[LINK] Contracts at heart of outsourcing success
Fri, 11 Oct 2002 09:34:52 +1000
Of the three different types of outsourcing deals as identified by Gartner
(probability of being correct <0.5) the Federal Government falls into none.
The most common - utility deals - does not describe a public sector
environment. Government agencies very rarely use "mature and commoditized
Although Government IT outsourcing is off the radar screen of the media at
the moment, that doesn't mean all is quiet under the surface.
Contracts at heart of outsourcing success
By Juan Carlos Perez
11 October, 2002 8:02 LAKE BUENA VISTA, FLORIDA, U.S.
Many outsourcing projects are doomed before the ink dries on the contract
because the contract stipulations don't correspond with the clients'
expectations, a Gartner Inc. analyst said Thursday during a presentation at
the company's Symposium/ITxpo. When outsourcing contracts and expectations
are misaligned, clients end up feeling that the service provider failed to
deliver on goals and objectives, said analyst Chris Ambrose during his
presentation titled "All outsourcing contracts are not created equal."
Gartner estimates that up to 50 percent of outsourcing projects fail, and
many of those failures can be traced back to the contracts, he said.
To draft an appropriate contract, clients need to understand that there are
three different types of outsourcing deals:
-- utility deals, which are the most common (80 percent of all deals) and
involve the transfer of mature and commoditized IT operations, such as IT
infrastructure management, and whose goals are maintaining a consistent
delivery of services with incremental improvements at low costs compatible
with industry benchmarks;
-- enhancement deals, which make up between 15 percent and 17 percent of
all deals and which call for the outsourcer to deliver measurable
productivity enhancements in, say, human resources or finance operations,
to drive specific business goals, something involving a higher level of
risk and complexity for both parties;
-- and transformation deals, the more ambitious and less common type of
deal (3 percent to 5 percent), which often involve the creation of a
partnership or joint venture between the client and the outsourcer and
whose goals are the creation of new business opportunities, such as the
development of new products or the penetration of new markets, and thus
require the highest degree of innovation and risk.
An outsourcing engagement's likelihood of success increases by 50 percent
if the client knows what type of deal it wants to enter into before the
contract is drafted, Ambrose said. "Enterprises must determine what sort of
sourcing relationship best meets their business needs," he said.
Each deal typically involves different pricing schemes, delivery methods,
technology approaches and customization levels, he said. Moreover, service
providers are typically more adept at one type of deal, so being aware of
the type of project will also help the client choose among outsourcing
vendors, he said. "Matching the right type of supplier and the right type
of engagement model will become increasingly important," he said.
Contracts must also be structured in a flexible way so that they allow for
modifications as the client's business evolves, expands or shifts course.
"Plan for change," Ambrose said.
Moreover, clients must continually supervise the outsourcing project and
manage the relationship with the outsourcer. This close oversight lets the
client enforce service level agreements, address problems early before they
spin out of control, and identify areas of the engagement that need to be
modified, he said.
Correlation is usually used when knowledge is incomplete, and many times it
leads to unsound conclusions. Every statistics student knows the story of
the man who had a hangover after drinking scotch and water one night,
bourbon and water the second, and vodka and water the third. A statistician
advised him to stop drinking water.
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