Strategies For Effective Outsourcing

ATKINS: What have you outsourced, and why?

WEGENER: One area that St. Michael’s Hospital has outsourced is the management and operation of its network. When I joined the hospital as CIO in 1998, I found the network in dire straights and in need of replacement. To make this issue more complex, we were in the midst of a merger with the Wellesley and Central Hospitals, locating all programs and services at our Bond Street site, and therefore were unsure about the ultimate size of our network. Furthermore, in evaluating our staff skill sets, we realized that we didn’t have the appropriate skills necessary to manage the network on a go-forward basis. As a result, we developed an RFP for a network that asked two questions. First, what is the total cost of ownership if we purchase the components and you help us build the network, and secondly, what is the total cost of ownership if you deliver network services as a utility model over the same period of time? From the responses we got, we quickly realized that a utility model made the most sense. Not only would it satisfy our organization’s demand for the operation and management of a sophisticated network, it would also provide it at a cost cheaper than we could do it ourselves.

MELODYSTA: We’ve outsourced a number of activities at Grand & Toy. To begin with, all of our printing; we produce a large number of invoices, statements, and the like; all that has been outsourced. We did that primarily because we don’t want to invest in the equipment and have it sit around for 28 days a month and then use it for two. We’ve also outsourced all of our imaging. That’s going to change very shortly, because we’re going to capture all signatures electronically on delivery. But for the past couple of years, all of the documents that provide proof of delivery have been sent outside and imaged, and are resident on a server at an outside location, and then accessed by our people internally. We’ve outsourced the operations of our main computer system. We run an ERP system and we outsourced the operations many years ago. We’ve also outsourced some of our network monitoring, particularly on the Web site, and I’ve got a mixed bag of systems development – some done internally and some done by external parties. So we’ve done a fair amount of outsourcing, primarily where we either didn’t have the skill set or, more particularly, where we didn’t feel it was a value-added kind of activity.

ATKINS: From a strategic perspective, what are the key business drivers for outsourcing, and why?

BHANDARI: For CCL Industries, the key consideration will be cost. If somebody can do it significantly cheaper than what we are doing it for, that will be the right condition for us to consider outsourcing. Additionally, we would be attracted by the expectation of better reliability and scalability. For example, some of our operations run on old legacy systems that we don’t have redundancy for. If an outsourcer has similar legacy applications for another client and can afford to provide redundancy and hot backup, that could be an important consideration for us. The same goes for scalability. An outsourcer managing larger infrastructure, larger capacity, would perhaps be much more geared to providing scalability on demand. So you pay in accordance to your needs, as they go up or down.

ADAMO: The two top drivers at WSIB are legislative compliance and strategic alignment. We have a set of principles and value statements that we operate under, and those have to be complied with. That being the case, we’re only willing to look at outsourcing a very limited number of things. Better, cheaper, and faster would be some of the key criteria – and also strategically achieving a significant business change or a significant cultural change. I would say, therefore, that in the back-office areas there’s a stronger ability to look at outsourcing. In our case we have sourcing principles we use and those sourcing principles are really about the better ability to achieve the business outcome at an acceptable risk, at a better price.

POLATAJKO: I see three key factors that would drive outsourcing at CIBC Mellon. If it’s not within our core competency, it doesn’t make sense for us to do it in-house. Because we’re a client service organization, we are always looking at the best pricing component, so definitely the price would be an important driver for us. And leading right into that would be the client service aspect. In other words, if I outsource something, I want to ensure that the service I’m providing now would be replicated by an outsourcer, because at the end of the day, the client is really indifferent as to whether it’s being done specifically by my organization or by a third party. They shouldn’t really care; they just want the best service.

ATKINS: What do you see as the three most important attributes of a potential outsourcing partner, and why?

WEGENER: The three attributes that come to mind are commitment, financial viability and appropriate skill set. Outsourcing any functionality is costly in the short run. The only way it makes sense financially is over the long term. St. Michael’s was therefore not interested in signing a short-term contract. We were interested in evolving a long-term relationship – a strategic alliance, so to speak – that would help us address our network issues while at the same time allowing our partner to count on our business over the long term. Number two is the financial viability of the outsourcing partner. If the vendor is not financially viable, then you can bet that the great price and quality service they offer you will not be sustainable. Something will give, either price or quality of service. Worse yet, the vendor goes out of business, leaving your outsourced functionality vulnerable. Finally, there is no substitute for experience. When outsourcing an important hospital function I want to be sure that the potential partner has the necessary skills and experience in that specific function. If I’m looking at outsourcing my PC desktops, I want to make sure that these folks have done it before and have good skills in this area. Just because they ran a lot of data centres somewhere doesn’t mean they can handle the desktop side.

