When outsourced means out of sorts

Unanticipated costs are the biggest drawback for information technology outsourcing projects, according to an Anglo-US study. The report, published by Templeton College, Oxford, particularly criticises deals described as "strategic partnerships" between vendors and clients. "None of these provided the expected cost savings," say authors Leslie Willcocks and Mary Lacity.

The four-year study claims to be the most exhaustive study of IT outsourcing yet, covering 61 deals involving 40 American and British organisations in such industries as airlines, banks, chemicals, electronics, utilities, retail and food as well as government organisations.

Among the examples of poor practice it documents is the case of a chemicals company where senior executives signed a comprehensive seven-year outsourcing deal. Because those involved saw themselves as partners, certain contract negotiations were omitted and an incomplete contract signed. One month after the contract began, the vendor's excess charges for items not covered in the contract were exceeding the fixed monthly price.The company finally paid a stiff penalty fee to discontinue the partnership, bought its own hardware and software and hired 40 IT staff.

This is an extreme case but Mr Willcocks and Ms Lacity warn against senior executives taking the view that IT services can be "plugged in and out". Few information technologies operate in isolation, they say.

The authors advocate selective sourcing rather than the "all or nothing" approach. Selective sourcing involves not just deciding how best to source specific IT activities but also introducing governing mechanisms for overcoming organisational resistance.

In addition, there are more suppliers entering the market, introducing niches and options as well as the lower costs that come with competition.

But even with conventional outsourcing, there are four steps that will help ensure success, say Mr Willcocks and Ms Lacity. First, tailor the contract carefully - 91 per cent of tailored contracts were successful. Second, use short-term contracts.

Third, internal IT departments should be allowed to bid alongside vendors. Nearly 90 per cent of deals carried out this way succeeded, though the study warns against defensive internal bids based on cursory or dubious valuations. Fourth, both IT specialists and senior managers should be involved in the decision. Where senior management alone decided to outsource, the chance of success was 40 per cent, against 56 per cent for those where only IT specialists were involved. If both groups were involved the success rate was much higher.