INFORMATION TECHNOLOGY:
MANAGEMENT ISSUES IN OUTSOURCE CONTRACTS
by
DIRKIE COETZEE (8907151)
MINI-DISSERTATION
submitted in partial fulfilment (25%) of the requirements
for the degree
MAGISTER COMMERCII
in
BUSINESS MANAGEMENT
in the
FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES
at the
RAND AFRIKAANS UNIVERSITY
JOHANNESBURG SUPERVISOR
Preface
Writing this particular mini-dissertation has been a challenging yet fulfilling assignment due to the extreme work pressures and changing of positions and location that occurred during my M.Com studies at the Rand Afrikaans University.
The background to this mini-dissertation is in the context that I have spent 16 years in the information technology industry and particularly the information technology (IT) outsourcing environment and have planned, implemented, participated in- and managed many IT outsourcing contracts in South Africa and internationally. During these valuable experiences it became clear to me that the issues that occur within these contracts are always similar and as such I developed a framework for myself, based on the experience gained, and known research, in order to assist in making sure that all elements were taken into account when engaging and managing an IT outsource contract. This framework has been used in a consultative approach for both local and international customers and within my company, where relevant and applicable, and is as such a tested model although it has been adapted and expanded upon.
It would have been impossible to complete this mini-dissertation without a solid support base of peers, friends and family. In particular I want to thank Professor Nic Lessing for assisting and guiding me, but also for putting up with my frequently changing schedule. To my parents that have always unconditionally supported my academic aspirations. Also to the company I work for, Siemens Business Services, for the support and time required to further my studies.
I wish to especially thank my wife, Linda, for the never-ending support and love she gives me and for not ever complaining about the long hours and effort I had to put in to complete this study. She is an amazing person. Lastly, I want to thank God for the opportunities and abilities He has given me.
Table of contents
Preface ...ii
Table of contents... iii
List of figures and tables ...v
List of acronyms ...vi
Synopsis... vii
Sinopsis... ix Chapter 1: Orientation ... 1-1 1.1 Background to management issues in information technology outsourcing ... 1-2 1.1.1 Information technology outsourcing... 1-2 1.1.2 Business process outsourcing... 1-6 1.2 Research problem statement... 1-7 1.3 Research objectives ... 1-11 1.4 Research methodology... 1-15 1.5 Closure ... 1-15 Chapter 2: The information technology outsourcing life cycle and its associated.... 2-17 Synopsis... 2-18 2.1 Background to the management issues in outsource contracts ... 2-19 2.2 Problems that arise in the information technology outsourcing phases ... 2-21 2.2.1 Initiation phase ... 2-22 2.2.2 Due diligence and contracting phase ... 2-28 2.2.3 Transition phase... 2-32 2.2.4 Execution and operations phase ... 2-36 2.2.5 Termination phase... 2-40 2.3 Closure ... 2-41
Chapter 3: Solution models for the information technology outsourcing life cycle .. 3-42 Synopsis... 3-43 3.1 Background to the solution models available for outsource contracts ... 3-44 3.2 Solution models in the information technology outsourcing life cycle ... 3-45 3.2.1 Initiation phase ... 3-47 3.2.2 Due diligence and contracting phase ... 3-56 3.2.3 Transition phase... 3-67 3.2.4 Execution / Operations phase ... 3-72 3.2.5 Termination phase... 3-77 3.3 Closure ... 3-79 Chapter 4: Business process outsourcing trends, drivers and inhibitors ... 4-81 Synopsis... 4-82 4.1 Business process outsourcing trends ... 4-83 4.1.1 Current focus areas for business process outsourcing... 4-84 4.1.2 Business process outsourcing growth drivers ... 4-88 4.1.3 Business process outsourcing growth inhibitors... 4-90 4.2 Closure ... 4-91 Chapter 5: Summary ... 5-94 5.1 Introduction... 5-95 5.2 Objective 1 – management issues facing information technology ... 5-96 5.3 Objective 2 - solution models for information technology outsourcing ... 5-97 5.4 Objective 3 - business process outsourcing trends ... 5-99 5.5 Closure ... 5-100 BIBLIOGRAPHY ... 6-101
List of figures and tables
Figure 1.1 Status of cost reduction efforts 1-3
Figure 1.2 Factors influencing willingness to outsource 1-4
Figure 1.3 Reasons cancelled contracts 1-5
Figure 1.4 Factors inhibiting outsourcing 1-8
Figure 2.1 Information technology outsourcing phases 2-20
Figure 2.2 End-user expectation change 2-22
Figure 2.3 What outsourcers can do to increase receptivity to outsourcing 2-25
Figure 2.4 Contracts being renegotiated 2-38
Figure 2.5 Renegotiated contract resolutions 2-39
Figure 2.6 The mid-term crisis 2-40
Figure 3.1 Main issues that make for successful outsourcing 3-44
Figure 3.2 Coetzee solutions framework 3-46
Figure 3.3 Initiation phase 3-48
Figure 3.4 Gartner analysis model 3-49
Figure 3.5 Gartner business decision making model 3-52 Figure 3.6 Gartner’s suggestion around initiation 3-54 Figure 3.7 Due diligence and contracting phase 3-57 Figure 3.8 Gartner future outsource contract model 3-65
Figure 3.9 Transition phase 3-67
Figure 3.10 Operations phase 3-72
Figure 3.11 Gartner measurement model 3-73
Figure 3.12 Gartner business measurement model 3-76
Figure 3.13 Termination phase 3-78
Figure 4.1 Business process outsourcing with information technology 4-92 Table 4.2 Business process outsourcing contracts in 2003 4-92
List of acronyms
BAFO Best and final offer
BPO Business process outsourcing CEO Chief executive officer
CFO Chief financial officer COO Chief operating officer
IS Information systems
IT Information technology
ITO IT outsourcing
RFI Request for information RFP Request for proposal SLA Service level agreement
Synopsis
Title Information technology: management issues in outsourcing contracts
Author D. Coetzee
Study leader Prof. N. Lessing Publication date 20 October 2004 Document type Mini-dissertation
Academic institution Rand Afrikaans University
Scope 25% fulfilment of M.Com (Business Management) Related subject Information technology
Country of publication Republic of South Africa
Language English
Abstract
This study concerns the investigation of management issues within information technology outsourcing contracts. The information technology outsourcing life cycle is used as the flow structure for the investigation. The associated user expectations that occur in each of the phases of the information technology outsourcing life cycle are identified. Following the identification of the management and user expectation issues in each phase of the outsource life cycle, the “Coetzee solution framework” is introduced to ensure that the identified management problems are addressed in a structured approach. The solution framework is described in the context of each phase of the information technology outsourcing life cycle.