MELODYSTA: As the old adage goes, the three most important success factors in retail are location, location, and location. For me, when it comes to outsourcing, it’s service, service, and service. And it’s the toughest thing to measure and judge when you’re picking an outsourcer. But if you pick the right outsourcer that provides a high level of service, you’ll win every time. Every one of us around the table spends an inordinate amount of time managing our vendors. With a certain few, you spend more time managing them than you get in services. I can figure out whether the vendors have got the expertise and the critical mass, and whether their costs are reasonable, etc., but at the end of the day, for a successful long-term relationship, it’s all about the service and their ability to proactively correct the problems that they have. And they will have problems, just like we do.

BHANDARI: For me, the first and foremost attribute would be stability. You have to know that the outsourcer will be around for at least the term of the contract. The second consideration would be their experience – whether they have dealt with companies such as yours (not only similar companies, but companies that are doing the same thing) and the types of business issues that you face. And third, you have to look at their own cost structure. Do they have the ability, through economies of scale and through their geographic presence, to bring in the needed skills at a reasonable rate as you add things later on? If possible, you want to do one-stop shopping, so you have to make sure that the vendor’s cost structure enables them to be a low-cost provider over the long term.

ATKINS: What are the top three most important business or contractual considerations when entering into an outsourcing partnership, and why?

POLATAJKO: I think the service level agreement [SLA] would be paramount; in other words, understanding and ensuring that both of us are in agreement with the service level that’s expected and demanded. I would spend a lot of time on that component. You would hope not to get into problem resolution, but that would also be important to have spelled out in the contract. If and when problems arise, what is the problem resolution; what provisions are there for monetary compensation, problem escalation, or terminating the contract? Finally, there may be some risk factors that get exposed with outsourcers as you go through this, and mitigating the risk to the company should be threaded into the contract.

BHANDARI: I agree that measurable service level agreements are a must. You have to keep it simple and focus on those areas that are easily measurable; you don’t want to spend a lot of time checking them or monitoring them. A second important consideration is flexibility. Organizations these days are going through a lot of reorganization, mergers and acquisitions, and divestments, so you have to build some kind of flexibility into the contract. If you are reorganized or if you acquire or divest some companies, there should be no penalties for that. Third, the pricing aspect has to be on a principle of gain-sharing, as opposed to taking it all or worrying about whether or not you’ve left too much on the table. As you scale up or scale down, you have to have an element of openness about the cost structure of the outsourcer and what incremental costs they have for providing certain services.

ADAMO: For me it’s not so much empirically the SLA, it’s the process by which you set, check and reset. In terms of dispute resolution, I agree that it’s a critical piece, but I would extend it all the way out to what we call the repatriation clause. When things are not going well enough, exactly how will we take it back? Exactly what will that cost us? Exactly what will that process be? So I’d push it just a bit further out. As to the flexibility piece, I would say that outsourcing contracts are usually not to move A to B; they’re generally a more complex bundle of things. The flexibility is in making sure that I’m going to get the total value from all of those services before I get into change-order processing. It’s a process by which we can trade things from column A for things from column B for things from column C, so that we avoid the change-management and the change-order process. Because those are the processes that cause you to fall out of bed every time.

ATKINS: How likely would you be to use off-shore partners for outsourcing?

POLATAJKO: I think it’s fifty/fifty that we will do it. We’re not adverse to it. In fact, we’ve actually had some conversations with some companies that are off-shore, but we’re not there yet. The Mellon side of our partnership is based in the States and they are engaged in an off-shore arrangement. They’ve explored it for their call centre and they’re looking at it for their application development. That’s the advantage that I have as a joint venture. I can look at either side of the house – the CIBC side or the Mellon side – and see what they’re doing. I don’t believe that there’s a downside to going off-shore at this point, albeit we have to be cautious about privacy issues, because we are in the business of client data. So we clearly have to understand what that means. Frankly, I would look for the data to reside here and maybe do some processing back and forth. I don’t think I’d ever move my data off-shore.

ATKINS: What are some of the biggest risks of outsourcing, and what are your mitigation strategies to deal with those risks?

MELODYSTA: One of the biggest risks is the failure to perform. There is always the danger that the outsourcer might go out of business or exit the particular piece of business that you have outsourced. And the last thing you want to do is try to repatriate something you’ve outsourced. I’ve been in that situation and it’s a heck of a lot of work; you’ve dismantled your infrastructure and now you’ve got to take it all back. The way you can mitigate that is by choosing your outsourcers very carefully. It’s crucial to do a lot of the upfront work in choosing them. And you’ve got to know the outsourcers – maybe start small with them and find out what they’re all about. You’ve also got to continually monitor them to make sure they are doing what they are supposed to do, and are proactive about fixing the problems that arise. Lastly, you have to get them involved in your business. I actually take our outsourcers’ staff to our distribution centre and walk them through the whole process. It makes a big difference, because not many customers do that for them. When they understand your business we usually get first crack at service to get things back up and running.

