How to Decide What Goes
The first decisions that any CIO makes in a transaction relationship are choosing which work to outsource and which vendor to send it to. However these are the most difficult steps. If someone wants to succeed, says Ross, he/she must make sure that something “extractable” that is easily definable, removable or considered noncore is sent to the vendor. Tasks such as desktop provisioning, business continuity and mainframe processes tend to fall into this category.
In some cases, the categorization of a slice of IT work as extractable is straightforward. Guy de Poerck, CIO of the International Finance Corp. (IFC), an arm of the World Bank, has been outsourcing help desk services to Affiliated Computer Services (ACS) for six years and hasn’t had to give it a second thought. “With help desk, the transaction is pretty simple,” says de Poerck. “I know it’s successful because I hear so little about it. I’ve never been confronted with a problem.”
But what is easily definable, removable or considered noncore can be changed by company. JM Family has a well-defined annual process for categorizing its technology. The process helps it to prioritize IT costs and decide what should be done in-house and what should be done for outsourcing. Yerves divides all technology into four categories: emerging, mainstream, contained and retirement. IT department focuses its budget, training and workers on Emerging and mainstream technologies. Contained technologies are often legacy systems. Though they are not in use, they must be kept up and running for outsourcing (although internal improvements in efficiency might suffice as well). Retirement systems are on their way out.
Going through this process in August 2002, Yerves and his leadership team categorized mainframe operations in the contained category for the first time. One of the company’s three business units went to be seperated from the mainframe. The others still employ the services but without increase in usage. Although the company’s usage was always changed, managing mainframe operations was a fixed cost in the IT budget.
So Yerves began to examine potential outsourcing vendors in early 2003, narrowing the field to two contenders by April. He put a valuation matrix together which found what the vendors could offer in variable capacity and cost. Variability was important because of the peaks and valleys in the business’s mainframe processing needs. Finally Yerves went with IBM.
But settling on the right outsourcer wasn’t the trickiest part for JM Family. As proved in the CISR-CIO study, protracted contract negotiations can destroy a transaction outsourcing arrangement. “The concept of a transaction relationship is, in some respects, an oxymoron. Ideally, there is only barely a relationship—much like we’d have at the grocery store with the sales clerk. I find what I want, the clerk rings it up, I pay,” Ross says. “If client and vendor engage in protracted negotiations about unique features or special pricing arrangements, they no longer have a simple transaction.”
Yerves had heard some terrible stories from peers and analysts about disputes on outsourcing contracts. So he’d like to find solutions to avoid contractual conflicts by simplifing the process. Yerves isolated some leaders and lawyers in a local hotel from the vendors and JM Family. “We gave them 72 hours and said if we can’t get to an agreement by then, we don’t have a deal,” he says. And it worked. Before time ran out, JM Family and IBM had signed an agreement. “We were able to mitigate that early risk of long or contentious negotiations”, he says.
In fact, a sign of good transaction relationships is that contract negotiations are straightforward. The outsourcing services are extractable, and companies and vendors have similar goals for the arrangement: Make it fast, easy and cheap. “It’s a lot easier to get to success with transactional-type outsourcing [than with other types] if the customers have well-defined requirements,” says Mary Lacity, professor of information systems at the University of Missouri. “If the customers know exactly what they want, they can tell the vendor, and the vendor can price [the contract] correctly. The expectations [for the outsourcing arrangement] can then be well defined in the contract.”
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