It is common knowledge that there is a high failure rate in IT outsourcing. It is estimated that 25% of all outsourcing contracts end up in failure, with hundreds of millions of pounds being wasted.
Headline mega failures have involved some of the biggest players in the business, such as IBM, with the failure of their 5 billion dollar contract with JP Morgan. Then there is EDS who had to write off more than $500m following its failed IT contract with The US Navy.
Nearer to home, we constantly read about IT outsourcing failures in commercial organisations, especially in the banking sector, such as the ongoing Royal Bank of Scotland IT fiasco.
IT Outsourcing In The Public Sector
In the UK public sector, there are also numerous instances of IT disasters with local authorities, such as the recent cancellation of a £160M contract between Cornwall County Council and BT, which was scrapped, only 2 years into its 10-year duration.
Then we have the costly IT failures within the UK Government itself. Head of the list is ATOS, who has continually failed to deliver on its commitments, prompting the Government to review more than £500M worth of IT contracts it holds with the European IT giant.
The list is endless: The Universal Credit Scheme rollout, the failed £60M Scottish Police IT project, and so on.
Never has there been a time to be extremely circumspect in your selection of the right IT partner. Whatever your IT needs may be, failure to engage the right company will cost you dear in terms of financial outlay and future performance. In extreme cases it can lead the collapse of businesses or the overhaul, (including staff dismissals) of a public department.
Why Do IT Outsourcing Partnerships Fail?
The first step in finding an IT partner that is right for you is to understand the reasons why so many IT outsourcing partnerships fail.
Here is an honest and forthright list of the “ten reasons for failure” that I have put together to help with your selection. My list sets out many of the common mistakes and errors that are frequently made on both sides of the partnership.
Let’s not forget – it is a two-way partnership in which both parties have crucial roles to play. Both sides must take their share of the blame if things go wrong.
#1: Choosing the lowest price and squeezing the IT outsourcing provider’s profit margins. If your main contract criterion is to choose the cheapest IT company, you will almost certainly get what you pay for. Many businesses opt to outsource to cheaper offshore companies without considering the problems that may lie ahead, in terms of communication issues, quality of staff, and cultural aspects.
Consider carefully how you structure your contract. Clauses regulating costs and delivery that are specifically designed to financially punish your IT provider for non-compliance may be self-defeating. If you try to pare down the contractor’s profit margins to a bare minimum, they may look to recoup their losses in any way they can. It will set the partnership off on the wrong foot, with one side trying to strangle costs and the other side trying to generate an acceptable profit. It won’t bode well for a happy outcome.
Rather than simply choosing the lowest bidder, you should award the contract on the basis of the company’s ability to do the job. You should take into account their previous track record, the quality of their staff and whether you feel they are a good fit in terms of personal relationships
#2: Failure to ensure that the technical specifications are an integral, comprehensible part of your contract. Know what you are paying for, and don’t leave it to the IT company to throw the specs together in an incomprehensible technical rider full of IT jargon. It is essential that you fully understand what you are paying for, precisely what is being provided and why. Don’t be afraid to discuss and ask until you are satisfied.
#3: Poor communications. As mentioned above, miss-communication often occurs if you opt to outsource the project or IT service offshore. As well as language issues, there are time-zone differences, which means that you and your staff will have to work extended hours in order to keep in touch, which will lead to fatigue, bad morale and mistakes.
But there can also be communication issues with UK based IT companies. Make sure the IT staff are on the same wavelength as your own staff and that there is a good mix of personalities who can work together in harmonious teams. Bad communication can seriously impact the success of the service or project.
#4: Failure to recognise and accept the need for flexibility. IT infrastructure can be out of date – even obsolete – within months of implementation. Technical advances and new developments in IT happen so fast that you have to decide from the outset whether you are going to be flexible or inflexible on what is being delivered.
In the long-term, failure to agree to common sense changes as the contract plays out could spell failure and a huge waste of money. ‘Contract flexibility’ as the project develops will ensure that you keep up with the latest IT advances and that your project remains relevant.
#5: Micromanaging the IT outsourcing provider. If you have selected the right contractor who has all the necessary skills to execute the work as defined in your contract, it makes little sense to continually tell them what to do. Having built good communications and working relationships, you should allow them to use their skills to manage the project or service for you.
By all means keep yourself regularly informed. Understand what is being done and discuss any problems with their senior representatives, but let them get on with it. Micromanagement can lead to bad morale, even resignations, which will result in a less than 100% effort. In extreme cases, it can lead to failure of the project.
#6: Expectation mismatch. It is essential that you and the contractor are in total agreement on what is to be delivered. There may be many variables, different service level agreements, and bespoke solutions that are discussed prior to signing the contract: make sure you understand what you’re getting.
It’s also important to become an integral part of the delivery process and to be kept informed at every stage. The successful transition of your IT requirement to a service provider depends on both parties meeting expectations at each stage of the process.
#7: Failure to recognise the IT outsourcing provider as a strategic partner. In long-term IT projects and provision of IT services, your service provider can become a valuable partner in helping your business to grow. Let them know that they are contributing to the success of your business, and they are not just performing IT tasks in isolation. The rewards of this approach can be considerable.
#8: Outsourcing the wrong functions. Make sure that you understand what IT functions are better kept in-house and which ones can be successfully outsourced. Which areas of your business will offer the best value for money if outsourced? Which areas will benefit by being managed by IT professionals who can spearhead key changes and implement new technology? A good IT contractor will be happy to discuss these options with you, and advise you accordingly.
#9: Failure to properly manage any changes in requirements. Many project failures can be attributed to the inability of management to manage add-ons and any re-definitions of the contract.
A flexible contract (see above) will help in this approach. But changes to the contract are often predicated by changes in the business model or aspects of IT that weren’t properly considered at the outset. Delays and uncontrolled cost increases can often spell not only doom to the project, but also to your business as you fall behind your competitors. The solution is to get the contract as relevant as possible from day one, and if changes become necessary, it is essential that they are well managed and that costs are controlled.
#10: Failure to recognise and manage the special issues associated with public service contracts. Public authorities often try to mirror the private sector in the way they deal with IT contractors, and while in some respects this is an admirable aim, they should also understand that there are some key differences.
They must take into account the needs of not only the general public (the customers) but also the staff who provide many essential public services. This can mean a different IT emphasis than in a commercial environment. There may also be issues concerned with cuts in public spending which can have a detrimental effect on IT contracts. Arbitrary cuts to IT funding will be counterproductive if the projects end in failure.
Another thorny issue is the sharing of IT service contracts with other local authorities. If this can be achieved, there will be obvious savings and benefits to all parties.
So there you have it – my very frank summary of ten things to avoid or to seriously consider when awarding IT outsourcing contracts. I would be delighted to discuss any of these issues with you in more detail at any time.