What is IT outsourcing?

Outsourcing is a process where an organisation sub-contracts certain functions or processes within a business to a specialist, third-party, company.

These activities are something that we often do in our daily lives. For example, many people have gardeners or cleaners simply because they do not have the time or inclination to clean their house or mow the lawn. In fact from a business perspective you’ll rarely see a member of staff cleaning the office at the end of the day, it is nearly always contracted out to a specialist company.

IT outsourcing can be used by most companies and, in fact, many outsource some key IT services without actually realising it. For example, many companies outsource their IT support function such as software support and hardware maintenance. It is very rare, especially for small to medium size companies, to retain these support services in-house simply because employing specialist personnel who may only ever be called upon occasionally, is not cost effective. This means that the company have the expertise of a professional but not the overhead or cost of a full-time person.

IT outsourcing is also sometimes known as ‘managed services’. This is a very similar system where generally, non strategic IT functions are subcontracted to a specialist third party organisation.

The outsourcing provider may not necessarily provide all of the services required directly as they may not have the relevant resources or expertise. Quite often certain services are sub-contracted to specialist companies, leaving the original provider to manage those relationships.

The future of IT outsourcing

The market for IT outsourcing is set for continued growth. This is as a result of companies looking to reduce costs and focus on key areas that affect their business.

One of the main causes is the current ‘credit crunch’ and talk of recession, so naturally, companies will wish to reduce costs and outsourcing can be a useful way of achieving this.

Why outsource?

The main reason to outsource the IT department is generally to reduce business costs and benefit from the expertise that an outsourcing company can provide.

Managing technology is a complicated function let alone choosing, installing and supporting it. For most organisations it is seen as an overhead or even a potential headache!

It can also be difficult for a management team to measure the success of an IT department, unlike many other functions or departments within an organisation. As a result, quite often managers believe that ‘if it isn’t broken then don’t fix it’. Also, because technology it is so often misunderstood, i.e. people know they need technology but don’t know how it works, an organisation might not be fully using their technological advantages in order to become more efficient lower costs and improve profitability.

Types of IT outsourcing

There are a number of different IT areas that can be outsourced depending on an organisation’s requirements and size. IT outsourcing agreements may include all of an IT department, or just particular areas.

Helpdesk or first-line support

The IT helpdesk acts as the first-line or support function of a company. Employees who are having technical problems can phone the helpdesk and expect support in order to resolve their issues.
The helpdesk can either be a support desk in-house (if the size of the company warrants this) or off-site at a suppliers’ premises.

Any employee within the company can phone the support desk at which point the call will be logged or registered. The purpose is to find out whether the problem is a hardware, software or network problem and whether it can be resolved over the phone or whether an engineer will be required to go on site and fix it. This is to make sure that the right resources are allocated to fix a particular problem or if the problem is simple then the helpdesk can often resolve this over the phone

Installation

A part of the agreement may be to install new equipment or IT functionality as and when required and to ensure that users are trained and confident with the new systems.

Software support

The role of software support is to allow end users to contact a support line to solve a problem, generally over the phone. If not, then an engineer may go to the user to fix the issue, or access the faulty system remotely and solve it.

Hardware support

Hardware support enables end users to have any hardware problems fixed, such as a faulty PC or printer. This will generally mean that an engineer needs to come out to visit the user to fix the problem.
Some agreements specify that a certain amount of ‘hot-swaps’ must be available. A hot-swap is a spare piece of hardware, whether a PC, server, printer or even a network card that is swapped with the user’s hardware in order that they are able continue working quickly, rather than waiting for the engineer to fix the problem or order the relevant part.

Software development

Software development is increasingly being outsourced or ‘off-shored’, with teams (the people who write and design software) based in areas such as Central or Eastern Europe and Asia where there is access to highly educated, well trained personnel whose wages are essentially lower than in Western economies.

It is also far more productive and effective to have a team of people used as and when needed rather than having full time developers being paid even when they are not required as can often happen with software development projects. In fact the majority of software vendors have software developers based outside of their country for this very reason.

