Outsourcing Risk Reduction: How to Avoid Disasters and Ensure Solid Working Relationships

With the right outsourcing arrangement, you can convert fixed IT costs to variable, gain access to scarce resources and increase service availability. But you need to manage outsourcing risks.

Today, more and more businesses understand the benefits of working with outsourcing companies. Although having a business relationship with an outsourcing vendor can be a smart move, it is important to minimize the risks associated with this type of business partnership. Let's look at some in-depth suggestions on making good outsourcing decisions.

Why Outsource at All?

Without a doubt, the most important positive aspect of working with an IT outsourcing company is the ability to save substantial money. Cost reductions occur because outsourcing vendors usually spend less on both labor and overhead. For example, offshore outsourcers typically enjoy lower energy costs than onshore vendors," says Darin Stahl, Lead Analyst for Info-Tech Research Group.

Stahl believes that successful outsourcing engagements must yield savings of at least 15% to 20%. And enterprises should avoid contracts that can't deliver a minimum savings of 10% in headcount and technology costs, he says.

Another benefit of outsourcing is the ability to increase service availability. Specifically, businesses that provide 24/7 services will especially appreciate the inherent value that outsourcing can provide. For outsourcers, the cost of providing a wider array of technical support/management tools is spread out among all the vendors' clients.

"The challenge is to ensure that the long-term enterprise technology strategy is aligned with the skills and competencies of the outsourced vendor," says Stahl. "This requires at least a 5-year view of the enterprise IT strategic plan compared to the vendors' capabilities."

Another advantage to outsourcing is that companies gain access to scarce skills or resources. Stahl recommends that enterprises should target a minimum savings of 25% from deferring additional headcount in-house for the outsourcing to be successful.

Using outsourcers also allows enterprises to substitute fixed IT costs with variable costs (e.g., pay for usage). Businesses may choose to avoid large capital expenditures in favor of lowered variable costs.

According to Stahl, companies must examine any opportunity of this type through a very long lens. "Enterprises must quantify and track savings against expected in-house costs throughout the life-cycle of the engagement and take into account switching costs that would occur if the relationship sours or business conditions change," says Stahl.

Finding Offshore Outsourcing Companies

There are several ways to minimize risk when researching outsourcing vendors. One way is to find a dependable outsourcing company by referral from colleagues who have experience working with outsourcers. While this method is good to determine reliability, you must also ensure that the company is qualified to work on your particular project.

Businesses can find relevant outsource partners via search engines. Trade associations are other good places to find information about outsourcing vendors.

What Should a Company Consider Before Working with an Outsourcing Provider?

Businesses should examine any governance frameworks that are in place before they begin to work with an outsourcing company. "For example, Info-Tech works with a number of customers who operate under ITAR (International Traffic in Arms Regulations). The infrastructure supporting the lines of business under ITAR must be retained in-house," says Stahl. "This impacts the cost savings since the retained infrastructure has to be funded, staffed, and maintained within an in-house cost model."

While researching a potential offshore company, enterprises should carefully determine the economic viability of a particular company. After all, businesses do not want to begin working with a company only to discover that the company will be going out of business. This is especially important considering today's economy.

"In the current economic climate, outsourcing vendors are finding themselves under increasing cost pressure. Info-Tech has observed migration of some outsourced services back in-house (for a variety of reasons) and this has the potential to lower revenue for outsourcing vendors. The revenue pressure could negatively impact offshore vendors' ability to fund skills and technology tools," says Stahl.

Instead of just looking at short term cost savings, companies should also determine whether or not an outsourcing company can provide longer term support. "The vendor's ability to deliver in the near and mid-term must be weighed against its ability to continue support beyond the term of the engagement," says Stahl. "A mismatch in technical competencies at later stages of the engagement can have dire cost consequences for the enterprise."

Of course, companies seeking to work with an outsourcing company should determine its experience and reputation. Obtain references to determine the track records. Also find general information about an offshore company's reputation by doing a Google search and by asking questions on the appropriate online forums.

Other important factors to consider in order to minimize risk are as follows:

• You should find out if the outsourcing company subcontracts work to others.
  
• You should determine what size of a development team your company would prefer to work with on your particular project. After all, your company wants to work with an outsourcing company that has an adequate number of staff, but not be so "big" that you are treated impersonally.
  
• If a company is working to obtain internationally accepted certifications, this type of certification reveals that the company is indeed a high quality one.
  
• It is important to determine how good the communication will be between an offshore vendor and your company. Thus, you should determine what types of communication they support (email, telephone, online chat etc)

Once you have a list of companies that you would like to work with, you can further narrow down your list by checking specifics of the companies more closely. For instance, find out how each company differs from the others and whether they will be scalable enough to meet your company's future needs. Also, consider other details such as time zone, price and cultural factors.

In order to minimize risk, your company may find it helpful to ask for examples of similar projects that the outsourcing vendor has completed. Remember that sometimes these outsourcing vendors have confidentiality agreements and may not be able to produce samples for you.

At this point, your company should prepare a request for proposal (RFP) from the selected outsourcing companies. The RFP should describe your projects and needs in a detailed manner. In this RFP, you can ask for specific information including the resumes of people who are completing the project and information on the vendor's management. Your company should obtain outside information on relevant certifications that an outsourcing vendor may have.

Finally, before deciding to embark on a major project with one particular vendor, it is an excellent idea to give the IT outsourcing company a smaller test project to work on. During this test project, you can determine if the company is the best fit for you by observing how they work with you.

In addition to quality, communication and reliability it is important to keep track of expenses. "Enterprises must detail all in-house and outsourced costs. Compare the actual costs to those anticipated in the original business case," says Stahl. "Info-Tech has noticed that 44% of initial agreements were entered in order to reduce costs, and yet 39% of agreements result in increased annual costs. If original cost reduction objectives have not been met, immediately undertake a critical review of all process efficiencies for in-house and outsourced processes."

All in all, if your organization follows these guidelines, you will help your company minimize risk when you partner with an outsourced vendor.

The article Outsourcing Risk Reduction: How to Avoid Disasters and Ensure Solid Working Relationships was originally posted on ExecutiveBrief