To effectively manage an information technology (IT) outsourcing contract in today`s dynamic business environment, both service provider and client must value the relationship, says Martin Vergunst, managing director of Computer Sciences Corporation`s (NYSE: CSC) operations in South Africa.
In fact, recent research of 1 200 outsourcing contracts around the world, undertaken by the UK`s Warwick Business School, has found that relationships based on mutual trust rather than punitive service level agreements and penalties benefit from a `trust dividend` worth as much as 40% of the contract`s total value.
"Trust is not just a warm fuzzy feeling between client and provider," says Vergunst. "The relationship must be properly managed. There must be a mechanism in place to monitor relationships, rather than a checklist of technical expectations."
He adds that CSC`s more than 15 years of experience in outsourcing worldwide has given it the knowledge that success is built on the outsourcing service provider`s ability to systematically add value to the client`s business.
"In recent years corporations have learned that successful IT outsourcing is not only about systematically reducing costs, it`s also about adding value. But true value is less easily measured in precise financial terms. We should no longer be seen as IT subcontractors, but partners who have ideas, global knowledge and experience, and who can make significant contributions to the ability of the corporation to meet dynamic challenges."
Recent research among Fortune 500 companies by CSC`s Leading Edge Forum (LEF) on the value, challenges and future of outsourcing found that more than 80% of outsourcing customers were satisfied with their overall cost/benefit experience.
Outsourcing providers and their customers now understand, however, that they also need to improve the ability of the partnership to add value to the way the business operates, adds Vergunst.
CSC`s research uncovered specific reasons why increasing the business impact of IT outsourcing has proved elusive. Among these is the fact that many companies outsource because they have problems with IT. Internal disputes cannot be resolved and management and decision-making cultures cannot be changed by outsourcing. Unless these are addressed, the outsourcing relationship can suffer from these underlying issues.
Another misconception about what traditional IT outsourcing can achieve is that, because the business believes IT is not a core competency, it should be outsourced. However, IT is now so pervasive and mission-critical that companies need to partner with a capable IT service provider in order to make the most of their IT operations.
Vergunst says CSC`s research also found that long-term strategic implications of outsourcing are often sidelined while provider and client focus on the short-term financial and management gains.
"Hopefully, those issues are becoming history because dynamic businesses need flexible and agile support from their outsourcing service providers as they focus on both long- and short-term goals."
He lists five steps for successful IT outsourcing, including:
* Outsourcing must serve the business, not IT. Agenda and contracts must be grounded in a clear sense of where the business is going. This means customer management must think beyond tactical concerns and opportunities, and factor in the full strategic consequences of their outsourcing decisions.
* Technology usage as a core competence. Companies must decide whether outsourcing is the best way to fulfil their ongoing need for IT competency.
* A shift from cost saving to cost-effectiveness. Quality and innovation must be brought back into the outsourcing price/performance equation by using a balanced-scorecard approach.
* Alignment of customer and supplier interests. Contracts must motivate suppliers to pro-actively support the customer`s business. Close alignment of financial interests is the only way to sustain productive long-term business partnerships.
* Flexible, fixed contracts. Flexibility must be built into the design of the outsourcing contracts so they are capable of addressing changing customer priorities and objectives without requiring complex, new negotiations.
"While this approach is easier said than done," says Vergunst, "it will lead to improved partnering that will be beneficial regardless of the specific outsourcing goals."
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