Why Successful Integration Is Critical to Outsourcing Success

The following is an abbreviated version of an article that appears in the December '02-February '03 edition of CSC World.

By William C. Evans

Ten years ago, the information technology outsourcing market was in its infancy. Today it is a multibillion-dollar industry. Industry analysts expect this rapid growth to continue as companies move beyond the outsourcing of information technology systems to the business processes they support.

The successful integration of the outsourced function into the service provider's operations is critical if the outsourcing engagement is to achieve its strategic objectives for both the client and the vendor. A recent study by consulting firm Booz, Allen & Hamilton indicates that 68 percent of mergers and acquisitions fail to live up to expectations. According to the study, the problem is not flawed strategies but the failure to successfully integrate the businesses.

Because outsourcing arrangements are in effect acquisitions - the outsourcer acquires a portion of the client's business operations and sells these services back to the client - a parallel correlation can be drawn that a significant number of these agreements also do not meet both parties' expectations.

In the past, many companies viewed M&As and outsourcing contracts as one-time events, and therefore saw integration as something to get over with, versus a process that is essential to a successful business relationship. Today, though, vendors and clients alike are beginning to understand the critical role that integration plays in the success of outsourcing agreements.

Successful integration is critical to a successful outsourcing relationship for three reasons.

First, it prevents the loss of key staff, knowledge, and productivity by addressing "people" issues in a timely and sensitive manner. Second, it minimizes disruptions to the business by focusing on a seamless transfer of resources and services. Third, it frees executive management to focus on the strategic issues that will return long-term value (beyond simple cost savings) to the organization.

Successful integration requires a significant investment in developing a repeatable, sustainable program designed to smooth the process. There are four major stages of integration: people, stabilization, relationship, and transformation. The first three stages are what people historically considered transition: the movement of people and services from one company to another. The fourth stage, transformation, implements the full technical solution that ultimately allows each party to achieve their strategic objectives.

This process-driven approach is a best practice learned from hundreds of integrations over the past several years - understanding that 80 percent of all integrations can be standardized and repeated - and captures discrete deliverables for the main elements of each stage.

The people issues are the single most important area of focus during the early, transitional stages of integration. Rumors will start from the moment a company begins to consider outsourcing as a business option. That is why it is essential that the company develop a detailed communications plan to provide employees with as much information as possible, as soon as possible to help prevent the loss of key personnel and productivity.

The keys to outsourcing success

Once a vendor has won an outsourcing contract, it should initiate a comprehensive organizational change management program designed to help employees through both the practical and emotional aspects of what this agreement means to them.

This program, with its emphasis on early and frequent communications, is designed to provide transitioning staff with the right level of information at the right time, allowing them to understand their choices, deal with the emotional aspects of outsourcing, and become committed members of the new team.

The communications program should use a combination of formal and informal channels to provide employees with crucial information on the vendor as a company and an employer. The program also should include an integration-specific Web site, toll-free phone and e-mail hotlines, social events, question and answer sessions, advisor programs, large and small group meetings, workshops, and seminars.

After considering the people issues, the next priority is transferring the work from the client with no disruption in service. A process-driven approach ensures a seamless transfer of services by understanding the current work environment and processes and limiting the initial changes.

By working closely with clients, vendors gain a full understanding of the projects that are currently in process, priorities for upcoming projects, current processes for initiating and authorizing new projects, as well as available information around metrics and service levels. Vendors can then implement a limited number of administrative and operational processes that are required for working within their company environment.

Relationship - focus on management

While the contract determines the basis of commitments to a client, for an outsourcing engagement to truly meet the operational and financial objectives of both organizations, it must be more than a client-vendor business relationship.

The most successful outsourcing engagements are those where the client organization and outsourcer work together to develop technology solutions that allow both parties to meet their strategic objectives.

Just as transitioning employees must learn new ways of working, so must the retained IT organization. Outsourcing requires the retained IT staff - especially managers - to approach their jobs differently. Before outsourcing, retained managers are responsible for deciding what needs to be done as well as who does the work and how they do it. In outsourcing agreements the customers decide the results they want to achieve, but the service providers are responsible for deciding who does the work and how it is done.

During this stage, it is imperative that the management procedures and controls are put in place that will permit and encourage this partnership. This includes refining and finalizing reporting criteria and relationships and governance models, as well as implementing contractual commitments around invoice structure and service-level agreements. Implementing a focused management alignment and governance program facilitates this process and helps clarify expectations among all affected groups.

Transformation - focus on solutions

Generally, it is during transformation that the client begins to see the real benefits of the outsourcing agreement. Once the transition is complete - usually two to three months after operational cutover - and the operating environment has been stabilized, the vendor starts delivering the technology solutions that provide the client with the financial and operational return they are seeking.

Primarily project-oriented, transformation activities include a process focus and, depending on the contract, may include help desk and data center consolidations, application rationalization and standardization, technology refresh and enhancement programs, or systems integration or implementation projects.

Conclusion

Integration is a critical, but often overlooked, first step in an outsourcing engagement. A systematic approach can reduce transition costs and increase customer satisfaction. A successful outsourcing engagement relies on a process that fulfills each party's expectations through all four stages of the integration.

William C. Evans is vice president of transition management for CSC's Technology Management Group.

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