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Outsourcing journey starts with 'Why?'

Why outsource? CIOs should know precisely why their company is a candidate for outsourcing before they vote on a vendor.

Rick Bullock, vice president of global technology and infrastructure for Bax Global, wants to see the money. Like many technology executives, Bullock wants to fully understand the bottom-line benefits of outsourcing before taking the leap. A $2.4 billion transportation company specializing in business-to-business shipments of heavy cargo, Bax weathered the economic downturn and the Sept. 11 terrorist attacks by getting "lean and mean," Bullock said. After four years of learning to do more with less, IT spending increased in 2004 and so has the pressure to outsource.

"I still find it challenging to know how, with our knowledge, we're going to turn things over to an outsourcer and save money and have them make money. I just don't see the model," said Bullock, whose department employs about 200 people.

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A "very small percentage" of the department's multi-million budget is spent on outsourcing, and the results have been mixed. A Web development project farmed out to Pacific Crest has worked out well, Bullock said. But a VoIP management project handed over to a well-known provider remains a challenge. And some decisions get made in crisis mode. The company's telecom invoices were outsourced, for example, after an employee fell ill and an unprocessed bill resulted in the power being shut off at a Bax station. "That was a wake-up call."

Bullock, who attended the 2nd annual CIO Decisions Conference in Pebble Beach, Calif., last week, is right to be cautious, according to one expert. The first step in outsourcing is not choosing a supplier, according to one expert. The successful outsourcing deal begins with why, not who.

"Before you begin the process, it is important to figure out if global outsourcing is right for you. Why are you looking at? What part of your business strategy does this actually address, and if it is right, are you ready to take it on," said Atul Vashistha.

Vashistha, CEO of NeoIT, a global outsourcing consultancy in San Ramon, Calif., was a featured speaker at last week's conference. The three-day event drew nearly 200 CIOs to discuss "Building the Integrated Enterprise: IT and Business Realities."

Looking at outsourcing as a way to unload a problem is usually a mistake, Vashistha said, in particular for large-scale projects. "If you can't fix it, how can somebody who doesn't know your business fix it." The companies that do outsourcing best tend to see it as transforming the business, not as a project-based decision. They also make sure the project has support from people who can communicate the goals and consequences of the outsourced project.

"Many times companies take the approach of let's not talk about this until the deal is done. I have not seen a single company do that well. You can't hide," Vashistha said.

With the "why" figured out, companies then can take on the what, where, when and who should do the work, he said. Should you go with a third-party supplier or build your own operations? And, if you choose a third-party, should you go with an IBM or Accenture, or a smaller company, such as Keane? Country selection is important. Companies looking at outsourcing voice-based systems will find that the Philippines does an even better job than India, according to Vashistha. China outperforms India on embedded systems. And with every offshore project comes political risk.

"If you are doing business in the Philippines, I hope you are thinking about how to manage the political situation, with the president under investigation," he said. Three years ago, when nuclear testing was a hot issue in India and Pakistan, "many clients made the right decision by paying extra attention to business recovery plans," he said.

Janet Parkhurst, an attorney in the New York office of Milbank, Tweed, Hadley & McCloy LLP, agreed with Vashistha that the "our-mess-for-less" approach to outsourcing doesn't work. "You can't outsource what you can't manage yourself."

Houses in order

Companies need to get their house in order before they choose a supplier, she said. "If your processes are clear, if you have your service levels measured, if you know what security and audit controls are required, you're in a much better position to demand that from a supplier," said Parkhurst, who specializes in technology and outsourcing contracts.

Companies undo a good contract by putting it away in a drawer. "I can't tell you how many times a client calls and says, 'We're having a problem, what does the contract say about this,'" Parkhurst said. Companies need to enforce the protocol spelled out in their contracts from Day 1, if they hope to avoid problems down the line.

Parkhurst agreed with NeoIT's Vashistha that employees need to be kept in the loop.

"Frequently, the CEO knows the real reason they are outsourcing and everybody below that CEO has no idea why," Parkhust said. If the goal is to save money, that's fine; if it's to transform the business, that's fine, too, she said, but the people who are managing the project need to understand the goal.

When objectives change, as they inevitably do in an outsourcing relationship, those changes should be speedily communicated to people negotiating the contract. "You'll often have the CEO at the top of the chain deciding one day that the company doesn't need platinum standard service levels, and that isn't relayed down the line. Then the outsourcing is doomed to failure," Parkhurst said. Finally, companies should know how to bring that outsourcing back in-house before they sign a deal.

After listening to the litany of risks, one audience member wondered why anyone would want to outsource: "Can you give me a sense of some of the advantages along with all those risks?" Bottom line?

"If you're not saving money, you shouldn't be doing it," Vashistha said.

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