Getting a grip on outsourcing

Top local outsourcing business drivers, according to the recently released results of ITWeb`s Outsourcing 2005 Survey, are the need for special skills, services, equipment, cost savings and a lack of in-house expertise.

ITWeb ran the online outsourcing survey in April, drawing responses from its readership base. As the sample of respondents was uncontrolled, the results of this research are by no means a definitive study of the local outsourcing market. However, they do provide a snapshot of current and developing trends in this space.

Of the 168 completed questionnaires obtained, 26% were filled in by technical members of staff at companies representative of a wide range of industry sectors. Just over 20% were submitted by chief executive officers. Other designations included in the response base were managers (20%), directors (12%), consultants (7%), chief information officers (4%), business development personnel (4%) and sales executives (3%). The remaining 2% of the respondents did not supply their job titles.

Over half the respondents work in the ICT sector. Other sectors represented included banking, accounting and finance (9%), manufacturing (6%), consulting (6%), education (4%), insurance (4%), retail (3%), and research, government and communications (2% each).

Just under half of the respondents were employed at companies with fewer than 50 staff members, while the remainder were submitted by ITWeb readers who worked for companies where staff complements ranged from 51 to over 10 000 employees.

The annual IT budgets of the companies represented ranged from under R100 000 (25%) to over R500 million (8%). A further 8% indicated their companies spent between R50 million and R500 million on IT each year. Some 14% had an IT budget of between R100 000 and R250 000, and 8% of between R250 000 and R500 000. The remaining 34% had IT budgets of between half a million rand and R50 million.

The results were not significantly affected by the large number of small to medium enterprises (SMEs) that participated - an analysis of the results by company size showed that responses remained fairly similar regardless of the number of staff employed.

"In SA, outsourcing has moved away from being an option only for large corporations to being an accepted resource for midsize companies. In turn, this has resulted in an increase in the number of outsourcing service providers in the local market," says David van den Berg, director at IT solutions provider Bula.

One small company that has an outsourcing success story is design and manufacturing services provider Flextronics. Mark Robson, MD, says his company chose to outsource several IT functions to enterprise services and solutions provider Bytes Technology Group.

Both parties need to commit to regular interaction to understand where the business is going, and this type of communication often doesn`t happen.

Martin Vergunst, MD, Computer Sciences Corporation

"They handle our desktop support, e-mail, dial-up servers and various application services countrywide. We have 140 employees, of which 90 are based at our head offices in Randburg," explains Robson.

Flextronics signed its outsourcing agreement two years ago, and the contract still has a year to run. "We`ve been happy with the way it`s gone so far. Key for us is that IT is not our main focus. Outsourcing helps us to focus on our core business."

Robson points out that, like many smaller companies, Flextronics finds it "difficult" to achieve world-class IT service levels across the enterprise. "We`d end up with a small group of IT people who would have to have a very wide range of skills - without being able to offer them the kind of career paths that would encourage them to stay with us."

Bytes Technology, he says, was able to offer solutions that matched the company`s requirements. "We`re able to tap into a supplier here that has services that are well-suited to a company of our size. A few years back I didn`t realise that outsourcing was an option for smaller companies."

Does Robson see Flextronics renewing the contract? "We`ll probably go out to tender just to see what`s out there and make sure we`re getting the best deal possible. But right now, we`re very comfortable. Outsourcing the way we have costs us about the same as handling it ourselves would, but it has lots of added benefits," he states.

The results of the ITWeb survey showed that 15% of the respondents had outsourced more than half their IT functions, while 26% said they handled less than half of their IT functions this way. Many of them haven`t had nearly as pleasant an experience as Flextronics - 46% of the overall response base confirmed they had been involved in an outsourcing deal that had gone sour.

The issues don`t appear to have changed much over the years. Poor service delivery was the top reason (67%) given by respondents for their lack of success here, followed by a breakdown of interpersonal relationships (17%).

