Outsourcing 103

Criteria for Evaluating Outsourcers

1. Commitment to Outsourcing: outsourcing is distinctive and in many ways requires expertise beyond your typical system integration services. It requires specific methods and experience.

• How long has the company been involved in the outsourcing industry?

• How is the company organization when it comes to staffing, commitment to specific customers and industries, and dedication to resolving specific problems and needs? How much is the revenue and profit percentage coming from outsourcing?

2. A Flexible and Proven Methodology/Function: There will be little time to explore your way to the paradigm of technical and management issues due to the short transition period given to the outsourcer taking over your IT business. A flexible and proven methodology will provide your outsourcer with a benchmark and the tools for them to be able to meet your specific needs.

• Do you/they have a standard methodology? Is it fully documented? To what extent is it used?
• Has it been used successfully in the past? Where has it proved unsuccessful? Why?

3. A Pathway and Access to Talent: The key to any solution is the Executive management, project management, programming and testing talent. The capability of pooling in talents and experts is very crucial. Especially if you may need off-shore designers, programmers, and testers who are usually less expensive than your conventional labor force and which are more familiar with older technologies.

• How big is the outsourcer staff in terms of: consulting staff? Analysis staff? Design staff? Programming staff? Testing staff? Documentation staff? Implementation staff? Help desk? Knowledge in terms of mainframes, customer server, telecommunications, etc.?
• Does the outsourcer have a relationship with off shore or domestic programming "factories"?
• How does the outsourcer go about with training and integration of staff?

4. Industry Knowledge and Superiority (Intellectual Capital): It is a must that the outsourcer possesses special industry knowledge especially in regulated industries or those undergoing legislative changes. For other industries, this may not really be important. As you relegate your manpower to the outsourcers, you are likely to rely on the knowledge of outsourcers as to your industry and more.

• How comprehensive is the industry knowledge and superiority of your outsourcer in terms of your current and future industry needs?
• What connections, positions do they hold with key industry organizations?

5. International Scope and Presence: Your organization should be looking for an outsourcer that will be able to handle your current and future needs and be able to coordinate in correcting problems on a global perspective. This will be particularly needed in testing interfaces on different platforms, in different languages, and between different systems world-wide.

• What experience and resources does the outsourcer have outside of the United States?
• Where are the outsourcers' key offices situated?
• What treaties is it a member to and does it abide by?

6. Organizational and Financial Staying Power: To outsource your processing information needs, which could be partially or all the way to your entire information technology function is a risky business and requires a marriage between the parties. Your organization should observe due diligence in the selection of the outsourcers making sure that the latter is right for you and has a long business life span. There are many instances where giant outsourcers have a battery of lawsuits for failure to deliver service. It is also critical that you thoroughly examine all related financial data of the outsourcers, corporate organization strategic plans, and corporate culture and history. Make sure that you see the gauge of business health of the outsourcer.

7. Customer/Referral Base: Because it's easier to trade extra services to new customers so take on original ones, an outsourcer with a powerful and different client home is possible to get the inside course on original opportunities at existing customers and therefore have improved "staying ability”. Checking the references of new customers is possibly the almost severe criteria for judging outsourcers. While nobody likes to acknowledge they selected the incorrect outsourcing spouse, there are ways to build resonance rapidly with your interviewee, and have that individual to speak about "things" that they would make differently if they had to have the outsourcing resolution, draft the outsourcing contract, or handle the outsourcing relationship differently in the future. Get this crucial data, and hear from others' mistakes and adapt your thought as needed.

8. Strategic Alliances: Successful outsourcers have almost probably engaged in important alliance and relationships with new parties (i. e. , tools establish providers, methodology companies/consultants, testing houses, catastrophe recuperation companies, particular "leading margin" integrators, etc. ). Such alliances offer a willing approach to resources and tools that maybe otherwise insufficient. Wouldn't you like these resources to be accessible to you when needed?

• What relationships and important alliances does the outsourcer have?
• To what extent have these relationships and/or tools been integrated and used by the outsourcer before?
• To what extent might they be needed and integrated into your needs?

9. Strong Commitment and Budget for Research and Development: Not only will your company change over time, but the information technology industry will change. Your outsourcing needs a powerful dedication and budget for R&D so that it may go reward of original technologies as they get accessible and rapidly decide which might be proper for your needs (e. g. RAID systems, ATM, HIPPI switches, Fiber Optic vs. Satellite Communications, original web architectures, original I-CASE tools [Integrated-Computer Assigned Software Engineering], etc. )

10. Quality of the Contract: The contract must get the proper clauses and incentives to remain to have the outsourcer do and to remain to have you do. Any article that appears biased in favour of the outsourcer, should too be written with your figure place in spot of the outsourcer. See if that makes for an impartial relationship and would be satisfactory to the outsourcer. In addition, if the outsourcer gives you a contract that is "overly better to be genuine" so it likely is! Just believe about the seniority and subsequent problems the outsourcer will get if it offers the same good advantages to hundreds of new customers. Are they better job folks? Will they remain in the industry for so long?