As business process outsourcing is emerging as a long term business solution, the trends in business process outsourcing with the related factors that are contributing to the growth of business process outsourcing are investigated. The inhibitors that
slow down the progress of acceptance for business process outsourcing are also investigated. The interdependence of information technology outsourcing and business process outsourcing is also shortly reviewed.
Key words: information technology, information technology outsourcing, business process outsourcing, management issues
Sinopsis
Titel Inlingtingstegnologie: bestuursaangeleenthede in uitgeekontrakte
Skrywer D. Coetzee
Studieleier Prof. N. Lessing Publikasie datum 20 Oktober 2004 Dokument tipe Skripsie
Akademiese instansie Randse Afrikaanse Universiteit
Onderwerp 25% ter vervulling van die M Com (ondernemingsbestuur) Verwante onderwerp Inligtingstegnologie
Land van uitreiking Republiek van Suid Afrika
Taal Engels
Samevatting
Hierdie skripsie behels die ondersoek van bestuursaangeleenthede in inligtings-tegnologie uitgeekontrakte. Die inligtinginligtings-tegnologie uitgeektontrak lewensiklus word gebruik as die vloeistruktuur waarin die bestuursaangeleenthede ondersoek word. Die gebruikerverwagtinge wat gekoppel word aan elke fase in die uitgeekontrak lewensiklus word geidentifiseer en gemeld. Na aanleiding van die bestuurs-aangeleenthede word die “Coetzee oplossingsraamwerk” beskryf om die bestuursaangeleenthede aan te spreek en teen te werk deur ‘n gedefineerde proses te volg. Die oplossingsraamwerk word volgens die fases van die inligtingstegnologie uitgeekontrak lewensiklus beskryf.
As gevolg van die feit dat besigheidproses uitgeekontrakte beskou word as ’n aanvaarde besigheidspraktyk word die tendense en verwante groeifaktore wat die
besigheidsproses uitgeekontrak mark aanhelp ondersoek. Die stuitingsfaktore wat veroorsaak dat besigheidsproses uitgeekontrakte stadig geimplimenteer word, word ook ondersoek. Ten slotte word die noue verband tussen inligtingstegnologie uitgeekontrakte en besigheidsproses uitgeekontrakte ook kortliks ondersoek en bespreek.
Sleutelwoorde: inligtingstegnologie, inligtingstegnologie uitgeekontrakte, besigheidsproses uitgeekontrakte, bestuursaangeleenthede
Chapter 1:
Orientation
Table of contents
Chapter 1: Orientation ... 1-1 1.1 Background to management issues in information technology outsourcing ... 1-2 1.1.1 Information technology outsourcing... 1-2 1.1.2 Business process outsourcing... 1-6 1.2 Research problem statement... 1-7 1.3 Research objectives ... 1-11 1.4 Research methodology... 1-15 1.5 Closure ... 1-15
Chapter 1:
Orientation
1.1 Background to management issues in information technology
outsourcing contracts
1.1.1 Information technology outsourcing
The information technology outsourcing (ITO) market is about 30 years old, dating back to early time-sharing arrangements for mainframe computer processing power. The market leaped into the spotlight in the early 1990s when major corporations began signing contracts worth hundreds of millions, and then billions of dollars (Caldwell 2003:2).
According to statistics collected by Gartner (Couture & Silliman 2002:5) regarding 1055 surveyed outsourcing contracts, it is fair to say that outsourcing contracts are a major strategic decision that has to be made by a organisation and can have a significant and possibly disastrous effect on the profitability of the organisation if anything goes wrong.
The following are some facts around information technology (IT) outsourcing contracts (Caldwell 2003:8):
• The average length of IT outsourcing contracts is six years
• The average annual IT outsourcing contract value is $47 million which translates to a total contract life value of $282 million or R1.9 billion
• The top five industries, in terms of average annual contract value, are aerospace and defence ($88.2 million), automotive ($87.4 million), high tech ($80.5 million), telecom ($79.9 million) and financial services ($49.6 million).
The whole concept of IT outsourcing has evolved from being a cost saving mechanism for organisations that wished to focus on their core strengths to a competitive advantage factor in their ability to attack their selected market. As can be seen from figure 1.1, cost saving has not really been effective and as such organisations have realised that IT outsourcing is not only about cost reduction any more, but about value add and careful management thereof (Couture & Silliman 2002:12).
Figure 1.1 – Status of cost reduction efforts
Falling short of goal, 46%
On target, 54%
Source: Couture & Silliman 2002:12
While organisations still outsource to try and save cost, many now look at the value add that can be obtained by engaging with an expert in the field of the chosen outsource, and the streamlining that these organisations can provide. It is now more about remaining competitive than ever before, as illustrated in figure 1.2 (Couture & Silliman 2002:16).
However, it is not all good (Caldwell & Young 2003:5), as many outsource contracts fail due to:
Relationship and management problems in terms of:
Focusing on pure cost saving, instead of looking for value add or cost optimisation (meaning getting more for the same or less budget), thus resulting in cost overruns
Inflexibility in contracting and costing mechanisms
Transparency and communications surrounding contract performance
Failure to deliver on the agreed service levels.
All of the above relationship issues often relate back to mismanagement, lack of process and limited governance that the IT outsourcing suppliers or vendors are guilty of when managing the contracts
Figure 1.2 – Factors influencing the willingness to outsource
9 14 39 38 15 17 40 29 20 7 25 49 32 7 27 34 38 11 34 18 41 5 31 23 42 6 35 17 45 5 30 20 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%100% Percentage of respondents
September 11 terrorist attacks 2001-2002 recession Merger, acquisition or divestiture An executive who previously outsourced joined the
company
Need to reduce IT cost My company re-engineered a business process or planned
a new technology initiative
Increasing competitiveness in industry A competitor or business partner outsourced
Positive Negative Neutral NA
Note: Number of respondents = 323
Source: Couture & Silliman 2002:16
To emphasise the previous point figure 1.3 shows some of the most common reasons for cancelling outsourcing contracts, in the context of complete IT outs, namely failure to deliver on agreed service level agreements (SLA), relationship issues, cost
overruns, failure to deliver innovation and various other smaller issues in terms of significance (Couture & Silliman 2002:22).
