Outsourcing requires careful planning

Companies looking to outsource some IT functions should plan carefully ahead of time, considering a broad range of issues, to help insure these projects will be successful, according to industry analysts.

Demand for outsourced IT services is rising quickly as more and more companies look for ways to cut their IT costs and improve productivity. By 2007, global spending on outsourcing will top $50 billion per year, according to market analyst Gartner. But not all of these outsourcing projects will succeed. Many outsourcing projects fall apart because companies fail to consider the costs and complexity that are associated with outsourcing.

Deciding to outsource an IT project is a strategic decision for a company and it’s important to not rush headlong into a project without proper planning, said Nick Rossiter, a partner at Mithras Consulting Group, which advises clients on outsourcing-related issues.

In June, Gartner released a report that outlined common pitfalls for companies that outsourced IT services. That report identified five factors that companies often fail to fully consider when deciding whether or not to outsource IT functions: cost, productivity, communications, culture, and organizational readiness.

If your company is considering an outsourcing project, Gartner recommended that you start by analyzing the total costs of the project. Don’t look just at the difference in labor costs, the report said. Be sure to factor in additional costs for conducting due diligence, communications, oversight, international travel, and training, it said.

That’s sound advice, according to Rossiter. “These costs can be greater than the cost of labor,” he said.

Since outsourcing costs will not be constant during the life of a project, companies should consider the costs for different stages of the project. Since initial costs are generally highest during an outsourcing project, your company may not realize significant cost savings until one or two years after the start of the project, according to the Gartner report.

It’s also important to be realistic about the level of productivity that outsourcing providers can offer, Gartner said. Some companies assume that the productivity of an outsourcing partner will match that of internal IT staff: this isn’t always the case. In particular, be prepared for lowered productivity during the initial phase of an outsourcing project.

Throughout the life of the outsourcing project, productivity levels may be affected by staff turnover at the outsourcing provider. In these cases, new staff may have to be trained to fully understand the applications they are working with. “They need time to get really efficient” Rossiter said.

Another key factor to consider is whether your company’s senior management has bought into the outsourcing project. Support from top executives is “instrumental” in keeping an outsourcing project on track, the report said.

Effective communication between your company and your outsourcing provider are also important to the success of an outsourcing project.

All communication between your company and the outsourcing provider should be documented and made as clear as possible to avoid misunderstandings, Gartner advised. This is particularly important when conveying the technical requirements and business objectives of an outsourcing project. If companies fail to communicate these goals clearly, problems that may arise include lower productivity and increased errors in the project, it said.

Another issue to consider when choosing an outsourcing service provider is culture, which differs from country to country and between companies.

Be sure to consider which cultural issues may affect the working relationship between your company and your outsourcing provider, Gartner said. Seek advice from consultants and consider cultural training when necessary to ensure a smooth working relationship with your partner. In addition, sending internal IT staff overseas to work with the outsourcing provider may help to minimize the risk of cultural issues affecting the success of the outsourcing project.

Rushing into an outsourcing project before you have fully considered all of the factors associated with these kinds of projects can result in additional costs or poor results, Gartner said.

Be sure your company is ready to outsource before taking the plunge. Make sure that internal staff understand the reasons for outsourcing and are supportive of the project. Carefully consider all of the risks and determine how much risk your company is willing to accept. Once you have done this, look for ways to mitigate risks, it said.

Companies should also assess the maturity of their own IT operations before outsourcing, according to Gartner. Some factors to consider are standardized methodologies, project management skills and service-level agreements, among others. Any weakness in these areas may result in lower productivity and a less-than-desirable result, it said.

When considering an outsourcing project, companies are well advised to take their time, considering a range of different geographies and service providers, Rossiter said. India is the best-known outsourcing center and has a large number of experienced outsourcing service providers. But there are other choices, such as China or The Philippines, which have a smaller number of experienced outsourcing providers to choose from, he said.

“Above and beyond that, It depends on the business goal of the client,” Rossiter said, noting that many Japanese companies choose to outsource to China because of the close economic relationship between the two countries. Some U.S. companies have also chosen to outsource to China in order to further their business objectives in the country, he said.

When you’ve settled on a partner, you should consider starting off with a smaller IT project that is not mission-critical before moving on to larger and more important projects. This will allow you and your outsourcing partner to develop a strong working relationship and will minimize the risk of problems, Rossiter said.

If the project goes well, you can pass more projects to the outsourcing service provider, he said.