Network Computingwww.networkcomputing.com

This is a good outsourcing client: One who understands "I'm no longer going to be managing the operations, but instead managing the [outsourcing] relationship."

Tom Cotney: The most important thing clients can do is communicate internally about why they are outsourcing... make sure everybody understands why they are doing it and they agree they will work to make it a success. Unfortunately, in more complex environments, [there are] varying levels of motivation.

Doug Welch: You need to decide: Why are we doing this? Are we unhappy about the cost of doing it internally? Or are we unhappy with our internal response? Are we perceived internally as not being a very strong IT group? And you need to define what the objectives are and have total buy-in from executive management.

Everyone has to agree on service level agreements... these are a scoring system. The outsourcing contract, along with the SLAs, have to be living documents. And you have to allow sufficient time for the agreement; typically, the most successful are for a minimum of five years. Of course all agreements have "out" clauses for performance issues -- that's why you have SLAs.

Chris VanLuling: Identify the account executive who is going to make the decisions and [ensure] that they've clearly stated the performance criteria they're looking for in customer satisfaction, end-user measurements, and certainly financial criteria.... Often, customers are reluctant to share information and might be embarrassed about how little information they have about their current environment -- how their telecom services are performing or how the network management group is managing [the network]. But they have to get over it.

This should be an open project, and you need to be up front with employees who might be impacted by it. Have a career path or a plan for those employees... it's very encouraging to know there is perhaps more interesting work for them once this arrangement is complete. In the worse-case scenarios it's all done in secret, and the employees aren't quite sure what will happen to them. For WorldCom, it's rare that our customer's staff does not know what is being considered.

NWC: What are the biggest challenges in working with an IT department that recently has been partially or totally outsourced?
McCarthy: A manager has spent several years building his organization, and he has a vested interest in the success of his people. There's a certain amount of fear and trepidation about "What's going to happen to me." ...But you have an opportunity to learn entirely new methodologies and more efficient ways of doing the work. If you're good at what you do, there's usually a place for you [at CSC].

VanLuling: There is some politics. [For example], with regional management not being terribly thrilled with the decision coming from corporate.

You should be very open in asking what the outsourcing company's interest is in hiring the staff. ...One of the advantages of being up front in what the plan is for employees is that it avoids politics and encourages performance when talent has the opportunity to find another assignment or position with the outsourcing company.

NWC: Are there stats available on how long ex-corporate employees stay with the outsourcing company?
VanLuling: Some people stay for years -- we still have employees from one large customer working for us even though they outsourced to us over two years ago. And in many cases, customers have network management opportunities within WorldCom.

NWC: What are some of your pet peeves with customers in an outsourcing arrangement?
McCarthy: Clients must understand and communicate to the service provider exactly what they want to accomplish with outsourcing. The primary reasons companies outsource are cost savings, better service, and systems enhancement/access to best practices and cutting-edge skill sets. A conflict might arise, for example, if a company's primary, but unarticulated, goal is to deliver better IT-based business capabilities, yet they negotiate the contract solely on price.

VanLuling: If customers are very open about the fact that they have no records, for instance, and they don't have a plan for what they are going to do with their employees, and the primary driver is financial, they've started to set the ground rules, and the service provider can begin work with them. If they are not up front about their objectives, we can't work with that.

NWC: Beyond pet peeves, what are some things an outsourcing customer should definitely not do?
Cotney: People who don¹t understand the delivery-of-services business think about service levels and penalties as a way to get their vendor's attention. ...They fail to realize that if a provider is not meeting their service levels, probably the one thing they need to do is invest more [time] in the relationship. ...I've seen some consultants come in and construct creative ways to ratchet up the dollar penalties, and that sets the provider and customer up for failure where you've got a disproportionate amount of money related to performance. That builds animosity.

I'd like to see people do a little better job of maintaining continuity through the life of the deal, remembering why they did it and what the motivations were. One way relationships unravel after a change in management is when other people come in later, look at a contract and say, "This looks out of line." Both parties in an outsourcing relationship could do a better job at that.

Welch: I would not allow an outside consulting organization to tell me what I needed. I would be careful about having them write my agreement for me. You [instead] find out what you need through your own internal staff and through the top providers of that service.

VanLuling: A customer might just be focused on service-level guarantee reporting, trying to micromanage performance hour by hour. This doesn't happen very often, but it does [negatively] impact the relationship between customers and us.

NWC: What are the most common mistakes companies make when negotiating an IT outsourcing contract?
McCarthy: A contract is not necessarily an end state -- it's a jumping-off point. A contract cannot predict what's going to happen two years from now. ...[Ideally,] it can be updated at any time, given changing business needs. We try to maintain the flexibility to change things and to adapt things as we go along. Updating a contract is always in both parties' interests.

Cotney: The hardest thing for both parties to do is to predict demand for volumes over a period of time. What we end up doing is put pricing in place that assumes a certain blend of fixed and variable costs. Being below those volume projections would be damaging to us, and being significantly above [projections] hurts the customer.

To ensure demand can be accurately predicted, we work closely with customers not only when we sign the contract, but on an ongoing basis. The skills and knowledge of both vendor and customer must be tapped to do this right. An IT services vendor shouldn't assume it is the expert and attempt to predict volume needs unilaterally.

Welch: Scheduling a regular review is important. If you don't have regular meetings at least once a quarter, sometimes you only hear the big problems ...not other things like personality problems, where a technician was rude to a manager, or something such as that.

VanLuling: The governance model should be written that you don't have to renegotiate the contract every time you need to make a change. ...The contract should anticipate things, like a customer selling off a piece of its business. Let the contract acknowledge that might occur ...deal with it as a change, not as a reason to open up or renegotiate the contract.

NWC: Why not renegotiate?
VanLuling: The customer can incur an extra cost if it has to renegotiate terms in the contract, and it also becomes time consuming and costly to us. So anticipate that the scope of the network and WorldCom's services will change with the customer's business direction and include in the contract how acquired companies, the sale of a customer's existing business units, etc., will be handled.

NWC: Bottom line, what are the most important elements to a successful IT outsourcing arrangement?
McCarthy: Know what you want to accomplish, understand what outsourcing really is, and understand your own organization and the service provider's organization.

VanLuling: A model should lay out the business plan of how the two organizations are going to work together, basically the job descriptions.

The best situations are when we are dealing with a project team that represents all CIO and IT folks. ...With one national retailer, we are actively engaged with the CIO and involved in the business plans, providing basic strategic guidance, not just how the network is performing. As the IT shop is defining how it wants to interface with its customers, its point-of-sale requirements and the type of kiosks it is putting in stores, all of that is getting factored into the network. We provide companies with constant engineering input, which was factored into the agreement up front.

Cotney: There has to be trust between the two [organizations] ...the client must recognize that the service provider has to make money; otherwise, it can't be a quality provider. And the provider must recognize that circumstances in the client's business change over time, so it cannot just rely on the content of the contract.

NWC: What process manages this change over time?
Cotney: We have a relationship kickoff process where we jointly define roles and responsibilities, decision-making processes, conflict resolution procedures, etc. To make sure things stay on track, we conduct annual relationship audits and make adjustments as necessary.