It is critical that the management issues surrounding IT outsourcing be tracked and that trends are identified as soon as possible in the IT outsourcing contract life cycle, in order to (Caldwell 2003:10):
• Help manage risk in terms of customer and supplier financial exposure, security, resource requirements, pricing, management and contracts
• Obtain data for negotiation on service levels, pricing, and requests for additional or new services
• Know the behaviour of other organisations in same industry or revenue range
Figure 1.3 – Reasons for cancelling contracts
4 10 16 24 46 9 18 18 55 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Complete IT outsource contract Desktop outsource contract Percentage of respondents
Failure to meet SLAs Relationship problems Cost overruns
Failure to deliver innovation
Others
Note: number of respondents = 70
1.1.2 Business process outsourcing
Many chief executive officers (CEOs) and chief financial officers (CFOs) who have been outsourcing certain functions in a piecemeal way have begun taking a holistic view of the benefits of outsourcing. Furthermore, they have begun taking steps to adapt their organisations to the virtual organisation (where they do not necessarily own all processes or assets in-house), creating a stronger focus on core business and a network of specialised relationships for non-core, yet strategic functions. Others continue to turn to outsourcing for transactional reasons, hoping to improve operational performance while reducing costs at the same time (Scholl 2003a:1).
The increase in awareness and adoption of business process outsourcing (BPO) should not overshadow the fact that BPO services are still immature and that in many instances, early adopters of BPO are still seeking to understand their cost and business benefits.
Summary
The background section provides information on the IT outsourcing market and some of the problems experienced during the life cycle of an outsource project. While cost saving was a focus in the past, organisations are looking for more value-add which means that the outsource suppliers have to look at the structure and governance of their contracts in order to optimise value for their customers.
In addition to IT outsourcing, organisations are starting to identify those commodity business processes which add value to the business, but is not the core business focus. These processes are then considered for business process outsourcing in order to gain competitive advantage.
1.2 Research problem statement
In section 1.1.1 it became clear that many IT outsourcing contracts experience significant problems on service level attainment, the structure of the contract, and the management of the service relationship and communication to the users. As such:-
Research problem 1
The highest risk of outsourcing IT- or business processes to an outsourcing supplier is the provider’s ability to govern and manage the complex arrangement through its entire life cycle, and to enable sufficient flexibility to customers, so as not to impede the customer’s ability to compete in their market.
In this section the first part of the problem statement will be discussed relating to IT outsource management and the problems typically associated with IT outsourcing contracts.
A large part of earning customer satisfaction is meeting customer promises and expectations set before the contract was entered into. While research in general shows that IT outsource contracts are satisfactory, serious room for improvement can be found. Lack of cost saving is but one of the few reasons why IT outsourcing customer satisfaction is low. Figure 1.4 shows some additional reasons that inhibit ITO or causes low user satisfaction with regard to ITO in terms of the average respondent responses, those respondents that are currently outsourcing, those respondents that are considering outsourcing as an option in the next twelve months and those that are considering it in more than a year’s time. The additional reasons are:
• Executive management is opposed to outsourcing in general
• If job security for staff is not addressed, then satisfaction with ITO can be low
• Previous experiences by users of ITO could be negative which affects perception regarding ITO
• Vagueness around the detail of ITO can cause fear and uncertainty
• That the costs of ITO are often higher than expected or higher than existing IT spend
• That in-house skills are lost and that the control associated with the in-house skills is lost
Figure 1.4 – Factors inhibiting outsourcing
0 10 20 30 40 50 60 70 80
Percentage of respondents
Higher than expected costs Loss of inhouse expertise Concern that cost reduction won't be
realised
High cost of outsourcing Fear, uncertainty and doubt about
outsourcing in general Past negative experience Internal IT opposed to outsourcing Job security issues Executive management opposed to
outsourcing Others In hi bi ti ng r e a s ons f or non-a c c pe ta nc e of I TO
ITO inhibitors in terms of those respondents that might be outsourcing in more than 12 months time
ITO inhibitors in terms of those respondents that might outsource in the next 12 months
Inhibitors in terms of respondents that already outsource their desktop environment
All respondents in regard to ITO inhibitors
Source: Couture & Silliman 2002:15
Years ago, long-term IT outsourcing agreements of five and ten years were regularly announced. Today, decade-long contracts have disappeared and largely been replaced by one- to three-year contracts to more accurately reflect changing business climates and rapid technology evolution.
However, even in these shorter-term contracts, the contracts frequently do not survive intact to their end dates. More often, they are revisited, revamped, revised or restated to reflect ever-evolving client requirements and/or the failure of clients and service providers to adequately estimate or manage the scope of work required (Caldwell 2003:10).
As pointed out in the first research problem statement the issue of contract structure, flexibility and service need to be investigated. Some questions that pertain to these points and that need to be investigated are:
• Why is the scope of work very often inadequate?
• Why are service levels not adhered to?
• Why do many contracts show losses instead of forecasted profits?
• Why do pricing structures not suit the customers?
• Why do customers require more transparency in costs and service metrics?
• Why are cost savings not achieved?
• Why are IT outsource contracts cancelled?
All these questions are investigated, and the models that address them are discussed in Chapter 2 and Chapter 3.
As discussed in section 1.1.2, organisations are reviewing their opinions as to retaining and owning all business processes within their own domain of control. They are taking a holistic approach to what constitutes their core business.
Research problem 2
Contrary to previous beliefs regarding business processes that give organisations a competitive edge, business process outsource models are now fast becoming the trend for large businesses in order to limit process risk and have experts perform specific processes.
As was discussed in the problem statement there is much confusion as to whether business processes are a core competitive edge to an organisation. BPO needs to be evaluated and the true benefit needs to be identified prior to organisations entering into BPO arrangements.
Though business process services have been delivered since the 1960s, BPO has only emerged as a market in the past decade. Even today, the BPO market still shows dynamic characteristics of an "emerging" market. During the transition phase toward higher maturity in BPO, there is still significant confusion about what exactly BPO is, how much process responsibility organisations should delegate to service providers and how the services are delivered.
Points of confusion include the following and need to be investigated (Brown 2003:4; NelsonHall 2003:2):
• Confusion on the buyer side — the business decision-makers (CFOs, COOs, CEOs, purchasing managers) who are buying BPO services frequently fail to learn from years of experience in IT outsourcing and are making similar mistakes in the basics of outsourcing. They are carving out the wrong processes for outsourcing, selecting providers hastily, ignoring SLAs altogether or setting inflexible service levels.
• Confusion on the provider side — a number of service providers have jumped on the BPO bandwagon, attracted by high-growth rates and high profile contracts, but each provider brings a different set of skills and capabilities to the table. Many organisations want to be in the BPO market without having any business process capabilities at all. With such a fragmented competitive landscape, providers are trying hard to establish a brand presence and a competitive differentiator. Some of the legacy players in BPO are now branding their services differently to stay ahead of the pack.
The BPO environment is reviewed in Chapter 4 on a high level in order to clarify some of the mentioned issues.
