Think About the End Right from the Start

Dr. Peter Dück
Dr. Peter Dück

Dr. Dück, as an analyst and consultant in IT services and sourcing – especially ERP outsourcing – at Gartner, you’ve worked with outsourcing for many years. How do you see current developments?

Dück: I’d like to see something of a more factual position in the discussion for and against. A lot of what’s said on the topic sounds like personal beliefs rather than well-founded arguments. For example, consider the promised reverse trend back to insourcing.

Ultimately, outsourcing involves nothing other than a division of labor that makes sense from the viewpoint of business administration. Current topics include industrializing the provision of services, standardizing processes, and setting up value-creation chains. I like to use the example of the construction industry here. Architects use standard elements even with individual and creative solutions. Executing much of their solutions involves standard descriptions of services and processes. Why shouldn’t this principle be applied to IT?

Outsourcing is a key word used when companies want to reduce costs. Does that really happen, or is it more likely for a company to miss the follow-up costs?

Dück: To put it briefly: both. Outsourcing offers many opportunities to save costs – through economies of scale or cost-effective locations. But companies often miss the costs for getting into outsourcing and the investments in things like a professional sourcing management team. And superficial descriptions of services in contracts can quickly push expenses for unplanned services to 30 percent more than the original cost.

Where are the limits of outsourcing?

Dück: Every company has five areas – I call them areas of sovereignty – that should remain within the company: strategy, service architecture, process development, technology development, and, naturally, sourcing management.

Most other tasks are services that can be outsourced a priori. Of course, doing so depends upon economic factors, the core competencies a company doesn’t want to give away, and what it uses to generate revenue. For example, a manufacturer of brand name shoes might find it extremely problematic to give up production. But the situation looks different when the business involves buying shoes from other manufacturers and selling them under your own brand name. It’s also a question of benefits. Is the service that can be purchased so professional and offered at such an attractive price that the benefits outweigh the risks? In the end, I always recommend that every outsourcing project be thought through from beginning to end and carefully planned before any decision is made.

How detailed should such planning be?

Dück: In many places, more than you think. In large companies with several locations, you can stumble into a minefield by asking where value is added that’s relevant to taxes. When data is stored in a computer center in location A, the server runs in location B, the system is managed from location C, and when locations involve several countries and trading borders, the answer is difficult. And economic sanctions can become a problem. For example, one of our clients with a supplier in the United States has to work with special subcontractors for a location in Iran.

Let’s talk about international complications and borders. What’s the state of outsourcing within the originating country or to the eastern Europe of the far east? Can the linguistic barriers be overcome securely?

Dück: In actual fact, that’s not always unproblematic. You hit linguistic and cultural barriers rather quickly – especially with offshore outsourcing. The classic example of different ways of thinking and working is the faith in authority in India. This mentality leads to stubborn adherence to specifications, even when the employee thinks of a better way of doing things. In our culture and in eastern Europe, employees ask a lot more questions and suggest improvements on their own.

Regardless of the target country, what conflicts typically arise during outsourcing, and what should a contract contain to avoid such conflicts from the very beginning?

Dück: Conflict usually involves performance much les than the rules for collaboration. Mutual expectations are often insufficiently formulated from the beginning. Of course, the parameters of performance can be defined exactly for a purely utilitarian service like a network. But complex project services, such as migration projects, exact definitions are not always possible without some assistance. Consulting and continuous monitoring of progress toward the goals play a much greater role here – and these factors are often defined with too little precision.

But defining the general rules of the game, including the detailed mechanisms of collaboration between all those involved, is just as important as the definition of services. Service requirements can change quickly today. That’s why rules that describe possible change mechanisms are required. Therefore, the linchpin of a contract is the question of how to react to changes. Other questions also apply. Who gets what information? Who is to become involved? Who hires what personnel? What requires special attention? What’s the situation with rights and licenses? And above all, how and under what conditions can the contract be ended?

How often do disagreements actually occur?

Dück: According to a study we commissioned, almost half of all outsourcing projects must be considered unsuccessful. In addition to deficient agreements between the partners, the reason is usually that the focus has been on short-term savings rather than on meeting long-term goals.

What absolutely requires attention at the start of an outsourcing project?

Dück: Outsourcing projects always play out over several years and require solid project management. Correct and comprehensive preparation of the content and structure of the outsourcing project is therefore critical for later success.

Preparation includes the ability of a company to examine itself critically, to look clearly not only at its strengths, but also its weaknesses. And you need to clarify the effort required for the project and the correct team. Unfortunately, people with the right experience do not always make decisions based on such considerations. A purchasing agent typically pays too much attention to payments and too little to the technical background. A good consultant can help here. The role of the consultant has become more important in the past few years – especially in terms of strategic goals. But even with a high-powered consultant, remember that consulting is just one side. Ultimately, you have to make your own decisions.