However, Martin Vergunst, MD of IT services provider Computer Sciences Corporation, says there is growing recognition from all sides that outsourcing contracts have to be flexible. Suppliers - both primary and sub-contractors - and their customers are beginning to work harder at developing the kind of close-knit and accommodating strategic relationships that successful outsourcing requires.

"Outsourcing deals are usually long-term partnerships that generally start off focusing on short-term cost reductions. Savings generally come through, but technology moves on, business changes occur, and new systems are introduced. When the original contracts aren`t flexible enough to accommodate these changes, customers start to become dissatisfied. They`re still seeing cost reductions, but they don`t feel they are getting real value-add as far as innovation is concerned," he says.

"Unfortunately, these partnerships end up being akin to supplier relationships, rather than strategic ones. The business goes off down the left field, and the supplier goes off down the right field. Both parties need to commit to regular interaction to understand where the business is going, and this type of communication often doesn`t happen," says Vergunst.

Research results released by Gartner earlier this year show that nearly 80% of all outsourcing relationships will be renegotiated. Lack of flexibility is the main issue leading to these renegotiations, followed by a need to improve the relationship between the supplier and customer. The research firm, which polled almost 200 executives from midsize and large companies in Western Europe, found that 15% of all contracts had been renegotiated within what it calls the "honeymoon period" - the first 12 months of the contract - leaving little hope for the long-term success of the relationship.

If you do outsourcing right, and manage it well, you can significantly reduce costs.

Errol du Preez, CIO, MultiChoice Subscriber Management Services

Half of the Gartner survey respondents said lack of flexibility remains the biggest issue leading to renegotiations. Improving the supplier/customer relationship was also identified as a key area for improvement, followed by cost reduction.

Respondents to ITWeb`s online questionnaire rated flexibility as the fourth most important criterion used when selecting outsourcing providers. They placed technology and skills, pricing and prior experience with a vendor in first, second and third place respectively.

Speaking at the event where the results of the ITWeb survey were released, Benjamin Mophatlane, deputy CIO at Business Connexion, stressed that outsourcing deals had to satisfy the needs of three distinct groups:

* Business users (business benefits and innovation)
* Internal IT staff (transition and career path)
* Service providers (profitable service delivery)

Flexibility was key, he said, adding that all involved parties "must expect changes".

At the same event, Errol du Preez, MultiChoice Subscriber Management Services CIO, advocated open and frank discussions between customers and suppliers when issues arose. He cautioned that if companies found themselves managing their outsourcing suppliers via their contracts, then the working relationship was "obviously in trouble".

"If you do outsourcing right, and manage it well, you can significantly reduce costs," he said.

A lack of skilled resources, sub-contracting costs, and the need to access best practices as well as a wider experience base were among the reasons his company opted to outsource a large part of its IT functions. In the initial three years of its contract with Bytes Technology, MultiChoice reduced its costs by 34% in real terms and service levels went up by 15%, he said.

Du Preez is a firm believer in going back out to tender when contracts come up for renewal, as he wants to be sure his company is still getting the best possible value from its outsourcing partner, regardless of how well things might have gone. It`s important, he says, to "keep your outsource partner honest and on its toes".

Mardia van der Walt-Korsted, deputy CEO of ICT solutions provider T-Systems, says her company has seen several of its customers re-sign their contracts. "This shows that outsourcing is being positively perceived. We really strive towards getting contracts renewed, as for us repeat business from our existing clients is the most cost-effective way to do things."

She says that among the key success factors for outsourcing suppliers is an extensive knowledge of the industry sectors customers operate in. "The first thing they want to know is: 'Do you understand my business?`, so as an outsourcer you have to build this kind of industry knowledge capacity."

Also of paramount importance to a successful outcome is an initial comprehensive scoping of what a customer`s business requirements are. "If this is not done properly, the outsourcer will never be able to add real value." Thirdly, she says, suppliers have to develop and maintain a strategic relationship with their client base. "If you don`t want to do this, and put the right amount of effort into it, then you shouldn`t get involved in outsourcing," says Van der Walt-Korsted.