1.3 Research
objectives
Looking at the research problem one has to be able to identify some of the management issues that arise in ITO contracts. The ITO life cycle is well established and as such each phase can be investigated in terms of common issues that arise during each cycle. These issues frequently appear in ITOs, but is seldom taken into account when a new outsource is contemplated and implemented. There are also various models and solutions that have been developed over the last decade to assist with solving many of these issues. While these models exist they are either not known about or often ignored when setting up an ITO contract.
The objectives of this study regarding ITO management issues are:
Objective 1: To identify the most common management issues that arise in each phase of an outsource contract
The life cycle of IT outsourcing contracts have matured over many years and are now widely accepted as the method for entering into, operating and exiting from IT outsourcing contracts. However, there are many issues that are faced in managing each of the ITO phases and these will be identified in Chapter 2. In order to achieve the objective the following topics will be investigated:
• The life cycle of ITO contracts – which is now the generally accepted phased approach for entering into and management of the ITO operations
• Each life cycle phase will be investigated and discussed in the context of the typical management issues that arise during the phase:
o Initiation phase – looking at the preparation, and often lack thereof, in order to get ready for the outsource decision and issuing the relevant proposal request to select a vendor
o Due diligence and contracting phase – where the selected vendor engages with the organisation to verify the data provided during the proposal request, and the expectations are created by the vendor engaging with the organisation, followed by setting up of the contract between the two parties which is often problematic in terms of vagueness
o Transition phase – where the operations, staff and assets are transferred across to the vendor and the end user expectations are at its all-time high at which point micro management by both parties become an issue
o Execution and operations phase – where the operations are run on an day-to-day basis and relationship management and proper governance become critical, but is often neglected
o Termination phase – where the contract has come to a natural or unnatural conclusion and the operations have to be transferred back to the organisation or a new vendor, but is often hampered due to a lack of a pre-defined process or disputes that occur on a relationship and financial level between the organisation and vendor
Objective 2: To investigate the various solutions that are available to manage the issues in each phase
Many of the outsourcing suppliers have defined frameworks within which to manage some of the issues that are highlighted in Chapter 2. A consolidated framework will be used to look at how many of the problems can be managed in each phase of the outsourcing contract life cycle.
This objective is discussed in Chapter 3 in terms of:
• Introducing the “Coetzee solutions framework” (also referred to as the solutions framework or framework) based on own experience and research performed by Gartner and other sources, to address the issues highlighted in Chapter 2.
• Each phase within the life cycle is discussed in the context of this framework and substantiated through examples and applicable research:
o Initiation phase – where the process of internal readiness is investigated leading to a comprehensive proposal request
o Due diligence and contracting phase – where using a detailed due diligence process, the vendor is lead to understand the exact scope of the ITO and then focusing on setting up a flexible and comprehensive contract to govern the ITO
o Transition phase - where a detailed joint management approach of the transition is discussed and the importance of governance and communication in order to maintain end user expectation is highlighted
o Execution phase – where extreme emphasis is placed on governance and relationship management while delivering according to SLA and the need for continuous improvements during the contract life cycle
o Termination phase – where the need for a termination plan is emphasised and the organisation has to increase communication internally and ensure understanding of the transitioning process back from the vendor to the internal organisation or to a new vendor
Business process outsourcing is being introduced into organisations that have identified specific repetitive commodity processes which were previously viewed as strategic importance for the organisation to hold in-house, but in actual fact, while being important to the business, is not a critical competitive edge apart from having the process run as effectively as possible.
As such the objective of this study regarding BPO management issues are:
Objective 3: To examine the current trends in business process outsourcing (BPO) and why organisations are considering BPO as an option to increase competitiveness
Traditionally, business processes have been one of the elements that organisations believed gave them the competitive edge. Now organisations are considering giving many of these processes to third parties to run, in its entirety, on their behalf. These trends and the reasons for entering into such agreements are discussed in Chapter 4 by looking at the following topics:
• BPO trends – BPO is discussed in general in terms of history and the current increase in awareness and interest in BPO as an efficiency mechanism internal to an organisation
• Current focus areas for BPO – in the context of the areas in which BPO is currently strong and where future plans and industry requirements are focused
• Growth drivers – those elements that are allowing BPO to be adopted by organisations
• Growth inhibitors – some of the concerns around the adoption of BPO
1.4 Research
methodology
The research is performed from a strategic business management point of view. This mini-dissertation comprises a literature study of the issues and management problems within IT outsourcing contracts and investigates a framework to address these issues.
The methodology will be one of stating the issues that occur in each life cycle phase of ITO, backed by applicable research and then proposing a framework solution, based on applicable research, to these management issues. The BPO trends, growth factors and inhibitors will be identified based on surveys performed in the field of BPO.
The sources of information consist of:
• Research reports from internationally acclaimed survey organisations
• The internet relating to the topic of outsource management and business process outsourcing
Further information is drawn from many years of practical experience in the field of outsourcing.
This study is not meant to be an exhaustive investigation of all management issues and methodologies that are available, but to identify the most critical management issues and a framework solution to address these issues. Business process outsourcing is discussed in the light of the latest trend and form that are surfacing in the market, and why organisations are considering BPO as an option.
1.5 Closure
While discussions and studies have been ongoing regarding IT outsourcing, ITO is viewed from a customer point of view and seldom from a supplier point of view. The complexity of managing IT outsourcing deals is often the reason for dissatisfaction.
The main issues in each of the phases in the outsourcing life cycle are identified and a management framework is discussed to resolve some of the identified problems.
This study aims to investigate the management issues of IT outsourcing contracts and investigate the trends that are emerging regarding BPO.
Chapter 2:
The information technology outsourcing life
cycle and its associated management
problems
Table of contents
Chapter 2: The information technology outsourcing life cycle and its associated.... 2-17 Synopsis... 2-18 2.1 Background to the management issues in outsource contracts ... 2-19 2.2 Problems that arise in the information technology outsourcing phases ... 2-21 2.2.1 Initiation phase ... 2-22 2.2.2 Due diligence and contracting phase ... 2-28 2.2.3 Transition phase... 2-32 2.2.4 Execution and operations phase ... 2-36 2.2.5 Termination phase... 2-40 2.3 Closure ... 2-41
Chapter 2:
The information technology outsourcing life
cycle and its associated management
problems
Synopsis
This chapter is devoted to investigating the first research objective as defined in Chapter 1. The life cycle of IT outsourcing contracts have matured over many years and are now widely accepted as the method for entering into, operating and exiting from outsourcing contracts. However, there are many issues that are faced in managing each of these stages and these will be identified and covered in this chapter.
