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Smart IT outsourcing advice in a declining market

IT outsourcing megadeals are on the decline. How has this affected the outsourcing industry in general? Get advice on how and when CIOs should plan and implement outsourcing deals in the future.

The prevalence of IT outsourcing megadeals valued at $1 billion or more dropped 67% in the first quarter of this year, according to Gartner Inc.

But that doesn't mean IT outsourcing is showing any signs of slowing down, said Kurt Potter, research director at Stamford, Conn.-based Gartner. In fact, company research has found that end-user spending for IT outsourcing will grow at a 7.5% annual rate globally, to $318 billion in 2011.

Outsourcing megadeals

"There are only so many megadeals out there, and 80% to 85% of the largest companies have significant outsourcing deals. We're going to see more deals in the $350 million to $500 million range. Future megadeals will come from government," Potter said, citing last year's announcement that the German military had awarded a 10-year, $9.3 billion deal to Siemens AG and IBM to modernize and run much of its communications network.

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The National Labor Relations Board (NLRB) isn't large enough to forge megadeals, but the U.S. government entity has been involved in IT outsourcing since 1994, when it farmed out software and development, said Rich Westfield, CIO of the 2,000-employee agency. The help desk went to a third-party provider in 2001, and a year ago the NLRB decided to move and consolidate its IT infrastructure to utility managed services with Herndon, Va.-based Savvis Federal Systems Inc.

"I'm only budgeted a [five-day-a-week, eight-hours-a-day] workforce," Westfield said. "Outside that, if something broke, it would be addressed the next day or after the weekend if it occurred on Friday, and that's not good enough anymore. We needed 24/7 support, especially for public-facing portals."

Sophisticated IT outsourcing

Companies are more comfortable with IT outsourcing as onshore and offshore providers increase the sophistication of their offerings, said Vivian Hanson, partner in the technology transactions group in the New York office of Morrison & Foerster LLP. "In the early years, customers treaded carefully, outsourcing noncritical assets, but today any asset can be outsourced to the right provider."

Kettley Publishing Co. in Newport Beach, Calif., recently brought its internal servers back under company purview after outsourcing to two companies since 2002. But it also just outsourced its customer-facing Web site to Irving, Texas-based Data Return LLC to ensure sufficient bandwidth for its financial services and insurance industry clients, said Lance Geeck, IT manager at Kettley.

"You have to be careful globally about transporting IT to an outside organization," Geeck said. "You should only outsource what makes sense and keep what makes sense in-house."

The internal network systems were brought back to Kettley's IT department because previous providers weren't offering the service and tech support Geeck believed was required. "We went through an evaluation and were considering another provider, but we decided we wanted these resources on site during normal business hours," Geeck said.

Financial services and insurance company clients use Kettley's Web site to create private-label content for potential customers, so adequate bandwidth, a sufficient number of access points and uninterrupted service were key factors in the selection of Data Return. "We needed a better Internet backbone to support a large number of users and give fast response with minimal downtime," Geeck said.

Managing IT outsourcing agreements

A successful outsourcing agreement results from a company knowing exactly what it wants upfront, Hanson said. Due diligence will help define the scope of work, establish service levels and determine appropriate pricing. "If you don't know how much goes into [what's being outsourced], the scope of work won't be defined," Hanson said.

Company stakeholders must have buy-in to properly support the outsourcing agreement. Insufficient buy-in can result in difficulty during the contract management phase of the agreement.

Finally, service levels should be clearly defined, and the company should include a "sweep" clause in any contract to catch items that may have fallen through the cracks during due diligence performed by the company or the vendor. A company may have two servers covered under a contract when it actually has three servers, or the internal call center answers incoming calls by the third ring while the vendor is answering in 10 rings, Hanson explained. A "sweep" clause should ensure the customer is getting at least the same service level from the vendor that it was providing to itself.

"Lower price among vendors may not be the best alternative," Hanson said. "The first and most important criteria should be that the solution a vendor offers meets customer requirements."

Matt Bolch is a freelance writer based out of Atlanta. He can be reached at

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