Outsourcing To Win: 4 Steps To An Effective Strategy

Here's what experts say CIOs and managers need to know to effectively manage a team of outsourcers and get the biggest bang for their IT dollars.

March 9, 2007 08:20 AM

Next month, the U.S. government is expected to dole out one of the largest public sector contracts on record -- a $20 billion deal to revamp the telecommunications infrastructure used by virtually all major federal agencies. The project is called Networx, and to fulfill the deal contracting officials in Washington will tap a team of outsourcers comprised of some of the biggest names in tech services.

Create A Winning Outsourcing Team

1. Pick a "head coach"
2. Use standards religiously
3. Select team-oriented vendors only
4. Put balance in your lineup

It's an approach that contrasts markedly with some previous federal mega-projects, such as the Navy's 10-year effort to create the world's largest, most secure intranet, where a single outsourcer is handed the bulk of the work. The Navy awarded that contract to Electronic Data Systems in 2000. Now, however, federal officials say a different approach is necessary in an age in which outsourcing technology work means more than just handing over the keys to the mainframes, servers, and desktops.

"The team arrangement will provide us with all the components we need," says John Johnson, assistant commissioner for integrated technology services in the General Services Administration's Federal Acquisition Service, noting that the breadth of the Networx project -- it encompasses everything from VoIP installations to network security management -- is beyond the capabilities of a single vendor.

That kind of thinking is catching on with Johnson's counterparts in the private sector, CIOs at multinationals such as ABN Amro, General Motors, and Kimberly Clark. Those technology chiefs all hold sway at companies that in recent months have awarded billions in outsourcing contracts to teams of vendors in the hope of accessing so-called best-of-breed skills. "There is no single vendor who can satisfy all of our requirements... one size doesn't fit all," said ABN Amro CIO Lars Gustavsson last year, after he handed off the bulk of his IT operations to a team that includes Accenture, IBM, Infosys, Patni Computer Systems, and TCS, under contracts totaling more than $2 billion.

A recent study of the strategies of 108 global companies that externally sourced more than $1 billion in IT work in the last 10 years found that 44% of them used one service provider, compared with 56% who used two or more. Few went as far as ABN Amro, though: Only 20% used four or more service providers, according to the study, which was authored by research firm Technology Partners International.

That's likely to change as companies hand more of their critical IT functions to outsourcers. A CIO now wants enough service providers familiar with his company and its business so that it's possible to shift work among them and keep all the vendors competing for more work. "Having more providers creates healthy competition," says Gartner outsourcing analyst Kurt Potter.

Choose A Head Coach

But while splitting an outsourcing contract among multiple vendors holds a number of advantages, it also brings with it increased management challenges as vendors multiply and the number of "throats to choke" multiplies. "There's no question that it can be a more challenging environment from a management perspective," says Liz Campbell, a consultant at outsourcing advisory firm EquaTerra.

Campbell says most companies lack the necessary management structure to effectively manage a team of outsourcers. With businesses spreading work around to more and more external contractors, they need to elevate vendor management to the executive level and hire the equivalent of a chief sourcing officer, she says. "There are not a lot of individuals within a company that have the multidisciplinary skills required for that sort of role."

The skills needed to effectively manage a team of vendors include familiarity with contract law and negotiations, a technical background, and a sound grounding in project management techniques and tools, according to Campbell and other experts.

Beyond effective management, successful teaming requires an almost religious adherence to standards by contractors and in-house IT departments so as to prevent a confusing proliferation of processes and methodologies for dealing with issues such as server configuration, help-desk resolutions, security procedures, and the like. "You have to know how these things are going to get passed between providers to ensure they're not working at cross purposes," says Shawn McCray, practice lead for service management and governance at Technology Partners International.

Raise Your Standards

Among the more significant sets of standards gaining wider adoption for just those reasons is the Information Technology Infrastructure Library, which is published by the United Kingdom's Office of Government Commerce and specifies best practices for a number of IT functions, including change management, incident management, and security. "With ITIL processes and standards now in place for service delivery, vendors are theoretically capable of plugging their offerings into that larger framework to ensure there's compatibility across the board," says Gartner's Potter.

