To outsource or not to outsource -- What are the factors? We give you guidelines for deciding what and when to outsource

August  1997

One of the biggest issues CIOs and/or IS directors are dealing with these days are questions related to outsourcing. Faced with increased cost pressures while trying to improve services, CIOs are looking at all alternatives. Many, including the CEO, are suggesting that outsourced third-party providers can solve all their problems, like lowering the cost of services while improving the service provided. With the introduction of client/server applications and processes many executives think there isn't a need for IS and that all of the IS functions should be given to these providers. In this month's article we look at the pros and cons of outsourcing and our approach to dealing with this major issue. (2,100 words)

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S of the 90s and even into the millennium is coming under increased scrutiny and pressure from corporate executives and IS customers. Executives, who don't consider IS to be a competitive advantage to the company, are concerned about return on investment (ROI) and are continually thinking that IS spends too much money on IS with no return -- and IS keeps coming back to ask for more.

Why are we doing this? With the advent of client/server, distributed applications, and network computing, users of IS services are even wondering if there should be an IS function at all. Many users are implementing and supporting their own distributed applications and feel they don't even need IS -- the funny thing is the CIO is letting them!

Because the major theme of IS now is to improve service and lower the total cost of doing business (executives are always asking the CIO for budget relief), the CIO is starting to look at all the alternatives, including outsourcing. (Of course, we know that outsourcing as been around for many years, and there are several major corporations who have been very successful in this arena.) But now there are increased pressures with the new distributed computing model (i.e., let business units implement their own applications, do away with the glass houses, and use third parties for networking). And coupled with all this is that the perceived level of service provided by IS has been generally poor over the last last five to ten years. What can they do?

We have visited many corporations over the last four years and have seen the entire spectrum from outsourcing some components of IS (which we call selective outsourcing), to completely outsourcing the entire IS, to no outsourcing at all. What is right for some may not be right for others. Some may think that outsourcing is the answer to all problems.

We think there are several key objectives IS executives should examine before making the final decision. They are:

1. Define the IS service model.
2. Define the total cost of service.
3. Determine the core competencies.
4. Determine if outsourcing will fit the corporate culture.
5. If you plan to outsource, determine whether selective or total outsourcing is the best option.

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Define the IS service model
The first thing IS should do (regardless of whether or not outsourcing is being considered) is define the service model. Because of all the sins of the past and the new distributed computing model, IS needs to rethink what services are provided. We know that IS cannot be all things to all people, but there are a certain set of services that can and should be provided effectively by the IS function. We defined this service model in our May 1997 column (see Resources below), which includes planning, process, and people. The plan should address who the customer is and include the services provided. The process will define how services are supported. The most important piece is how we organize, train, and retain the IS staff (oh, those people issues). Our June 1997 column (see Resources) goes into more depth on the people issues. The service model should be defined, documented, marketed, and sold to users of IS services. When considering outsourcing this will really help in preparation of a request for proposal (RFP).

Define the total cost of service
Defining the total cost of service can only be determined after defining the service model. As part of the service model IS must become proactive with its customers and (again) market and sell its services. What better way to be proactive then to provide customers with a menu of services and associated costs. But a word of warning -- don't start selling until you know you can deliver! Part of the selling should include that fact that there is a fee for services rendered. Any customer who asks for services from a vendor should pay for those services. We do this in our every day lives, why can't we do it with IS?

The big thing is making sure we deliver effective levels of services for the fees. And as part of the menu of services provided, IS as vendors should show costs compared to other vendors' costs for the same services. This gives customers a view of the total costs and potential added value. As an example, we provide here a look at the desktop support functions, what the services might be, and what the costs would be for those services. Cost of service doesn't need to be sophisticated or lengthy. It should be kept simple:

Services and Costs - $12/day/person
Standard Services - $6/day/person System Administration System Security Desktop Application Support Hardware Installation Software Distribution Support Telecommunications User Training Local Network Services Software Configuration Selected Optional Software Database Administration Systems Analysis Performance and Tuning Disaster Recovery	Resources/Equipment - $6/day/person Client Servers Network Servers Disk Usage Home Directories Mail Misc.

We should then develop the same set of cost structures for all IS functions including wide-area network, local-area networks, data center(s), etc. If you haven't already done so, you must then document the service levels available at that cost. These two things (cost and service level) will probably be the two most important items when benchmarking your costs and services and developing a contract with potential third-party service providers. And if a contract is left with a vendor, understanding what services are provided in the contract, and at what cost, will ultimately determine the success of transition.

We don't want our service providers saying to our customers that the service they are asking for is not part of the contract and will be billed separately. We have found this to happen in many cases because the outsourcing contract was done without a complete understanding of the services provided, both from the service provider and end-user perspective.