The life cycle of the ITO contract is first explored in order to give context to the structure in which the ITO management issues will be described. There-after, using the ITO life cycle phases, the management issues are identified and highlighted in the context of the ITO life cycle, specifically in terms of the initiation phase where the contract is moulded and formed and sufficient investigation is required to build a proper foundation. This is followed by the due diligence and contracting phase where all the detailed information is cross-checked and a flexible contract is set up for the ITO. The next phase is the transition phase where the vendor assumes responsibility for operations and the relevant resources are transferred from the organisation to the vendor. Once transition is complete then the ITO enters the execution and operations phase and the vendor has to ensure service level adherence and relationship management. At the end of the ITO, the termination phase is entered and the operations are transitioned back to the organisation.
2.1 Background to the management issues in outsource contracts
As discussed in Chapter 1, ITO is being viewed as more than merely a cost reduction mechanism for organisations. Organisations now view ITO as a vehicle to increase competitiveness. The Outsourcing Institute research report (Casale 2001:3) states that “although the traditional drivers of IT outsourcing - to reduce operation costs, improve information systems (IS) flexibility, focus on core competencies, and increase operational efficiency - still stand, there is mounting evidence that organisations have turned to outsourcing for more strategic reasons, including keeping up with cutting-edge technology, building partnerships, creating value for the organisation and its customers, and broadening infrastructure and operations”. While this is the case, ITO however is associated with service failure, cost overruns, and relationship issues that sometimes have disastrous effects on the profitability of organisations.
There are many failures and successes when it comes to ITO, and the failures can often be tracked to the way in which an ITO was approached and the immediate management of problems that arise during the ITO lifecycle. The Outsourcing Institute indicates that in their research (Casale 2001:6), the “key concerns with buyers and vendors - that governance issues are usually top of mind”. The institute also states that “a lot of people used to think that once you outsourced, the tough part was over, when in fact, just the opposite is true. Now, people are giving a lot of thought to managing the relationship over time”.
There are essentially five main phases in an IT outsource contract life cycle as is described in Figure 2.1. Each of these phases will be shortly described in order to give context to the ITO life cycle phases. These phases will be used throughout this mini-dissertation to describe the management issues, user perception problems and the relevant solutions that are available to address the management and user perception issues.
Figure 2.1 – Information technology outsourcing phases Initiation Phase Due Diligence & Contracting Phase Transition Phase Execution Phase Termination Phase
Source: Siemens Business Services 2003:1, Simmons 2004:1
• Initiation phase – this is where the organisation has decided that they need to streamline the IT environment and as such start looking at the components they wish to outsource, co-source or run internally. The organisation will also at this stage typically prepare a request for information (RFI) to see what the vendors in the market can offer. Organisations often attempt to produce these specifications themselves in the hope to keep costs to the minimum. Following the RFI they will typically create a short-list of vendors they feel are capable of assisting in fulfilling their requirements. The organisation then issues a request for proposal (RFP) that requests detailed pricing and solution descriptions. These RFPs are also often internally generated in order to save cost. An adjudication panel within the organisation normally evaluates the RFP and chooses best price and service fit. One or more vendors are requested to enter into further negotiations with the organisation.
• Due diligence and contracting phase – Once the organisation has identified the vendor or vendors that they wish to continue working with, they open up their environment to the vendor to investigate the environment thoroughly in order to come up with the vendor best and final offer (BAFO). There after the organisation evaluates the BAFOs and decides on the final vendor. Contract negotiation is then entered into to finalise the outsourcing agreement.
• Transition phase – most vendors then enter into a transition phase whereby the services, possibly the staff, assets, and management is handed over to the vendor.
• Execution / operations phase – Once the transition is complete the vendor assumes the responsibility for the operations of the contracted services for the organisation. This carries on for the full term of the contract period.
• Termination phase – Once the contract period reaches its end, the contract is either renewed or terminated. In the event of termination, the services are either transitioned back to the organisation or to another vendor depending on the organisation’s experience regarding the outsource.
Each of the mentioned phases has a set of problems that arise and seem common to all outsource contracts. While many of the problems are brushed away initially, they often have significant influence in the longer term relationship and ability to deliver service between the vendor and the organisation.
2.2 Problems that arise in the information technology outsourcing
phases
The problems associated with the ITO lifecycle can be linked to the Gartner expectation curve on ITO (GartnerGroup 1999:4). The expectation curve is based on the expectations that are set by the vendor at the beginning of the ITO, but also by the end users within the customer who believe dramatic improvements in service levels can be expected in very short times. Figure 2.2 illustrates the Gartner user expectation curve with the first four phases of an ITO mapped to the various stages in user expectation.
Each phase is discussed in the context of the problems that typically arise as time progresses. This is not meant to be an exhaustive discussion on the issues, but merely a short overview of some of the main problems that do occur. A solution
framework is discussed in Chapter 3 and will not be dealt with under the problem discussion, but will be referred to.
Figure 2.2 – End-user expectation change
End user expectations Technology trigger Peak of inflated expectations Trough of disillusionment Slope of enlightenment
0 6 months 1 year 3 years
Announcement of intention to outsource Due diligence phase Deal is signed Transition to
vendor begins Initial problems encountered in transition
Learning curve during transition continues
Deal dynamics of SLA vs. price established
Informal renegotiations begin
1. Initiation phase 2. Due diligence and contracting phase 3. Transition phase
4. Execution and operations phase
Source: GartnerGroup 1999:4 with own adaptation (phases 1 – 4 shown)
2.2.1 Initiation phase
The initiation phase is probably one of the most important phases, but sadly and very often the most neglected phase as well. This is often the core source of IT outsource problems that arise later during the due diligence, contracting, transition and execution phases. At this stage the foundation for the ITO is created and the user expectations start forming. If the specifications and expectations are not clearly understood internally, then there is no way it can be understood or actualised once engagement with the vendor starts. Most organisations are guilty of not actually understanding
what they want to do and therefore ends up relying on an external party (very often the vendor) to try and define this for them. Gartner researchers (Caldwell & Young 2003:28) have identified that “upfront conversations with straightforward disclosure of goals and objectives for both parties are mandatory”.
This leads to the question of the strategic intent for the ITO. Organisations have to be clear as to why they are considering entering into an ITO. Gartner (GartnerGroup 1999a:3) indicates that organisations must ensure they have established a clear sourcing strategy before embarking on an outsourcing project and that organisations that fail to do this, risk project delays and even project failures. The typical situation is one of a vendor initiating a programme of convincing the executives that ITO is a business imperative. Another typical reason is that a competitor has entered into an ITO arrangement and the organisation does not want to be left behind. The organisation might feel that they are paying too much for IT and that they wish to reduce cost. The organisation might not be satisfied with the service they are receiving from the internal IT department and they might believe that they wish to focus on core business and not be involved in managing something they are not expert at.
