4 March 2010 | Jimmy Desai

Outsourcing technology can save money, but choose the wrong supplier and it will cost you dearly, says Jimmy Desai

According to a study by McKinsey & Company almost one-third of organisations are looking to cut IT costs. The same study revealed 38 per cent of firms are looking at outsourcing to drive down costs in the next 12 to 18 months. So is outsourced IT a match made in heaven? Not without careful consideration.

Step 1

One of the trends in 2009 was organisations saving money by outsourcing their IT to third-party vendors. This trend seems set to continue through 2010. But there is more to appointing an IT outsourcing supplier than meets the eye.

First, the wrong choice of supplier can cost your organisation dearly. You could end up paying more for IT than you did before entering into the outsourcing agreement.

Second, although IT outsourcing may be cost-driven, the services must be provided to a satisfactory standard. If they are not, this can damage your ability to deliver goods and services  and lead you to lose money in the future.

Third, an organisation’s in-house staff, resources and procedures are likely to be geared towards delivering IT to satisfy the unique needs of an organisation. So any potential vendor will need to come up to speed quickly and fully understand your organisation and its IT needs.

It is critical to appoint the right supplier and to seek external advice early on if you are not familiar with the process.

Step 2

Of the numerous IT suppliers out there it can be confusing as to which one is best for you. Your choice may come down to a combination of factors including the supplier’s reputation, industry expertise, price, ability to deliver on time, specification of the technology, and the vendor already being known to your organisation.

However, your organisation must be clear about what it is trying to achieve and be able to articulate this in detail. It is not unusual for an organisation to be uncertain about exactly what it needs at the start of an IT outsourcing process – since it may not know about everything on offer in the market – but it should at least have a framework to keep to in relation to its requirements, including what the IT should achieve and costs.

This will help it quickly filter out IT vendors that are simply not suitable for the project, for example those that are too expensive. 

Some organisations have only a vague idea of what they want or have not documented it. The danger is that without a clear vision of what is required an organisation can end up purchasing IT systems that do not achieve its aims.

Step 3

Here are some factors that might influence the choice of partner.

Size: it may be that a large global outsourcing provider has all the staff, resources and back-up that you are looking for. However, this may come at a high price, increasing rather than reducing your cost. Alternatively, choosing a very small supplier could achieve cost savings, but the disadvantages are that the vendor may not have all the staff, resources and back-up you need. So even though costs might fall it may be that service quality suffers.

Your voice: with large IT vendors, if you are a small organisation (in terms of that supplier’s customer base) you may get a smaller voice compared with the supplier’s bigger accounts. With a smaller supplier your organisation may be one of the larger accounts, in which case you might have more influence in getting things done the way you would like.

The point is that an organisation needs to look at itself and its specific requirements and needs before going out into the market to select a supplier. The organisation’s needs and the vendor’s services can then be matched. Once you have whittled down your potential suppliers to a few candidates, send out a specification of what you are looking for. The assessment of the responses and speed of reply, as well as each vendor’s approach to dealing with your concerns specifically, can provide an early indicator as to which organisation is likely to be best for you.

Step 4

Just like any tender process or interview, you should be prepared to ask tough questions of potential suppliers early on. Things to consider are:

Reference sites: Can you visit reference sites or talk to existing clients of the supplier to see what they think of the service?

Fixed prices: Will the supplier provide fixed-price quotes so you can avoid cost escalation over time?

Service quality: Does the supplier have a service level agreement (SLA) that will provide you with some assurance the services will be delivered as requested? Does this SLA cover what you need and is it sufficiently robust?

Step 5

Having chosen the appropriate vendor the contractual process will start. It is dangerous to think of this process as “standard” because it is not. Each deal will be different in terms of what your organisation wants and what the outsourcing provider is prepared to commit to.

There are numerous issues, both commercial and legal, to consider including, for example:

Limitation of liability: If the supplier breaches the contract and this causes your organisation loss then how much of that loss is the vendor prepared to pay for?

You might think that the supplier will pay for all loss suffered but this is rarely the case. The third-party provider will normally limit what it will pay for losses to a certain figure. You will need to pay anything above that figure, even if the loss is not your organisation’s fault.

Talks about the supplier’s maximum liability can become contentious if not approached with care. See the multimillion-pound legal battle between BSkyB and EDS as an example (Web news, 28 January).

Changes: A detailed mechanism for dealing with modifications will need to be incorporated.

Employment law: If your organisation is transferring its IT to a third party then employees who work on that system are likely to be affected. Therefore, your employment law obligations will need to be considered.

Termination: Your organisation might want to terminate the contract for a number of reasons. If your business merges or is taken over it may wish to exit from its contracts because it has other plans. Also, if your IT supplier is taken over (a small organisation taken over by a global group, for example) you may wish to be able to terminate because the reason you chose a smaller supplier might have been that it fitted in well with your organisation, whereas a multinational may not. What you will normally be looking for here is flexibility.

Exit plans: These need to be considered and formulated during the contract. Otherwise your organisation could be left without any understanding of its IT (or the ability to operate it) once your supplier leaves.

* Jimmy Desai is a specialist IT lawyer at Blake Lapthorn. His new book, IT outsourcing contracts: A legal and practical guide is available from www.itgovernance.co.uk