In the past, only larger companies used external service providers (ESP) to provide temporary staff with specialized skills, develop custom software or assume responsibility for functions or departments, such as payroll or information technology (IT).
Times have changed. As competition heats up and firms in many industries consolidate, small- and mid-sized companies must compete with larger organizations, and must cut costs and streamline operations to remain competitive. Outsourcing certain business processes (i.e., application development and maintenance) allows mid-sized companies to gain the economies of scale — and cost savings and efficiencies — formerly available only to large firms.
How do you select an external service provider? What are the critical success factors and potential pitfalls of outsourcing?
Relationships, not transactions
A company’s approach toward outsourcing ultimately determines the engagement’s success or failure. If approached as a finite transaction, the engagement will experience difficulty. This situation occurs because firms rush to hire someone to solve a problem, or because price is given too much attention, at the expense of a clear understanding of needs, expectations, abilities, and roles and responsibilities. As a result, the outsourcing relationship is fraught with misunderstanding and contention.
In contrast, when approached as long-term relationships, outsourcing engagements are more successful. Taking this approach, firms not only evaluate vendor bids, but they examine and understand the entire problem, from beginning to end. They determine specifically what they need from the engagement and what abilities and value the vendor can contribute (beyond technical skills). They document roles, responsibilities, critical success factors and metrics first, and they evaluate price last.
Know yourself first
Early on, examine your needs. You must clearly understand what you need before you can explain it to prospective ESPs. What is the desired end result — a new software application? A three-year agreement to have some or all IT functions handled by an ESP?
Next, how will you measure success? By dollar reduction in costs? By percentage increase in processing capacity? What metrics are most important? Be specific.
What is your organization’s tolerance for risk? How critical, visible and time-sensitive is the project?
What roles and responsibilities do you see for the engagement? Which roles and deliverables will your firm manage? Which roles and deliverables do you expect the ESP to manage?
Once you clearly understand your needs, document the desired results, measures of success, responsibilities, and expectations. Use that as the basis for evaluating ESPs.
Evaluate on many factors
For each prospective ESP, document its strengths and weaknesses. Often a firm’s particular weakness may not be an issue if your firm is strong in that area, or if that weakness is not relevant to your needs. Knowing each ESP’s strengths and weaknesses will help you objectively evaluate vendors, and will help you understand and prepare for potential pitfalls or risks.
Ask the ESP for the names of other clients in your industry, or clients who had a project similar to yours. Contact those clients to discuss the ESP’s work, weaknesses, strengths, flexibility and results.
Evaluate the entire package of abilities and value the vendor can bring to the engagement. Outsourcing involves many different skills and expertise, not just technical skills.
Involve your IT department
Be sure to involve your IT department. IT departments have significant experience negotiating maintenance contracts, and can ask pertinent questions you may have overlooked.
Regardless of the ESP you select, remember that long after the project is complete, you will forget about $10,000 saved. Instead, you will remember the overall experience — the vendor’s skills (or lack thereof), capabilities, responsiveness, attention to detail, ability to deal with unexpected problems, flexibility and — most important — results.
Prepare for outsourcing success by understanding your needs, evaluating vendors objectively, and considering the entire value proposition.
Dave Miles is director of IT Solutions for CIBER in Michigan and Wisconsin, and can be reached at (248) 352-8650 or at [email protected]. CIBER Inc., founded in Detroit in 1974, is a global IT consulting firm which builds, integrates and supports critical business applications in custom and enterprise resource planning environments. Visit www.ciber.com.