Determine the core competencies
One of the main things IS has forgotten about over the past few years is to look at what things they do right. Since they've been reactive vs. proactive they have not taken the time to look at or publicize the good things. We should always do that not only to show what we can do well but also to help morale. This is a very important step when looking at a potential outsourcing scenario. (It will really help when benchmarking your services vs. those of the outsource group). Should we outsource everything in IS? Should we keep the functions that we do well?

The best way to get started is to simply ask questions. Is the network a core competency for us? Is the desktop support function a core competency? Do we manage data centers as well as anyone? Once you have answered these questions it would be a good idea to get a customer viewpoint.

Will outsourcing fit my corporate culture?
A major factor IS needs to consider (and many times doesn't) relates to the corporate culture. We have been asked over the years to provide a set of standard guidelines for our methodologies, processes, and procedures. We would surely like to be able to give a cookie cutter approach, but in these times it is virtually impossible due to vastly different corporate cultures. A successful IS operation will always know its customer and its corporate culture when dealing with service. In many cases IS will have the most impact on culture. And how we deal with it usually determines our success.

Outsourcing can and will have a major impact on corporate culture. History has shown that depending on the outsourcing vendor and transition plan the transition itself can be seamless. But have we measured the impact on the culture? Probably not. The impact on culture also depends on the agreement with the vendor and how we treat the vendor. In some cases the vendor is seen as a partner and becomes the IS department. If the vendor does not have experience with the culture, it may take several months before the impact on service goes down (i.e., how the new IS responds to service issues or the customer, and what services are included in the contract and which are not). In other cases where the service vendor has had more experience with similar cultures the impact can be far less.

Selective vs. total outsourcing
Once you have defined the core competencies the next step will be to look at selective vs. total outsourcing. In either case, we must first define some basic objectives and goals to be accomplished from outsourcing. Some examples would be:

1. Provide a better level of service.
2. Reduce the total cost of IS by 20 percent.
3. Provide an increase in potential career opportunities for the IS staff.

During this time it is probably a good idea to send out a request for information (RFI) to a number of potential service vendors. The results of the RFI can provide very valuable information about the vendors you should consider. Once you determine which vendor(s) to consider then the next step is to develop and send out the RFP. The result should be a very detailed response from the selected vendors with their proposed solution(s) and costs to meet your objectives.

The RFP is very important. We recommend that technical managers be involved in preparation of the RFP to make sure all the current and potential services are defined. We have seen many RFPs developed at the executive level, and many important services and service levels often get excluded. This can potentially cause some extreme cost exposures because service vendors will charge different rates for any service outside the scope of the contract.

We have also seen this reduce the service levels because there is no one chartered to provide the service (i.e. the existing IS group thinks that the service is within scope of contract while the service vendor indicates it is outside the scope and can only support the service after an agreement to pay). As mentioned, the preparation of the RFP is very critical. It must contain a very detailed description of the current service(s) that are to be considered for outsourcing and those that will not. And, remember to never loose sight of your goals and objectives. There is always the risk that they will be pushed aside or forgotten during heavy legal negotiations.

If a decision has been made to look at total outsourcing this does not mean that the IS function goes away. The IS function is still important and a part of the corporation. You have just chosen a third-party vendor to provide the IS services. There must still be corporate managers to manage the vendors and their services. The key thing to remember is that they are providing a service to the corporation, not a partnership, and they need to be managed as such. IS employees (of the corporation) should be the interface between the service provider and the customer (user of IS services). IS must continue to manage customer expectations and service levels.

Harris Kern (harris.kern@sunworld.com) is Sun's Open Systems Migration Consultant for NAAFO Market Development. Randy Johnson (randy.johnson@sunworld.com) owns R&H Associates, a full-time rightsizing consultancy in Boulder Creek, CA. R&H Associates helps people worldwide in implementing and supporting client/server infrastructures based on their proven methodologies. © 1997 Harris Kern and Randy Johnson. All rights reserved.

Harris Kern and Randy Johnson are authors of Rightsizing The New Enterprise: The Proof, Not the Hype and coauthors of Managing The New Enterprise: The Proof, Not the Hype, and Networking The New Enterprise: The Proof, Not the Hype. You can buy these at Amazon.com Books. Select the hyperlinks to learn more about each and Amazon.com.

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URL: http://www.sunworld.com/swol-08-1997/swol-08-unix.html

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Resources

• "The New Enterprise IT Services Model," May 1997 Unix Enterprise column in SunWorld
  http://www.sun.com/sunworldonline/swol-05-1997/swol-05-unix.html
• "What will be the death of networked computing? June 1997 Unix Enterprise column in SunWorld
  http://www.sun.com/sunworldonline/swol-06-1997/swol-06-unix.html
• Full listing of Unix Enterprise columns in SunWorld
  http://www.sun.com/sunworldonline/common/swol-backissues-columns.html#unix

If you have technical problems with this magazine, contact webmaster@sunworld.com

URL: http://www.sunworld.com/swol-08-1997/swol-08-unix.html
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