Briefing Note - Outsourcing Software & Hardware Maintenance and Support

The annual ITtoolbox Outsourcing Survey (2004) found that cost saving (38%) and the need for technology, skills and equipment (21%) were the most important factors for companies in choosing an outsourcing supplier. The key factors in selecting an outsourcing provider rested with the pricing (49%) and the technology and skills possessed by the supplier (49%). Almost 27% of all contracts required from 11 to 50 hours a month to manage the relationship. Well managed outsourcing makes commercial sense. If a company needs experts and does not have the skills available in-house and is not in a position to dedicate resources to hire or train new people outsourcing is one solution. Most organisations base their decision to outsource functions and processes on cost savings, improved services, access to experts or technology. It makes sense: external, dedicated companies are better suited to perform specialised tasks, with a highly focused knowledge base.

Added benefits of such expertise may find the form of delivery of forward-looking information and value-added business analysis, clearing a path for innovation into a market or reduce response times allow a more timely deployment of solutions and improve system availability.

As technology improves, specialisation increases and companies focus more on core competencies look to service providers to manage critical but non-core processes for them, allowing more time for companies to focus on core competencies. There is little future in outsourcing core functions. The mainstay for outsourcing are commodity functions. It does not make sense to outsource activities that give or contribute to the areas that give the company its competitive advantage. Maintaining a perspective on the reasons for entering into the outsourcing arrangements allow a clear mind to evaluate the commercial merits of the outsourcing transaction.

Process of the Outsourcing

Depending on the scale of the outsourcing, due diligence of the ownership of assets is an imperative to ensure that assets to be brought to the party, are indeed brought to the party. One of the factors that should be incorporated into outsourcing agreements are a mechanism to encourage providers to continuously improve their services.

Plan for Change

The contract should allow some variance in the services. Competitive companies move organically. The alternative is that the supplier needs to be changed. Ideally some measure of enhancing or reducing the level of services to be provided. The hidden costs of outsourcing include the cost of replacing supplier in the worst case and the internal costs of managing the outsourcing company relationship. As a rule of thumb the larger the outsourcing, the smaller the percentage of overall costs. These should be budgeted for in the initial costings, as they incontrovertibly contribute to the cost of the outsourcing.

With outsourcing comes employment issues. No longer is a company in control of its own workforce, and on a practical level rather than a legal level, relies on the employment policies of other company for a stable and continuous service.

Customisation

Unplanned changes become expensive and may not occur in the time frame desired due to the reliance on others or a contractual consultation and development process. The specification for the outsourcing should be detailed. The parties need to know what they are delivering and what they are receiving. Reasons for cost overrides include system incompatibilities and demands outside and standard vendor package. Customisation cost.

Disaster Recovery

Disaster recovery and plausible exit strategy should be considered at the outset and carefully planned the contract is coming to an end.

Any contract that places some element of the supply chain in a third parties hand needs to be administered to ensure the performance paid for is the performance delivered. There is no easy way around the matter. The contract should not be put to one side and service levels allowed to lapse. Not only is it detrimental for immediate business and counter-productive to the original purpose, such an approach may be drawn out by and capitalised upon in the event of a dispute, creating uncertainty as to the actual rights possessed by either party: regardless of the fact that the contract is in writing.

Unwanted Competition

Finally, selection of the outsourcing supplier may have an added dimension. Although it may be possible to prevent competitors unfairly taking advantage using intellectual property law, be it patent rights, copyrights, confidential information or trade secrets, ensure that the contract prevents the outsourcing supplier becoming a competitor.