Outsourcing some of the IT Portfolio remains a direction that the majority of companies will continue to invest in as part of their overall smartsourcing or strategic sourcing strategy. Clearly the service and support function (Help Desk Level-1, Desktop Level-2 and Network Administration) of the IT Portfolio along with application development and network operations remain the most popular components to outsource. More companies are pursuing multi-sourcing and selective sourcing arrangements rather than the big multi-year and multi-million dollar deals. In the past year alone, almost 50% of the companies that were contracted for outsourcing services have prematurely ended their arrangement. Forty-three percent of those companies have actually brought the work back in-house leaving the question whether these companies had a business-driven sourcing strategy, completed a readiness, competency assessment identifying real internal costs, service levels and risks. You want to avoid the exercise of “back-sourcing” at all costs – mainly because of the costs and the disruption of services, business impact and timeframe necessary to get the resources, technology and processes back where they need to be to properly service the business.

When BankOne and JP Morgan Chase merged operations, a core competency/strategic sourcing analysis was done. In looking at areas within IT in terms of cost/benefit, innovation and competitive advantage, a decision was made to exit the long-term Outsourcing arrangement it had with IBM. The JP Morgan Chase’s Exit for convenience from the IBM contract after its merger with BankOne is a learning experience for all companies no matter whether you are considering outsourcing or considering exiting from your current outsourcing contract. It highlights the importance of doing the internal cost analysis, aligning sourcing strategies with business objectives and making the right business decisions for the right reasons.

In September 2006, Supportindustry.com and McGarahan & Associates conducted a survey on the state of IT Outsourcing. Impressively, 93.30% of respondents said they would outsource again and 94.10% said they would recommend outsourcing. 62.50% of these companies spend less than 10% of their IT budget on Outsourcing and predominately outsource or will outsource in the next 6 months Help Desk (Level-1) services and Server maintenance, monitoring and support. 82.30% of our respondents have less than 5 years experience with outsourcing but half have instituted the best practice of IT governance over the Outsourcing arrangement and 62.50% are using a penalty clause attached to their SLA with their outsourcing vendor. 88.20% of the companies that responded ranked their overall satisfaction with their outsourcing vendor as Very Good or Good. This was similar to the overall performance rating they gave to the internal staff before they outsourced. 27.8% and 33.3% respectively stated improved service levels and cost reduction as the main benefits to outsourcing.

Remember, these can only be a benefit if you baseline measure those operational performance and financial metrics and work to establish and report on service levels that continuously challenge the cost/performance ratio. It’s also a priority to ensure that your outsourcing vendors commit to targeted reduction and deflection of call type volume that allows their resources to be redeployed to handle those changes in scope work orders that you current pay for – without charge.

33.30% of the respondents outsourced to reduce costs yet 33.30% find outsourcing to be more expensive and a surprising 44.40% are not sure. These numbers are concerning given that Cost Reduction of these services have traditionally been the main driver to outsource outweighing improved service levels and not a core competency. Upon further investigation, many organizations are finding the majority of these cost overruns to be caused by increased management overhead, vendor profit margin and increased scope/change orders. Service levels are also under pressure when faced with the reality of the high turnover problem experienced by outsourcing vendors and their subcontractors.

This also impacts the quality of the customer experience and the resolution being applied and managed by the Level-1 Help Desk. What most customers should realize or manage is that fact that reduced call volume to the outsourced vendor is damaging if nothing proactively (applied solutions) is being done to eliminate the root cause of these incidents/problems as documented in the Case Management system. The root causes and category types used to classify incidents/problems like password reset, how to, break/fix, requests, etc. and the associated call volume should be a focused reporting priority from a baseline and ongoing perspective to prove the impact of the applied long-term solution.

You can easily save money outsourcing, but if your customers are not being serviced and it starts to affect productivity and have business impact – then the cost savings is not what it appears to be on paper. The most important metrics in managing an outsourced relationship seem to support the need for a Balanced Scorecard approach to reporting the efficiencies and effectiveness of the Outsourcing vender. These metrics illustrate the importance of measuring both the short and long-term financial impact, customer satisfaction, getting results and quality.

An IT balanced scorecard changes the way the IT organization is managed. It reinforces accountability for results, changes behavior, and focuses attention on areas that drive value. The balanced scorecard is one tool for performance measurement and management. The Kaplan and Norton model provides a holistic approach to Performance Measurement by supplementing the traditional financial measures:

• Financial Perspective — Is the company creating value for its shareholders?
• Customer Perspective — How is the company performing from the perspective of those who purchase the company’s products or services?
• Internal Business Process — How is the company managing its internal business processes to meet its client’s expectations? Is throughput improving?
• Innovation and Learning Perspective — Is the company improving its ability to innovate, improve, and learn?

It incorporates both leading and lagging indicators. The emphasis is on balance across multiple dimensions of performance; ensuring that good performance in one area is not offset by poor performance elsewhere. It is the strategy that drives the choice of performance measures.

In recent experiences, McGarahan & Associates has seen the following trends that are starting to surface at companies that are single-sourcing a majority of their IT service and support components.

1. In Control – The customer is in the driver’s seat as they are much more aware, educated, prepared and demanding in terms of what they want and what they want to pay for it.

2. Don’t Outsource a Mess - The customer has finally realized that outsourcing a ‘mess’ doesn’t work. In order to outsource something successfully, you must know what you are outsourcing in terms of work, internal costs and best practices. Only when you have a measurably successful service can you negotiate the terms of the contract so that everyone goes into the relationship knowing expectations and capabilities.

3. Reduced Margins - The vendor is under a great deal of pressure from the customer to lower their prices given the lower cost options of offshoring. Although over 50% of our respondents have no plans to offshore, the financial pressure continues on IT services and all lower cost options must be investigated and considered. The savvy customer knows the cost structure of the outsourcer and will continue to pressure the outsourcer to reduce the price which in turn pressures the vendor to reduce operational costs to keep profit margins from falling further.

4. Higher Expectations - The vendor will continue to be challenged to keep improving service levels, customer service and quality, yet the resources are getting more expensive, turnover is a problem and the tools continue not to deliver on automating more of the manual tasks or deflecting the calls to the Service Desk.

5. Sourcing Strategy - Companies will continue to be more proactive regarding their Sourcing Strategy by updating it yearly, involving key business peers and aligning it with the business goals and objectives.

6. Core Competencies - Quality, efficiency and unique business knowledge will remain the core reasons for companies being able to fight off the outsourcing demand from the C-Level Suite.

7. Subcontractor Usage - Outsourcing companies will find resistance from customers over the use of subcontractors. One of the main reasons to outsource is to leverage competencies of the vendor that go beyond the customer’s budget, desire or timeframe. These customers expect the vendor to invest in developing resources, best practices and technology to make their outsourcing investment in time and money worthwhile.

About McGarahan & Associates
McGarahan & Associates are in the business of helping organizations achieve service and support value. By applying extensive real world experiences, focus and industry best practices, we deliver results focused on strategic alignment, support structure, service level management, standard operating procedures, IT service management, staff utilization and training, tool optimization, marketing to senior management and reporting.

About Supportindustry.com
Supportindustry.com provides senior level service and support professionals direct access to information on the most relevant areas in customer support, including enterprise strategies, people issues, technology, trends and research. This data enables support professionals to benchmark and improve their customer support operation. Members are responsible for the help desk and customer support operation of their company. Titles include Director/VP/Manager of Customer Support and Help Desk, CEO, COO and CIO.