11. Willingness to Negotiate: The real procedure of negotiating the contract and reaching a consensus on hard alternatives, is a periscope into what living will be like with the outsourcer in the future as unexpected needs go upward. How your outsourcer handles the negotiations regarding its contract, and how ready they are to hear to your tale and needs and alter their access will suggest whether or not your relationship will be productive in the future.

12. Insurance and Litigation History: Look at your outsourcer's operation bond history and policy policies, their criteria for selecting original customers, and their story of litigation (all litigation including wins and losses and settlements. This will say you a plenty about what mistakes the outsourcer has made and whether it has learned (or is yet learning) as it continues to have its job productive.

Outsourcing 102

20 Steps to Successful Outsourcing

Objectives

The following 20-Step Program will provide you with a guide that would help you achieve the following:

• properly organize your team;
• achieve necessary management commitment;
• properly define your own corporate needs, objectives, and priorities;
• identify appropriate alternatives;
• identify and evaluated your risks and benefits;
• select the best alternative for each specified service area;
• developed and negotiated an appropriate and effective outsourcing agreement; and
• provide the mechanisms to administer, maintain, and monitor the contract and to resolve the inevitable problems.

20-Step Program

1. Organize a top management Steering Committee assigned in planning, monitoring, overseeing and searching for your transition to outsourcing. These includes members from your internal information systems division, key user groups, and executive management including marketing and/or strategic management. It is essential to factor the changing needs, markets, distribution channels from the beginning resulting to minimal surprises in the succeeding phases. Management also needs to be informed and be part of the process to make sure that there is due diligence being performed and to provide appropriate stewardship up over these key corporate information assets. This is to minimize the loss of important information resources, losing effectiveness, or leaving the company vulnerable to competition due to a screw up in an outsourcing deal which could lead to legal suits in the future.

2. Identify and engage an expert team to be able to guide you and the organization during the decision, selection, and contracting processes for your outsourcing needs. The team should include a small group of independent experts with specialization in outsourcing such as an information technology consulting professional who understands both you and your outsourcer in your needs and who is by far capable in helping you administer the contract over time, assuring a smooth transition to the systems, and resolve problems when the contract is signed. Then, an attorney with specific contracting, business, and outsourcing expertise to help develop and negotiate and outsourcing that would be beneficial to both parties and make the relationship work. Lastly, an organization development/merger and acquisition professional to make sure that the transition of staff and relationships works well.

This team is also warranted and needed to make tough decisions because perceived or actual weaknesses in your current IS team may have caused the failure of IS within your company in the first place. Also, engaging with independent experts to assist your IS managers will be wise because they themselves would probably be most directly affected by moving to outsourcing and the resulting contracts that goes with it.

3. Identify critical internal resources, such as a particularly competent data processing director or chief information officer, who will stay on your company's staff internally assigned in managing and administering the relationship between the outsourcer and your company. Determine which staff, and software and hardware licenses and resources should/must go to the outsourcer for the relationship to be mutually successful.

4. Identify what is good and bad about your current installation in terms of:

• service
• capability
• performance
• uptime
• costs
• user satisfaction
• backlog
• on-time
• on-target systems delivery
• controls, etc.

Then assess each strength and weaknesses such as budget constraints, changing needs of internal users, top management commitment, resistance to change, lack of tools and human resources, staff development and ability to attract and retain quality staff, lack of methodology, hardware technology limitations, platform limitations, etc. Quantify and identify which are essential items and service levels and which components should be added, improved and attained in the outsourcing arrangement. Go for the “good enough” systems and targets that are attainable, affordable and of necessary quality.

5. Update the company's strategic business plan. The typical outsourcing agreement would cover a period of 7-10 years. You should make it a point that you know where your company is going locally and globally in terms of products, markets, manufacturing, sources of supply, distribution arrangements, labor sources, etc., before you develop the systems plan to be able to support such direction and needs.

6. Develop a 7 to 10-year strategic systems plan to identify the long-term needs of the company that translate into the strategic business plan. Also, ascertain the new applications that will be required such as electronic data interchange, integrated manufacturing and production control using robots and automated “smart” buildings, international telecommunication networks, “intranets”, etc., which applications will be updated, which and when it will be discontinued, and which will be developed from the modified new applications software.

7. Identify the alternative hardware and operating systems alternatives and find out the recommended new architecture(s) needed to develop and support the new systems plan. This includes satellite communications, wide area networks, wireless communications, mainframe and client-server usage and inter-connect, specific operating systems, open-architecture decisions, database and programming language decisions, special development and maintenance tools, etc.

