What advice are you able to give to business executives who are considering IT outsourcing options?
Understand the project- Companies that prefer to outsource applications must have a high degree of understanding of the project they’re undertaking, including its requirements, the tactic of its implementation and the source of expected economic benefits. This is crucial to providing reasonable incentives for meaningful measures of performance.
On Wall Street, historically, attention and rewards have been given to those who produce profits, like successful trading desks; there has been less interest in managing cost centres like information processing. Despite the strategic importance of data infrastructure, many companies on the road have attempted to squeeze systems, and that they have did not provide the resources or the guidance needed for long-term investment in IT.
Understanding project objectives also helps to scale back the risks of poaching, since it’s then possible to specify and control access to elements which will be critical to the client’s future competitive positioning.
The risks of outsourcing product distribution-as airlines did with computer reservation systems within the 1970s, for example-can shift an excessive amount of power to the distribution system. Using a third-party information processor to manage client relationships can allow another party to possess access to your customer history and pick off your best accounts. The most successful projects we studied were those during which the client was fully capable of developing the appliance itself but chose to outsource just because of constraints on time or staff availability.
- Divide and conquer- Dividing a large project into smaller, more manageable pieces will significantly reduce programmatic risk. In principle, completion of every independent chunk creates the likelihood that subsequent development work is going to be handed off to an individual developer. Each chunk should have specific objectives and quality metrics, and every piece should be independent, within the sense that companies would need to absorb only tolerable increases in development costs should they prefer to switch vendors after one or more chunks has been completed. Although this may increase development costs, it reduces or eliminates the danger of vendor holdup. If the seller attempts to overcharge for continuation, the self-contained nature of the work completed so far will permit a more or less painless handoff to a different vendor for the continuation of development. Moreover, by assessing checkpoints after each chunk, the company can detect quality problems and reduce the risk of shirking or underperformance. Thus, when deciding on the milestones for such a project, it is essential to have a viable exit strategy if any chunk fails.
- Align incentives- Although the vendor’s incentives can never be fully aligned with those of the client, it’s frequently possible to style contractual incentives which will help enhance performance. If you pay a telephone interviewer for the number of calls he makes, they’re going to be short; if you buy the number of minutes he’s on the phone, each request will be long; if you pay for applications approved, you will have lots of approvals, and if you pay for applications rejected, you will have lots of rejections. What you want to do is pay for incremental sales. Unfortunately, such incentives are not always guaranteed to work. It is challenging to define additional sales or determine the basis of compensation for your call centre operators. A similar “law of the wallet” holds software outsourcing altogether, and it suggests that you get what you buy: If you pay for lines of code, for example, you’ll get many lines of code; if you purchase testing, you’ll get lengthy test logs. Incentives can bring vendor behaviour in line with a client’s expectations, thereby improving performance, but they will also distort it, causing performance to drop. It depends on how well individual vendor activities are often measured and the way accurately measurable and rewardable activities are often correlated with desired performance. In short, for all its attractiveness, there are several potential costs and risks associated with outsourcing. The above guidelines can help keep those risks in check. One final tip: When in doubt, hiring an honourable and well-managed vendor with a reputation to preserve may be your best protection.