
The vendor will continue to be challenged to keep
improving service levels, customer service and quality, yet the resources
are getting more expensive, turnover is a problem and the tools continue
not to deliver on automating more of the manual tasks or deflecting
the calls to the Service Desk.
5.
Sourcing Strategy - Companies
will continue to be more proactive regarding their Sourcing Strategy
by updating it yearly, involving key business peers and aligning it
with the business goals and objectives.
6.
Core Competencies - Quality,
efficiency and unique business knowledge will remain the core reasons
for companies being able to fight off the outsourcing demand from the
C-Level Suite.
7.
Subcontractor Usage -
Outsourcing companies will find resistance from customers over the use
of subcontractors. One of the main reasons to outsource is to leverage
competencies of the vendor that go beyond the customer’s budget,
desire or timeframe. These customers expect the vendor to invest in
developing resources, best practices and technology to make their outsourcing
investment in time and money worthwhile.
About McGarahan & Associates
McGarahan
& Associates are in the business of helping
organizations achieve service and support value. By applying extensive
real world experiences, focus and industry best practices, we deliver
results focused on strategic alignment, support structure, service level
management, standard operating procedures, IT service management, staff
utilization and training, tool optimization, marketing to senior management
and reporting.
About
Supportindustry.com
Supportindustry.com
provides senior level service and support professionals
direct access to information on the most relevant areas in customer
support, including enterprise strategies, people issues, technology,
trends and research. This data enables support professionals to benchmark
and improve their customer support operation. Members are responsible
for the help desk and customer support operation of their company. Titles
include Director/VP/Manager of Customer Support and Help Desk, CEO,
COO and CIO.