Data centre

Generally, only large companies have data centres, which is a facility used to keep all computer systems and telecommunications systems in one place. These facilities sometimes require a great deal of space and resources such as people with the right technical expertise to support them.
Data centres are used for systems that are ‘mission critical’ i.e. systems that must work 100% of the time as any failure can cause the company irreparable harm. Banks, for instance, rely heavily on data centres as any computer failure can potentially cost them billions of dollars every day.
These centres require a great deal of support as they may comprise of several different types of hardware, operating systems, software and often ‘legacy systems’. Legacy systems are old computer systems and applications that an organisation does not wish to replace, often on the basis that ‘if it isn’t broken then don’t fix it’, or the costs would be prohibitive to do so.
Data centres also tend to have a wide range of equipment and software and being able to have the resources to support the whole range can be expensive.

Legal issues

You have to keep a number of key business issues in mind when outsourcing, especially when it comes to personnel and their contracts of employment and their legal rights. This is encompassed by a piece of legislation entitled Transfer of Undertakings [link to: http://www.opsi.gov.uk/] (Protection of Employment) Regulations 2006 or TUPE as it commonly known.
In summary, TUPE ensures that:

• Employees are not dismissed before or after any BPO agreement is in place. This means that BPO cannot be used as an excuse to make personnel redundant.
• Employees are informed and represented throughout the process.
• Employees’ rights are not affected by the BPO, i.e. their salaries and packages must not be worse. This includes pensions and pension rights, holidays etc. In essence, employees’ terms and conditions must remain the same.

If these regulations are not adhered to, and an employee is dismissed as a result of the BPO, then this will be regarded as unfair dismissal and the company may be held legally liable.
The links below may be useful for companies seeking further information and it is highly recommended that a specialist lawyer be involved at some point.
www.out-law.com/page-448
www.berr.gov.uk/employment/trade-union-rights/tupe/page16289.html

Service Level Agreements

A Service Level Agreement (SLA) provides a framework or structure that both the customer and the IT outsourcing provider agree to. In broad terms, this may be that the IT outsourcing company must provide a response to an issue within a fixed time, the process for how problems are managed, expected resolution times and performance measurement. The SLA also lists the services that the IT outsourcing company agrees to provide

It is important to agree on a SLA in order to ensure that any commitments made by the service provider are met.

If the SLA conditions are consistently not met, this can lead to termination of the agreement and/or call for penalties to be made. These penalties are more often than not financial but act as a deterrent of delivery of poor service unless there are extenuating circumstances.

What type of companies would benefit from IT outsourcing?

Most companies can benefit from some form of outsourcing but many are not inclined to do so because they perhaps feel uncomfortable with contracting key functions to a third party.

The key to IT outsourcing is to ask the following questions:

• What is crucial to the business in terms of technology, implementation, strategy, and support?
• What are the areas or functions that are currently not effective?
• Would using an outsourcing company improve or resolve any of these issues?
• What are the risks?

Benefits of IT outsourcing

Organisations can gain a number of benefits by outsourcing their IT function.

• Cost reduction. Many IT outsourcing companies are able to provide certain IT services for less money. This is achieved by reviewing current technology, processes and procedures as well as by using their experience in saving money within the IT department.

• Quality of service. It is also possible in some instances to improve service quality by being able to have more resources and better qualified personnel.

• Services will be delivered against a contract to ensure that if the services delivered fall below a certain level, then the penalties may be used against them. This ensures that a high level of service is delivered most of the time.

• An IT outsourcing company will be able to advise you if you can improve your business by installing new technology.

• An IT outsourcing company may be able to help you run your business more effectively because they have experience from a wide range of industries and customers.

• Productivity improvements. It allows senior IT executives and management to focus on critical business’ functions.

• Access to a wider array of skills and knowledge. IT outsourcing enables a company to access skills sets and expertise that they would otherwise not have. Many outsourced service companies have skills and intellectual assets that may take many years to generate in house. For example, it is rare and expensive to have a number of people that can support a wide range of applications in one company. Or, your company may require ad hoc services such as application development or assistance with a particular IT project.

• Allocation of resources. Organisations that use outsourced service providers can effectively reallocate personnel into areas that will have a positive impact upon other projects. This may be a move from tactical projects to more strategic areas which can have a positive impact on the organisations’ longer term use of technology in order to remain competitive.

• Predictable IT expenditure. Most outsourced IT agreements provide a fixed price level (plus a percentage for increases in inflation) allowing for predictability for budgeting and financial planning.

• Flexibility. An IT outsource agreement will include the ability to cover for sickness, holidays and other HR related issues.

• Improved service levels. It is most unlikely that a small, in-house IT department will have enough resources to offer support 24/7/365.

• IT outsourcing companies have the knowledge and means to be able to purchase new systems at the right price.

