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7 Signs You've outsourced too much to IT service providers

By Stephanie Overby, CIO.com on Jan 11, 2012

Smart IT leaders understand that successful outsourcing requires a balance of internal and external skills. At a minimum, CIOs need a sufficiently robust internal IT organization to keep the supplier honest, assist in dispute resolution and get maximum value from the relationship.

The lure of IT outsourcing is strong from the promise of better service levels and lower costs to the premise of freeing up internal resources to focus on strategic business issues. And if your IT service provider and, let's face it, a few of your CXO peers had their way, you'd send it all out the door to a third-party.

Smart IT leaders understand that successful outsourcing requires a balance of internal and external skills. At a minimum, CIOs "need a sufficiently robust internal IT organization to keep the supplier honest, assist in dispute resolution and get maximum value from the relationship," says Bob Kriss, a partner and litigator in the outsourcing practice of Mayer Brown.

But it's a slippery slope. Once an organization gets a taste of the benefits of outsourcing one tower of IT service, appetites for further third-party provisioning naturally increase. Before long, the portfolio of outsourced IT work balloons, but the benefits begin to wane as the internal IT service organization grows anemic.

How much IT outsourcing is too much? That depends on the customer. But here are seven surefire signs you need to bring some work back in-house.

1. You have to bring in the service provider for CXO sit-downs: The CEO calls an all-hands-on-deck strategy meeting. The CMO wants to talk big data and analytics. CFO wants to re-examine IT's capital expenses. It's a bad sign if you have to drag your outsourcer with you to every important business meeting. "When they only way to supply strategic IT information to the C-Level suite is to invite the vendor staff to discuss it with them, you have given too much to the vendor," says Adam Strichman, founder of outsourcing consultancy Sanda Partners. "A good outsourcing contract preserves the right to control critical strategic issues and those affecting the core business," adds Brad Peterson, a partner in the business and technology sourcing practice of Mayer Brown

2. You're drowning in change orders: When even the most minor change requires major paperwork, chances are you've sent too much out the door. "Your governance team is powerless to do anything without going through a vendor approval process, so you often end up not bothering to make improvements as they take too long to implement and often cost too much," says Phil Fersht, founder of outsourcing analyst firm HfS Research. In such situations, IT organizations put off the adoption of important new technologies until their contracts are up for renewal, says KPMG's Le peak, putting them at a strategic disadvantage.

3. You've run out of meeting space: "When you need the company's largest conference room for the vendor management meeting & and suddenly, the largest conference room is not big enough,' says Strichman of Sanda Partners, you're outsourced to the hilt.

4. The transaction costs outweigh the benefits: It may sound like an obvious red flag, but the costs of managing an ever-growing portfolio of IT suppliers can sneak up on an outsourcing customer, says Stan LePeak, director of research for advisory services at KPMG. "This often happens because the customer has more suppliers than it needs to obtain the right skills and maintain competition," adds Mayer Brown's Peterson.

5. Key members of the IT leadership team have morphed into contract jockeys: Has the CIO begun to lament the fact that he never went to law school like his mother wanted? Not good. Other signs you need to pull back on the outsourcing, says Fersht: "You feel you have lost control over your operations and have merely become an administrative overseer. The people you want to hire to support you are not technologists, they are contract administrators. You need management accounting skills to improve your job, not more technology knowledge." And if your enterprise procurement group has had to staff up to handle the constant flow of RFPs and statements of work from IT, says Strichman, you've really gone overboard.

6. You can no longer answer fundamental technology questions: It's business continuity planning time. Your chief risk officer asks you where the company's data is actually stored, and you realize you have no idea. It sounds comically extreme, but Strichman of Sanda Partners says he's seen it happen in heavily outsourced IT organizations. And it's not funny.

7. No one's paying attention anymore to the outsourced work or you: When "there is no more room for taking out more costs through pushing more work offshore, and your vendor keeps going over your head to convince your bosses there are 'more FTEs' they can take out," says Fersht of HfS Research, the next one out the door might be you. When "your management sponsors are less interested in your outsourcing initiative -they've met their cost savings goal are have moved onto other initiatives," says Fersht, it's a sign that it's time to rein in the outsourcing strategy.


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