Without the strategic intent being clear, it is nearly impossible to get full buy-in from all business owners within an organisation which immediately leads to internal politics that substantially affect the future service relationship with a potential vendor. Buy-in is critical, as ITO affects all parts of an organisation and as such must be an overall organisation decision which should not be taken lightly. Research (Harris 2002:31) has shown that it is critical to “build consensus, and gain strong and explicit administration backing - if the project goes off-schedule or over budget, broad support will be critical”.
Once the strategic intent is established it is important that the objectives to be achieved are clearly identified. These will form the basis by which the ITO is measured and evaluated and assist in setting the expectation across the organisation. The management team within the organisation should define this to ensure full
understanding and context across all areas. Harris (2002:4) indicates that it is vital to “identify goals and objectives very clearly, and communicate them explicitly and to clearly define your expectations, and ensure that the organisation and the vendor clearly understand those expectations”. This is very often driven by an individual such as the CEO, CFO or chief information officer (CIO), and is not fully explained to the rest of the organisation. This will once again result in a lack of buy-in and also internal politics.
As these ITO contracts often span many years, full buy-in is required upfront as it is very likely that some of the management team might leave the organisation (Casale 2001:3), and it will be the rest of the team’s problem to ensure that the context within which the ITO was decided on, be transferred to new members. Many an outsource is questioned and “attacked” by newcomers, as the business reasons for entering into the ITO arrangement is not understood.
As one of these objectives, it is important for the team to identify exactly what additional value they are expecting to be added by outsourcing. As is shown in Figure 2.3 research (Caldwell & Young 2003:28) has shown that all organisations want more business-based results and that they would like more innovation. However, while this expectation is there, little effort is ever made to quantify what the expectation actually is.
Once the decision is made to outsource, then the organisation has to do a significant amount of internal homework in order to ensure that the scope of the outsource is clearly delineated in terms of precisely what is included in the outsource with regard to services, products, people and assets. Research (Caldwell 2003:10) indicates that outsourcers should carefully look at analysis of their environment in order to assist in balancing their own risk exposure and assisting in understanding their environment in terms of assets, costs and service levels. Gartner (GartnerGroup 1999a:10) also states that organisations should take the opportunity during the strategy and initiation phase to thoroughly evaluate the financial, organisational, delivery and technical status of their current environment. This will be needed throughout the process to
contract signature. Proposals based on vendor assumptions about an organisation are not a good basis for vendor evaluation.
Figure 2.3 – What outsourcers can do to increase receptivity to outsourcing
0% 20% 40% 60% 80% 100%
Percentage of respondents
My company would be more receptive to outsourcing if we could be contractually guaranteed business-based performance
results
My company would be more receptive to outsourcing if we could be contractually guaranteed a certain level of cost reduction
My company would be more receptive to outsourcing if innovation can be guaranteed
My company would be more receptive to outsourcing if outsourcers were more
flexible
Agree Neutral Disagree
Source: Caldwell & Young 2003:28
It must once again be stressed that as much detail as possible be put together internally at this stage so that the exact nature of the areas to be outsourced is understood from a financial, service and efficiency perspective. This will clarify and sort out many issues that typically arise around the understanding by vendors once the request for information (RFI) and request for proposal (RFP) is issued. If this is not done properly, it is very likely that assumptions are made on the part of the vendor which will result in confusion once contracting starts as to what is in and what is out of scope in terms of the contract. It must be remembered that the RFI and RFP detail is the only information the vendor will have in understanding the environment they potentially will take over. Any vagueness results in dysfunction later during the
contracting and execution phases and is often the reason why outsourcing is viewed as not working.
The organisation need to be clear on the service levels that they will be expecting. They thus need to understand their existing service environment in order to, later in the contract, measure service objectively. A major mistake when entering into ITOs is to do so without service levels being fully defined upfront. Research (Caldwell 2003:10) also points this out as the absolute need to obtain data for negotiation on service levels, pricing and requests for additional or new services. Often the organisation does not have any service level arrangements in place with their own IT and they leave it to the vendor to define at a later stage. This will create disagreement between the vendor and the organisation and will affect user perception on delivery.
It is important that the organisation clearly understands the cost associated with existing service levels and scope of services as this will set the cost expectations for the RFP responses. Vagueness can result in the wrong decision being made regarding the ITO. Caldwell & Young (2003:28) show this clearly in their research that “client expectations for cost reduction have escalated – this has created what the vendor repeatedly referred to as the ‘major tension’ in contract negotiations”. In addition to this the organisation management should carefully think about the pricing mechanism they want to use to drive the potential ITO: e.g. price per user, fixed or variable costing, business unit billing or central billing, sliding scales depending on user volumes etc. This is often neglected and creates friction between the organisation and the vendor during future phases.
The contract structure and flexibility required should also be investigated at this stage and guidelines should be included in the RFP. Figure 2.3 showed that most organisations would prefer that outsourcers were more flexible, but once again the quantification of what is meant by flexibility is not properly defined or investigated leaving room for uncertainty, doubt and wrong expectations.
While the organisation will take a business perspective with regard to an ITO, the people involved are often forgotten and left till last to deal with. This creates uncertainty with the internal IT staff that often results in hesitance to support the ITO once the people become aware that ITO is being considered. It is critical that the ITO intention is shared within the organisation as soon as possible. Caldwell & Young (2003:29) state that “being candid and honest about job security is mandatory, communications with employees during outsourcing is critical”. ITOs sometimes fail purely because proper communication does not take place during all phases of the ITO and uncertainty and a lack of understanding causes personnel to try and “hijack” the process.
Lastly, many organisations do not always realise the impact that an ITO might have on the cost structures of an organisation. They very often do not consider or perform a long term impact study as they have not properly investigated their own environment. Caldwell (2003:10) says that organisations would do well to track the internal and external contract activities to help manage risk in terms of financial exposure, security, pricing, management and to obtain detailed data for rigorous service levels in order to protect themselves.
The initiation phase is critical to the proper introduction of ITO into an organisation. If any of the issues discussed are not considered and managed, the assumption on which the ITO is based will not be clear and user expectation will be distorted in terms of what the reality is and what the expected services are to be within the contract.
The initiation phase, refer to figure 2.2 (initiation phase), sets a high user expectation and unless proper context is given, the expectation can border on unrealistic at this early stage, which will affect the entire life cycle of the contract.
Gartner (GartnerGroup 1999a:7) makes a significant statement that outsourcing is too costly and too crucial to business success to lack a proper financial analysis. When organisations determine the return on investment for an outsourcing program, they should augment the traditional calculations they employ, such as internal rate of return
or present value analysis, by considering other important cost or saving issues that they might otherwise overlook. Failure to do this can lead to the wrong expectation being set within the organisation and to outsourcing contracts that end in disappointment.