8. Understand your cost structure and determine/estimate future costs to build the projects outlined in the strategic systems and architecture plans developed mentioned in steps 6 and 7 above, including estimates of manpower and supporting hardware and software and equipment to aid you in building, upgrading, maintaining, operating, and controlling such systems. You should also recognize that over the next 5-10 years there is a need to estimate all relevant capital as well as operating costs; costs of supervising the outsourcer, likely increases in costs for salaries, benefits, service contracts, etc.; "cost of money"; interest costs; residual value of equipment and facilities; cost of transition, including personnel; cost of changes in direction and level of resources; cost of contract modification, etc. it is important to note that this is the most difficult task so you should be able to utilize your expert team for guidance and confirmation.

9. Identify your current and anticipated usage: normal operations, expanded operations over time, peak periods, off-site processing, storage, archive, integrations requirements, back up and disaster recovery requirements, etc.

10. Review the strengths and weaknesses of the outsourcing alternative. Establish how the outsourcing alternative will aid your company meet its long term goals and why it is a better alternative than staying in-house or partial outsourcing or working with multiple outsourcers. Determine which applications and resources should be outsourced and which to pursue using a different approach. Update this information and re-evaluate the decision throughout the entire decision-making process as new or better information is gained.

11. Using your expert team, identify several outsourcing alternatives. Get hold of the appropriate literature of relevant information from the team's pre-selected short list of outsourcers. This should cover all of the technical and administrative things you will need to know about your outsourcer, you will also need to know in depth: corporate history and stability; current, new and lost customers; employee numbers, turnover, and experience levels; financial stability through a review of audited financials and footnotes; technological status including methodologies, tools, platforms, expected life of existing hardware; age of current applications; their own business and systems plan; downtime statistics; results of operational and security audits; customer surveys and systems demonstrations (both are critical and must be well planned); conversion commitment success/history (a must if you want your business to prosper); such intangibles as responsiveness, control, competition for resources, flexibility, etc.

12. Determine which areas of your company you would like to outsource. Identify a phased-in approach for outsourcing services if that is the desired method.

Services can be selected for virtually any part of your Information System areas including:

• All activities in a specified area (with only listed exceptions) vs. defined tasks
• Applications software
• Audit trails
• Backup procedures for programs, data, etc.
• Communications equipment, software, and interfaces
• Compliance with applicable laws
• Consulting services
• Daily and periodic processing and reports (accuracy; timeliness; formats)
• Data and program security
• Data conversion
• Data entry
• Development of new programs and systems
• Disaster recovery capabilities
• Equipment
• Help Desk
• Live system operation, management, and control
• Maintenance
• PC installation of hardware, software, and modifications
• PC service
• Personnel
• Physical security
• Pickup and delivery
• Provision of facilities, utilities, etc.
• Responsibility for troubleshooting
• Systems integration
• Systems software, tools, etc.

13. Develop a rigorous request for proposal (RFP) with a uniform format for you to be able to compare such responses from other outsourcers. Their answers to pricing should be simplified so that you can readily understand which are essential or basic services and which are add-ons. Pricing can take on many forms and that the different services may be priced differently or in alternative combinations to your advantage such as flat monthly fees; transaction volume-based fees; fees based upon a customer unit of volume (i.e., number of customers, accounts, credit cards); fees based upon CPU usage required to execute your jobs; fees based upon the number of input or output transactions or both; fees based upon the amount of disk storage or other storage requirements; programming fees. Those may be different from enhancements, new developments, special reports, or rush jobs; data communication line charges; disaster recovery rates; training and seminar fees; consulting fees; documentation charges; conversion fees; etc.

Identify some key clauses that you would like to be integrated in the contract so that you may be able to win some concessions on these during the bidding phase and so that you can determine the sticking points early.

Identify Acceptance Criteria for outsourcer bids and for systems and service acceptance throughout the validity of the contract: the accuracy, frequency, and timing of reports and information; response time for on-line transactions; uptime of the systems or the various components; emergency procedures in the event of downtime or other disruption of services; responsiveness of outsourcer personnel in the event of problems or errors; data archiving; access security; ease of use; unit, string, systems, and acceptance testing methodologies to be used; systems development methodologies and user participation and signoff points; usage of data query, parameter-driven, fourth and fifth generation languages in programs; user of upper- and lower-CASE tools, client-server architecture, and object oriented approaches; etc.

14. Invite bidders to a bidders’ conference at your site and individually take the bidders into a tour of your site. Let your top management and the Steering Committee meet with the outsourcing representatives for at least an hour during the tour. This should set the tone and demonstrate the importance and visibility of the study and resulting relationship. This can be very important if your top management would need to meet the outsourcer's top management in the future.