Other success factors she rates highly are change management - "everyone talks about it, but few people do it correctly" - and effective project management.

Van den Berg has no argument here. "A successful outsourcing relationship is based on a strategic vision and implementation plan, underpinned with mutual understanding of what is expected. Outsourcing providers should strive to understand the culture of their client`s organisations," he says.

But it`s definitely a two-way street. "In turn, it will work to an outsourcing provider`s advantage if a client has understanding of the business benefits of the outsourcing agreement and works towards achieving this," he says. "One of the main obstacles for an outsourcing implementation is a business not being 'ready` or 'suitable` for an outsourcing relationship. It is therefore vital that an organisation has a process for implementing and managing outsourcing relationships. Top management need to provide their support and defy any internal sceptics or cultural resistance early in the process, so that they can make plans to overcome it," adds Van den Berg.

Sustaining strategic relationships during long-term outsourcing agreements that can last up to several years in rapidly changing business environments is no small achievement. Asked how long their outsourcing agreements had been negotiated for, 41% of the respondents to the ITWeb survey said between one to two years. A fifth said between three and five years, 2% said between six to seven years and 1% said between eight to 10 years.

But how long is too long? Opinions differ, depending on the nature of the contract; that is, which IT functions are outsourced.

"I still think in order to make the business case work for both partners the contract should be for between five and 10 years," says Vergunst, speaking on behalf of a company that does large, total outsourcing deals.

"We believe five years is a real optimum contract. There have been some that are still going at 10 years, and obviously no outsourcer says no to that. But I don`t feel it is realistic to have such long contracts anymore," says Van der Walt-Korsted.

T-Systems also prefers to play in the corporate market as the primary contract on enterprise-wide agreements. Here, she says, the "absolute minimum contract period should be three years".

Mophatlane said companies going the total outsource route could expect to spend up to 1% of the total contract price on selecting service providers, and up to a further 20% on managing transition issues during the first year. They should not expect to see any real returns until at least the third year of the deal, he said.

One thing that no one disputes is that outsourcing IT functions should result in reduced costs. The ITWeb survey showed that 32% of respondents had met their cost reduction expectations, while 37% had enjoyed some level of savings. Just under a fifth said it was too early to assess whether they would meet budget objectives, while 13% said they had received no financial benefits from their outsourcing initiatives at all.

Respondents had cut costs through better use of existing infrastructure (31%), the consolidation of existing infrastructure (17%), better use of the critical mass of people offered by the outsourcer (17%), and centralised management from the outsourcer (15%).

The need for governance is becoming increasingly top of mind among South African companies. This trend also emerged during the Gartner survey. But much still needs to be done here. The Gartner survey showed that 29% of respondents highlighted governance - specifically, clarification in terms of roles and responsibilities - as an area that required attention. In the ITWeb survey, half the respondents indicated they spent less than 10% of their outsourcing budgets on vendor governance.

The ITWeb survey also indicated a possible shift towards multi-vendor outsourcing. Over two-thirds of respondents said "No" when asked if they were currently involved in a total outsourcing deal with one vendor, with only 18% answering "Yes" to this question. In addition, 47% said they would agree that companies were moving away from total outsourcing deals towards smaller projects and more niche arrangements.

When releasing its research findings, Gartner said the good news is that as outsourcing has become more established, enterprises have gained experience and a better understanding of their business requirements. As a result, they are now more mature and feeling more confident in their own ability to select and manage the most appropriate vendor for each of their IT requirements.

With any luck - and lots of hard work - the South African outsourcing scene will continue to reflect similar positive overtones in the years ahead.

To access the full results of the ITWeb Outsourcing 2005 Survey and the other presentations from the SA Outsourcing 2005 Executive Forum, please click here.