2.2.2 Due diligence and contracting phase
The initiation phase is the foundation on which the ITO is built, but most vendors will insist on doing a full due diligence in order to verify the details that were supplied during the RFP. Harris (2002:18,32) has found that one of the weaknesses of outsourcing is that the vendor does not always carefully confirm the customer’s expectation and that the vendor does not make certain that they understand exactly what all the customer stakeholders are expecting. This is extremely important and the organisation and vendor should plan a careful due diligence process and agree this prior to due diligence starting. Many organisations require the vendor to drive the due diligence, but this does cause problems later on, as the vendor very often focuses on those elements which they deem interesting or have core competence in and often forget to take a holistic view of the environment especially in terms of process and business objectives. Harris (2002:31) says that organisations do not spend sufficient time in structuring the review, or due diligence, and also on the management of the vendor evaluation, RFP development and contract review.
The organisation should decide as to whether they wish to take a multi-vendor versus a single-vendor approach on the due diligence. Having more than one vendor performing a due diligence at a time can place significant strain on the operating environment and can potentially disrupt service, which in turn influences user perception regarding the ITO.
Throughout all phases communication becomes more of an issue in order to manage expectations, perceptions and to combat staff uncertainty. Communication is a major contributor to buy-in, unless this is done effectively, buy-in is not obtained at all levels. This can result in withholding of information by staff that feel that their positions are
potentially at stake. Gartner (GartnerGroup 1999:4) has found through their research that organisations must evaluate and re-establish the levels of service required by their business prior to outsourcing, thereby developing reasonable and attainable service expectations for the vendor. By involving the end users in the process and explaining the goals (i.e., to manage costs), the organisation will be able to institute new levels of service that deliver the desired business results. Best practice requires the organisation to: set user expectations for the service based on clear simple metrics and projections (consistency reduces the degree of mistrust users feel about technology); encourage direct customer involvement - flattening the service organisation by including the customer in the service chain increases trust by reinforcing a sense of equality and empowerment; and create a threshold that marks the boundary of the support infrastructure. The vendor often uses the due diligence phase as a mechanism to build relationships. This in turn increases user expectation and the expectation curve, as per figure 2.2, grows steadily in terms of expectation of services, scope and enhanced delivery.
It is essential at this stage that the exact service scope is known and user expectation is set around this. Limiting scope is one of the biggest problems that faces both the organisation and the vendor as the due diligence inevitably raises facets that were not considered before, often because the organisation did not spend enough time understanding their own environment in the initiation phase. Vague statements around scope result in major disputes once the operations start and can also affect the cost significantly in terms of the vendor claiming that elements are out of scope while the organisation’s interpretation is that the element is within scope. This disrupts operations until such time as the dispute is cleared which in turn start affecting user perception re the success of the ITO. Gartner research (GartnerGroup 1999:17) show that it is key that organisations perform a detailed benchmark analysis of IT costs and competencies before soliciting the services of an outsource vendor. Harris (2002:32) also points out that a key failing of a vendor is to very carefully confirm the customer’s expectation and make certain that all stakeholder expectations is understood and formalised.
Another major shortcoming in ITO is the amount of time spent on legal negotiations. The vendor would typically have a standard contract they suggest to the organisation, or the organisation gets an example contract from a consulting house which is then used as a basis for negotiation. Gartner (GartnerGroup 1999a:13) has found that contracts have become disjointed mixes of standard terms for outsourced operations, boiler-plate language about projects, and lists of vague promises for future services. This is an unacceptable situation. These deals are impossible for vendor or the organisation to manage. Vendors are losing money on them. Organisations are losing credibility with the business because of budget overruns, poor service and broken promises.
Working out the exact details of the costing mechanisms, service definitions, service level agreement (SLA), scope, business and technical objectives, asset lists, staff affected, security considerations, exclusions and many other elements are the essence of understanding of operations and responsibilities later during the contract. It cannot be emphasised enough that this must be worked through and agreed in detail, then communicated to the organisation so as to set accurate expectations.
Hand-in-hand with the detailed contract scope must be the definitions of the governance structures that will be used to govern the operations of the contract and the interaction between the organisation and the vendor. Looking at existing ITOs throughout the world, it is very often poor governance that leads to disputes and relationship breakdowns. Governance has to be solid from contract inception through the contract life cycle to termination. Without proper governance, verbal agreements and confusion reigns which cannot be healthy for a long term relationship. Research (GartnerGroup 1999:2) has shown that one of the most common reasons for the success or failure of outsourcing deals lies in an organisation’s ability to fully appreciate, plan for and manage its role in the arrangement. Organisations must establish the skills, processes, resources and tools to effectively manage their outsourcing arrangements for the duration of the agreement.
The Outsourcing Institute (Casale 2001:6) has found that vendors and customers alike should focus more of their effort around “paying attention to the contract and contract governance”. They further indicate that it means having the day-to-day relationship in a governance model that is described in writing, and that has to include an executive team relationship, where top managers meet, perhaps on a quarterly basis, and talk about business and technical issues. They indicate that this is a major source of breakdown in relationships between the vendor and their customers and often lead to chaotic effects on the business of the customer and the vendor.
Another major failing during the due diligence and contracting phase is that the existing organisation processes surrounding IT are not investigated in detail. Research (Harris 2002:31) on this issue indicate that organisations and vendors do not spend enough time understanding the applications, protocols, change management policies and procedures within the organisation or the vendor environment. The way the affected area within the organisation operates is thus not understood. The vendor will during transition phase define their own processes which causes a major breakdown in operations and communication between the organisation and the vendor.
It is further critical that the vendor physically verifies the information supplied by the organisation and that the agreed correlation is used as a baseline. As an example it is not acceptable that an organisation provides an asset register, which is merely an extract from their financial system, and that this is used as the basis of the actual physical assets, as very often these lists do not match and are not updated to the actual equipment that is deployed due to various reasons, such as changes of configurations, equipment being dumped and not repaired, and many other.
It is important during the contracting phase that the exact mechanism and cost equation for future termination of the contract is discussed, agreed and documented in detail. This is often left in the hands of the vendor which results in major financial and service implications for the organisation at the end, or during the termination of the
contract at any point. Gartner (GartnerGroup 1999a:16) also indicates that part of the contract strategy should include the termination mechanism which is often neglected.
At this stage the contract is typically concluded and the vendor enters into transition mode. As per the Gartner user expectation curve, refer to figure 2.2 (due diligence and contracting phase), expectations at this stage are reaching its highest level and users are expecting dramatic improvements in service delivery and scope of services. The details have probably not been effectively communicated to the entire organisation, and as such, the agreed services and scope within the contract is not understood by all.
