Failed outsourcing deals blamed on people issues

A recent report says SLAs, hardware and software have little to do with it

Successful outsourcing isn’t about tight contracts and meeting Service Level Agreements (SLAs). Rather, it is strictly a people-oriented business and is based on relationships between provider and customer, according to the first global outsourcing survey to be undertaken by KPMG.

Failed relationships equal spiralling costs, according to the report, with 60% of respondents claiming problems with their outsourcing provider are almost always people-related.

KPMG spokesman Egidio Zarella says this is because outsourcing arrangements are not managed correctly, with 79% of survey respondents not even knowing the cost of selecting a provider.

Zarella says 50% of respondents took longer than six months to complete the Request for Proposal (RFP) part of the process, while 30% took longer than nine months. During this time the market shifted.

He says organisations are in the dark when it comes to measuring the value of outsourcing deals, although 89% of respondents plan to increase their current level of outsourcing.

In fact, 42% of outsourcing arrangements are not supported by a formal strategic measurement framework.

More than 650 organisations in 32 countries participated in the survey and more than 60% of respondents are C-level executives.

Nearly half of respondents have an annual turnover of more than US$1 billion (NZ$1.45 billion) and 143 Australian companies participated in the research.

“Sourcing is completely a people’s business; only 13% blamed technology when the contract went bad,” Zarella says.

“It’s not about contracts but having the right people. The worst offenders are those with massive SLAs, they fail to keep it simple.

“Typically costs will initially go down when organisations outsource but two years later costs are higher than they were before outsourcing.”

Zarella blames lack of vendor management, claiming it is a full-time job to manage an outsourcing provider.

He says deals should be monitored every quarter with a ten-point checklist and companies should check all change requests that go to the vendor.

“Only about 20% of companies in Australia measure outsourcers effectively because they don’t measure the contract beyond SLAs,” he says.

He believes organisations need to appoint a full-time “relationship manager” to remove dependencies on consultants.

“It is too expensive to keep IT in-house but it has to be done properly by appointing a relationship manager.

“Because this is a new title there is a serious shortage of people with vendor management skills — the days of a contract manager working in accounts payable are long gone.

“Also, the person that does the deal and develops the contract should not be the person managing it afterwards.”

The study supports Gartner research which claims IT departments are shrinking as IT professionals move into specialist roles such as vendor management.

In the future, an IT career will not be about technology but managing a range of service providers, the Gartner study found.

By 2010, IT organisations in large and medium-size companies will be 30% smaller, according to Diane Morello, vice president of research at Gartner.

“Partly driving this trend is outsourcing and IT automation,” she says.

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