Indeed, ITIL compliance was a basic requirement for vendors bidding on the ABN Amro contract.

Powerful CIOs are also forcing vendors to pay more than lip service to those standards. Prior to awarding $15 billion in tech services last year to a team of outsourcers that includes Cap Gemini, Electronic Data Systems, Hewlett-Packard, and IBM, GM technology chief Ralph Szygenda brought representatives from those companies and others to the table to discuss ways in which they could better cooperate and adopt common processes."It takes the kind of leadership like we've seen at GM to drive the adoption of the standards necessary for successful, team-based outsourcing," says Potter.

It's a message that's not lost on outsourcers. Rising offshore star Cognizant Technology Services in January signed a five-year, multimillion-dollar deal to provide application development services to pulp and paper giant Kimberly Clark. In fulfilling the contract, Cognizant staffers will at times be working alongside contractors from offshore rivals Tata Consultancy Services and Genpact and North American-based procurement specialist ICG Commerce -- all of which have themselves recently won major outsourcing contracts from the papermaker.

Cognizant chief financial and operating officer Gordon Coburn says working in such an environment requires a change of attitude on the part of vendors that will find themselves hand in hand with rivals. "They are competitors, but more often now the obligation is to work side by side with them," says Coburn.

Team Players Only

Team-based outsourcing projects are becoming more successful because customers are getting more sophisticated in general when it comes to managing third-party service providers. "We see more companies instituting a program management office that can oversee all these relationships," says Coburn. India-centric IT firms such as Cognizant are increasingly being invited to bid on contracts that are global in scope but designed to be parceled out. The trend toward teaming up "gives us a chance for a larger share of these deals," he says.

The good news for CIOs looking to create an outsourcing tag team is that most vendors are getting the message that the ability to work cooperatively with rivals is becoming increasingly important in the selection process. "There's a growing awareness among service providers that to gain business, this is what they need to do," says Technology Partners International's McCray.

As part of its program management efforts, the General Services Administration has created a customer council comprised of technology officials from major federal agencies. The council is tasked with weighing in on project methodologies, standards, and vendor selection. The GSA's Johnson says it's a crucial vehicle for ensuring the success of a multibillion-dollar outsourcing project that could involve a team of up to a dozen vendors. "It's a forum where they can participate in requirements development and review drafts. This very much has to be a collaborative approach with the major stakeholders," says Johnson.

Create A Balanced Offense

The extra management overhead that will come with dealing with such a large roster of vendors is a price the GSA is willing to pay in order to get the expertise necessary to deploy Networx, Johnson says. The program envisions a government-wide, fully integrated computing and communications architecture to create what Johnson calls "a more seamless and interoperable government."

The effort entails installing state-of-the-art digital voice and data networks that will run over fiber optic lines at T3 speeds or higher. The end result will be a convergence of the computing and communications networks used by the federal government into a unified digital environment. To get there, the GSA needs contractors with both telecom and enterprise IT expertise. "The new technologies blur the edges between the two, so the team arrangements are designed to include expertise in both those areas," says Johnson. What's more, security will be paramount given that the program will extend not just to civilian agencies, but to the Department of Defense.

As a result, the vendor teams bidding on the Networx contracts -- expected to be awarded by April's end -- include major technology, telecom, and security players. One team comprises no less than AT&T, Bechtel, Cingular Wireless, Electronic Data Systems, Global Crossing, and Northrop Grumman. Another includes Computer Sciences Corp., Hewlett-Packard, MCI, and Verizon Wireless. Still another is made up of Hughes, Lockheed Martin, Sprint Nextel, and their subcontractors. "They all represent what we need to move toward a converged environment," says Johnson.

Once a team is selected, the GSA hopes to have Networx fully rolled out within two years. "We're delighted with what we've seen so far," says Johnson. "This is going to be a team effort."