The due diligence and contracting phase is critical in terms of establishing the exact scope and baseline according to which services will be delivered and should match closely with the initial objectives, baselines and understanding that the organisation would have set during the initiation phase. If there are radical differences, then caution should be taken by the organisation to re-look at their original investigations and ensure that ITO is still the best option for the organisation.
2.2.3 Transition phase
Theoretically the exact service scope should now be understood by all and the vendor should simply be taking over the various assets and people, and start delivering the agreed services. However, in reality many vendors underestimate the complexity of the environment they are “inheriting”. Gartner (GartnerGroup 1999:9) has found that organisations embarking on major outsourcing projects fail to appreciate the complexity of the long-term relationships they are forming. Responding to these challenges requires IS departments to radically restructure their management model. Vendors tend to take a simplistic and sequential approach to the transition without a clear plan or understanding as to how to optimally use the existing organisation processes and structures to cause minimal disruption in operations for the organisation. One of the most common reasons (GartnerGroup 1999:2) for the
success or failure of IT outsourcing deals lie in an organisation’s ability to fully appreciate, plan for and manage its role in the arrangement.
At this stage expectation management becomes essential as all issues start being attributed to the vendor’s inability to deliver and is blamed on the ITO contract. The users do not always have a clear idea of what the transition entails and expect immediate improvement in service. Communication breakdowns at this point are common due to operational elements taking precedence. Putting in place governance-, relationship- and operating structures alleviates and assists in expectation management and communication, but is very often ignored as the teams just want to get on and do the job. This has dire consequences on the relationship, the user perceptions and the future management of the contract. Gartner (GartnerGroup 1999a:3) says that how an outsourcing project is managed is as critical as what is outsourced. One of the most common reasons for the success or failure of outsourcing deals lies in an organisation’s ability to fully appreciate, plan for and manage its role in the arrangement. Organisations must establish the skills, processes, resources and tools to effectively manage their outsourcing arrangements for the duration of the agreement (GartnerGroup 1999:2). The vendor and organisation together should focus on ensuring that the user base understands the exact scope of services to be provided to ensure user expectations are set correctly and also to prevent unnecessary scope creep which is often caused by misunderstanding of the original scope.
Change management also needs to start at this stage in terms of cultural elements of the staff involved in the ITO and the user environment in terms of the way the vendor will be delivering and interacting with the user base. This is unfortunately often seen by the vendor and organisation as a “soft issue” and ignored or prioritised at the bottom of the list of priorities. The change management and communication should be taking precedence over all during transition, as it creates understanding and thus creates indulgence of possible error situations. Harris (2002:31) states that the organisation should understand the vendor change management capability in order to
identify any gaps there-in which might be required over and above the normal change process.
The staff take-over is normally an extremely sensitive issue as the staff would feel insecure in terms of their positions, their possible performance in the vendor environment and might even feel that the organisation has sold them out. Change management surrounding the staff-takeover process ensures success or disaster for the ITO at an early stage. It is often forgotten that the staff have a network of relationships within the organisation, irrelevant of the level, and will use this actively as either positive re-enforcement or as destructive perception creation in their attempt to find a “safe” niche for themselves. This can cause endless problems and political undercurrents within the end-user base. Research (Caldwell & Young 2003:29) shows that vendors consistently expressed that being candid and honest about job security is mandatory; communications with employees during outsourcing is critical.
It is further essential that both the vendor and the customer controls and manages every facet of the transition so as to have absolute control over the activities in order to ensure a smooth transition process. However this is seldom the case. Harris (2002:32) indicates that organisations should not trust vendors to always do the right thing. Set up a project management team that manages the plans and actions of your vendors. This will minimise cost overruns, unnecessary consulting time and missed deadlines. This is especially the case when taking over assets from the organisation. The asset register from the organisation’s financial system is often taken as the baseline and not checked or audited by the vendor. The chance that this asset register does not actually match with the physical environment is great as equipment configurations are often changed or components are removed without the information reaching the finance department. This is a critical mistake made by vendors due to them pushing to firstly get the deal done, and secondly to get through the transition as soon as possible.
Process definition is just as important and often completely underestimated. The mechanism used within the organisation and the new methods that the vendor will be
using to deliver is often glossed over as this is expected to merely work. This is not the case, and is the basis for confusion between the vendor and the organisation. The end users are worst hit by the uncertainty of how things will operate, where they should go for assistance and what the escalation points are. In general, confusion reigns without proper process definition, operating structures and governance being implemented from the start.
Gartner (GartnerGroup 1999:3) has found that an organisation’s decision to outsource is a “leap of faith” to pass control of in-house processes to a vendor. Too often, organisations divest themselves of these responsibilities in the hope that the vendor will correct internal business problems that have manifested themselves within the in-house operation. Although the vendors have economies of scale as an advantage, they have no “silver bullets” or “magic wands” for correcting flawed processes immediately. Throughout the six to 12 month transition period after the deal is signed, there is often considerable “thrashing” to position the customer/vendor relationship appropriately, which can exacerbate, rather than alleviate, the aforementioned business problems. Deals that are not established on a realistic basis and that are not good for both parties will not stand the test of time.
At this point in the Gartner user expectation curve, refer to figure 2.2 (transition phase), user expectation is normally replaced by user frustration and disillusionment sets in rapidly.
Faith in the ITO is replaced by internal politics and the organisation often starts looking for someone to blame because of the lack of success. Buy-in suddenly evaporates and the organisation starts questioning its outsourcing decision. The reason for this is all the issues identified in the due diligence and transition phase, and not given attention, culminates in complete user frustration. Remedial action at this point becomes extremely difficult as faith and trust is normally gone.
2.2.4 Execution and operations phase
Entering the operations phase is extremely difficult as the user expectations are dropping radically and the organisation essentially enters a trough of disillusionment; refer to figure 2.2 (execution and operations phase). At this stage everything in regard to the ITO starts being reviewed. The main issues normally arise around price and the related service levels. Since many organisations have not planned the initiation well and not done their homework regarding their expectation on the environment, in terms of costs and what the actual service levels are that they were experiencing prior to the ITO, they assume they are being overcharged and are not receiving an equivalent service level. Research (GartnerGroup 1999:10) has shown that while many organisations make a huge one-time effort at the time of outsourcing, a tendency is then to relax, assuming that what is a good deal now will be a good deal in the future. As cost and technology change rapidly, this is very often not the case.
The question of what value is being added is brought up as an expectation, but not necessarily understood by either the organisation or the vendor. This is not a weakness of IT outsourcing; it is the failure of management to place outsourcing in context with the type of value it can deliver (GartnerGroup 1999a:5).
Expectations by the organisation on assistance by the vendor with technology direction and business IT alignment is huge, which often leads to completely unrealistic or non-defined expectations. Expectation management and user perception’s become more and more difficult as operations progress