WEGENER: As everyone knows, one of the biggest risks to any large project is the risk related to getting the job done in scope, on time and on budget. In realizing that outsourcing is like any other project, St. Michael’s attempted to mitigate this risk by co-managing the entire project with our new strategic partner. We spec’d out the project together, and then worked on it together, with representatives from both sides providing very regular status reports and having frequent project-status meetings. Regular representation at these meetings was not limited to our techies but included very senior members of the participating organizations. In this way we were able to make immediate decisions and move smoothly through difficult phases of the outsourcing. A partnership is always great until it is tested. This was our way of testing our strategic alliance. Not everything went smoothly but in the end we developed a very strong and trusting relationship that has endured to this date. It’s turned out to be extremely efficient and productive for us.

ADAMO: We definitely considered all of the standard things around failure to meet the contractual arrangements. We put a lot of effort into building contractual safeguards as well as building what we call in-flight measures – in the middle of processes we actually take measurements to assure ourselves that the end goal is going to be met. One of the biggest risks is around complete and utter failure to perform, so we put a lot of effort into the exit ramp or the repatriation clause, as we call it. How will we get it back? We know and understand what it is we’re going to be required to do, as does the outsourcer. And I would say that the other major risk for us is around data security. We have some very specific clauses, that we continue to treat as boilerplate and template, that we insert into all of our contracts to ensure ourselves that we are not going to be exposed without knowing it to some kind of a problem.

ATKINS: What do you envision doing in the first three months after you sign a contract with an outsourcer?

ADAMO: We have five very specific processes we run, each with its own team, its own management and its own plan. We have a team-building plan, which is all about getting our people and the outsourcer’s people working together. It’s a very specific, deliberate, “Rah! Rah! Sis boom bah!” activity. There is a specific transition-management process that we follow, which has, generally speaking, been laid out and negotiated prior to actually beginning the project. There’s what we call baseline team management – we put the service delivery team in place, start it running, measure the heck out of it, and rectify it as is required. Those three processes run as joint teams co-chaired by the outsourcer and ourselves. The other two processes are something we call the survivorship team, which is run by HR and looks at helping the people who have not been placed land elsewhere, and the internal marketing and expectation management program, which communicates to our staff about how are we doing, and acknowledges where we’re having any significant transition difficulties.

ATKINS: What strategies would you employ to ensure that you get a good deal when outsourcing?

BHANDARI: Due diligence is most of it. You have to carefully evaluate the outsourcer and see that they have the ability to do what they are promising to do. You have to evaluate not only the cost structure but also their organizational structure: how they are organized; what kind of skills they have; what kind of people they have; what kind of projects they’ve done in the past. In our case, outsourcing will basically be driven by cost reduction, so we have to ensure that the cost reduction is truly what it appears to be – that we are not retaining certain activities that will put costs in other areas of the business; or subsequently, when we want to add certain things, that we are not taking on extra costs.

OLATAJKO: The strategies we would use to get a good outsourcing deal wouldn’t be different from those we use with any other type of vendor. Outsourcing is a little more complex and has a little more teeth in it, but it’s still about the same things that we always look at. We sit across the table and we have an honest up-front relationship. It goes back to the partnership idea. It’s not always about price; it’s about working together, and at the end of the day it has to work for both of us. In any of my vendor relationships I always look at that partnership, because that’s what’s going to drive the service, the cost and the performance.

MELODYSTA: I rely a lot on the attitude and the openness of the outsourcer. If they aren’t willing to open their books so that I can understand their cost structure, that’s a red flag to me right away. If they come to the table with the right attitude, that means a whole lot. You have to have a contract, but it’s the kind of document that I like to sign and then put in a drawer and never look at. If I have to pull it out, I know immediately I have a problem. I also rely a lot on references. Despite the fact that outsourcers generally refer you to the best customer they can, if you’re good at talking to a reference account and probing in the right areas, you can generally find out some things that the person who gave you the reference wouldn’t like you to find out. So I think those kinds of techniques will get me to the place I want to be at with an outsourcer.

WEGENER: I rely on a number of strategies to get a good deal. The first is making sure that the potential outsourcing partner understands the strategic direction of our organization, and specifically, the strategic direction that we have planned. It is imperative that the solution offered is congruent with our direction and philosophy. Any deviation from that will inevitably result in changing scope and added cost. Another strategy that I use is making use of a contract specialist. I’ve been through the process a number of times, and inevitably what happens is that the vendor offers up a standard contract that does not include all of the business pieces I feel are important. In turn, I use my own contract framework, and then there’s an exchange; and in the end, by the time the lawyers get into it, it’s a real dog’s breakfast. The value of a contract specialist is that he takes the time to understand the business and legal subtleties for both sides and crafts a functional and understandable contract quickly and efficiently. Of course, a further benefit to using a specialist is that this would not be the first such contract he has pulled together for this business need; so although he cannot divulge details of previous deals, he can certainly tell you if your getting a fair deal.

David Carey is a veteran journalist specializing in information technology and IT management. Based in Toronto, he is managing editor of CIO Canada.