15. Evaluate proposals against your pre-established, and fully documented, criteria. Identify different approaches recommended by the outsourcer and compare it from your own research and preliminary conclusions. Be receptive to suggestions but be careful in analyzing the differences. Have a debriefing with the outsourcers for you to be able to discuss alternatives and to clarify proposals.

16. Rank proposals so that you have a backup vendor. This is essential in case negotiations break down with your preferred vendor. This can also give you the confidence to negotiate with the vendors in a tough but fair manner. Identify absolutely necessary criteria early. If the outsourcer does not meet the minimum criteria they should be asked to clarify their proposal or drop them from the list.

17. Checking references is a critical part of the evaluation and comparison of outsourcers. This is very important. You should visit their other customers as well. Review their status reports on key projects and contracts if possible. Don’t underestimate the experiences of the other customers and assume that you will gain a different result.

18. Negotiate the contract using your expert team and using pre-determined target clauses, criteria, and escalating alternative dispute resolution (ADR) options to keep the outsourcing agreement and relationship in line with your mutual objectives and be beneficial to both parties.

Consider and develop a strategy for at least each of the following contract areas:

• scope of responsibilities and services;
• third-party services;
• project managers;
• project development standards and acceptance;
• project timetables and milestones;
• progress reports and meetings;
• problem resolution and escalation of differences;
• acquisition of systems and facilities;
• interim acceptance testing;
• final acceptance testing;
• service warranty;
• proprietary rights cross indemnity;
• documentation;
• training;
• fees;
• change orders;
• personnel;
• company's proprietary rights;
• exceptions;
• physical security and backup;
• customer access and copying rights;
• termination;
• general provisions including taxes, insurance, most favored provisions;
• force majeure, severability, right to offset, transfer of software licenses;
• ownership of developed software;
• specific concrete definitions and scenarios for those things with multiple interpretations

19. Monitor, manage, modify, and steer the outsourcer and the contract as required over time. Give three-month report cards to the management of the outsourcer. Update and change the contract over time to continue to assure that your needs and, hopefully, the mutual needs of the outsourcer continuously being met.

20. Be Lucky: Ben Rosen, a legendary high-tech venture capitalist who invested almost first in Apple and in Compaq and made it big, said in a speech a few years back that you must "be lucky" in these kinds of long term relationships in uncertain times.

Outsourcing 101

There are about nine “Billion Dollar Babies” companies that were expected to sign billion-dollar outsourcing deals in 1994. Companies such as the Xerox Corp., with a $4 billion plus outsourcing deal, McDonnell Douglas and General Dynamics all joined the hype.

There are definite advantages in outsourcing – but only in doing it right. Outsourcing is a dangerous playground especially to the unwary executive or corporate counsel. It is a “make or buy” decision applied to your company’s information systems and technology functions.

“Should you hire your own systems staff, acquire your own facilities, develop own systems, maintain owned hardware, develop documentation processes, contract your own telecommunications network, etc.? Or should I leave it all to outsourcing firms who have already achieved the so-called economies of scale, attracting the best full-time systems professionals and get the most processing power and developmental capabilities and tools for the least per unit cost to do the job for me?”

Pros and Cons

The promises outsourcing is very attractive due to the continued cost-cutting measures employed by the companies, downsizing, reducing software development backlog and re-engineering like the following:

• improved service and performance;
• expert resources and staffing;
• shorter systems development cycles;
• better management control;
• elimination of personnel problems;
• stabilized or reduced costs;
• improved business focus;
• possible "tax" advantages;

However, opposing realities and factors also put limitations and frustrate such anticipated gains:

• nickel-and-dime syndrome ("I have to charge you extra for this, and this, and that");
• contract termination problems;
• inflexible contracts that limit your ability to accomplish your stated and changing business strategies and objectives;
• loss of control over your key information resources;
• ineffective corporate or project management - they're no better than you in running a business (i.e., fighting their/our bureaucracy, turnover, etc.);
• loss of in-house expertise (including the fact that while it only takes 3-6 months to dismantle your corporate data processing department, it takes 3-4 years to rebuild it);
• conflict of interest (when push comes to shove, they make a profit by serving many customers and their own management - at times, possibly to your detriment);

With all these factors coming into play, it is very important to choose the right outsourcing vendor and the relationship be managed correctly.

Jeffrey Russell

10 years experience in the Web Industry...

worked on over 1000 web projects including several top end sites for our nation’s fortune 500 companies...

strong history of dealing with Real Estate companies including several projects dealing with CRM, Property Management, Open Source projects, MLS, National Real Estate Search Database of foreclosures, Tax Information, and Absentee Owners data...