• Time reduction and speed to market. IT outsourcing can dramatically reduce the time to market for certain products by allowing a company to accelerate development by utilising extra resources on ad hoc basis. IT outsourcing organisations can fulfil manpower requirements according to demand, so that if a particular project requires more resource in the short term this can be accomplished.

Potential pitfalls

There are many risks associated with outsourcing that should be considered when planning to outsource some functions.

• Loss of flexibility in reacting to changes in business conditions. It is impetrative that communication continues throughout the life cycle of any outsourcing agreement. This means letting the IT outsourced company know of any change of strategy or conditions that might impact their ability to deliver the services properly.

• Potential threat to security or access to confidential information. Most records from payroll, financials and HR (Human Resources) are stored on computer systems. It is important to have a process in place that ensures that these details remain confidential and can be accessed by relevant personnel.

• Job losses. Many people believe that IT outsourcing only leads to people losing their jobs. While this can sometimes be true, and while there might be a perceived threat to their economy, most often the roles that are outsourced are those that typically a company have difficulty fulfilling anyhow.

• Potential loss of managerial control. Naturally it can be easier to manage your own personnel than relying upon a third party, but again, this can be resolved with good communication and regular update meetings.

• Damage to morale. Some people may react badly to a new system or outsource agreement particularly as most people don’t like change or uncertainty. Hence the reason to communicate plans from the onset.

What can I expect to gain by outsourcing my IT function?

It can be difficult to identify a return on investment (ROI) for IT outsourcing but the benefits are clear.

When discussing your requirements with potential suppliers, make sure that they explain where they might be able to save money and if possible have this written within the agreement.

It does mean that while the overall responsibility of an organisation’s IT and infrastructure remain with that company, outsourcing will take away many of the day to day issues that can cause problems and impact upon busy work schedules. If someone working to tight timescales is affected by a technical issue, it can be very frustrating if they can’t resolve that problem straight away, or of they don’t have a contact to someone who can help them.

IT is generally very important to a business and as a result it requires the appropriate support and resource.

Six steps to successfully implementing an IT outsourcing agreement

Step one

In the initial phase, an organisation must ask:

• Why do we want to work with an outsourcing company?
• What are the risks?
• Do the benefits outweigh the risks?
• What sort of relationship do I expect from an IT outsourcing company?
• What sort of relationship will they expect?
• Don’t take anything for granted.
• How will we measure results and whether the relationship is working?

Step two

Analyse your business needs in the areas that you are considering outsourcing:

• Are you looking to save costs/money?
• Are you looking to re-allocate resources?
• What will happen to personnel within the IT department?

Step three

Identify the right supplier.

• Use Conjungo. [link to www.conjungo.com]
• Look through magazines and online reviews.
• Talk to others who have outsourced their IT department
• Use forums, networks and personal contacts to obtain recommendations.

Ask questions such as:

• Who has the experience of working with a company of the same size and profile as yours?
• What are the qualifications of the personnel involved? Ask to see their CV’s – they must be able to have the expertise to do the job properly.
• Are any of those suppliers local to where you are located?
• How many similar installations have they made?
• Ask for references – ensure that the company is capable and reliable.
• Talk to a couple of their customers in order to see what benefits have been gained and what pains those customers went through when installing the system.
• Obtain a credit check through ICC Credit (you can get a credit report on any supplier in Conjungo directly from their listing) to ensure that they are financially stable.

Step four

Request a detailed proposal from three or four of your preferred suppliers.

• Set a deadline for when you need the proposal back.
• Give out details in advance as necessary to ensure that the suppliers you have selected can give you the best proposal.
• Go and meet them in person – get a good feel for whether you will be able to work with them.

Step five

Select a supplier.

• Who best demonstrates that they understand your business and your requirements?
• Is it cost effective? Have they shown how and where you will save money?
• Does it clearly demonstrate the functional benefits – rather than just listing particular features? Does the proposal clearly show what the benefits are?
• Have you spoken to a couple of your preferred suppliers’ customers?
• Agree on financial terms - Will the service be payable monthly or annually?
• Agree upon the services or functions to be outsourced.
• Agree upon a Service Level Agreement.
• Don’t agree to anything more than a three year agreement.

Step six

Implementation

• Plan a handover with your IT outsource supplier.
• You may need to run your IT department processes in parallel for a short time until the outsourcing supplier is fully aware of your IT systems and operations.
• Communicate regularly especially in the early days in order to address any questions and issues.

Points to remember considering and planning IT outsourcing

• You must be absolutely clear as to why you are considering an IT outsourcing agreement. Make sure that terms are defined, objectives and SLAs are clear and that all parties know exactly what is expected.
• What type of relationship do you want with your outsourcing partner? Depending on your requirements, may determine the type of company that you work with.
• What are you trying to achieve?
• Costs savings?
• Increased service levels?
• Enhancing areas where perhaps your company does not have the right level of skills?
• Identify and assess any potential risks. How will the IT outsourcing organisation manage and deal with these? What contingency plans will be put in place, for example, will they manage the Disaster Recovery Plan.
• You need to make a balance in agreeing the scope and length of any agreement. Three years is fine, ten years can be too long. It must have long enough time to make a difference and short enough to remain flexible. The agreement should allow you flexibility to change certain areas of the agreement especially when it comes to an exit.
• Transition plan. You will need to work with the IT outsourcing company to fully work out how the services will be transferred and over what period of time. Remember that it takes time to outsource and at some time you may wish to bring those services back ‘in-house’. This can be complex and long winded.
• You must communicate internally, i.e. within your organisation, as soon as you start to consider any form of outsourcing. Outsourcing can be an emotive term and people will hear gossip, and this can impact performance as personnel may surmise that there will be job losses. However secret you try and keep it, people will find out. As long as you fully explain the business reasons for doing so, most people will understand.
• Compliance. If your organisation is effected by for example legislation or codes of conduct such as Sarbanes-Oxley, this must be considered and be potentially written in to any agreement. All companies have to keep records of some kind and these will fall potentially within the remit of the IT function.

Conclusion

Any IT outsourcing agreement should be dynamic as it must continually reflect the needs of the business and changing requirements of the IT department in order to reflect this.

IT outsourcing doesn’t necessarily require people on the premises of the customer. It can still be appropriate to outsource the fundamentals of the IT department, such as software support and hardware maintenance in conjunction with an appropriate Service Level Agreement in order to ensure that high levels of service are guaranteed.

FAQs

What is outsourcing?

Outsourcing is a process by which an organisation sub-contract certain functions or processes within a business to a specialist, third party, company.

Many organisations, and to some extent people with computers at home, already outsource the support function, for example where the manufacturer of their PC will fix the machine should it ever fail. Likewise with software applications. There are many support companies that will charge per minute over the phone or as needs require.

Why do I need it?

You and your organisation will need some form of support for your IT operations and the more complex the technology and the more reliant a company is upon that technology in order to function, the greater the need to have support.

It can be a good idea for an organisation to focus on core business areas rather than areas that are not within the capability of personnel within that company. IT outsourcing also means that the organisation can expect high levels of service as well as the benefit of extremely skilled personnel on a full time or ad hoc basis.

I have some people within my company look after IT. What will happen if I decide to outsource that function?

There are a number of legal issues that need be considered when outsourcing especially when it comes to personnel and their contracts of employment and their legal rights. This is dealt with by a piece of legislation entitled Transfer of Undertakings [link to: http://www.opsi.gov.uk/] (Protection of Employment) Regulations 2006 or TUPE as it commonly known.
In summary TUPE ensures that:

• Employees are not dismissed before or after any outsourcing agreement is in place. This means that IT outsourcing can not be used as an excuse to make personnel redundant.
• Employees are informed and represented throughout the process
• Employees rights are not affected by the outsource agreement i.e. their salaries and packages must not be worse. This includes pensions and pension rights, holidays etc. In essence, employees’ terms and conditions must remain the same

If these regulations are ignored to, and an employee is sacked as a result of the agreement, then this will be regarded as unfair dismissal and the company may be held legally liable.

How do I know that the company I outsource my IT function to will provide a better service?

This is part of the buying process or due diligence. You should have met at least three potential service providers, considered their proposals and spoken with a couple of their customers.

How do I ensure that they continue to deliver a good service?

It is important that you know what your objectives for IT outsourcing are and have an SLA in place in order to ensure that the service levels remain high.

What is a SLA?

A Service Level Agreement (or SLA) provides a framework or structure outlining the objectives that both customer and services provider agree to deliver. In broad terms, this may be that the IT outsourcing company must provide a response to an issue within a fixed time, have a process for problem management, resolution and performance measurement. The SLA is also a list of services and objectives that the IT outsourcing company agrees to deliver.