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10 steps to ensure your IT outsourcing deal fails

Stephanie Overby | Sept. 30, 2013
Even though the state of IT outsourcing has matured, mistakes in flawed deals are often repeated, and the most disappointing deals share common characteristics. Here are 10 steps that are guaranteed to lead to an outsourcing catastrophe.

"Happy families are all alike;" Leo Tolstoy wrote in Anna Karenina, "every unhappy family is unhappy in its own way."

One might be inclined to think the same is true for outsourcing — the successful relationships share the same best practices while the failed arrangements are uniquely flawed. But, in fact, the most disappointing deals do share common characteristics.

Diane Carco, president of IT consultancy Swingtide, has been studying the facets of flawed deals for nearly two decades. Even as the state of IT outsourcing has matured, the same issues come up again and again in failing IT services relationships. "Mistakes are often repeated," says Carco, who had to terminate a $2 billion outsourcing deal when she was CIO of CNA Insurance in 1999. "Awareness of why things failed is not necessarily propagated into the next generation of management and the next deal."

Carco, who now specializes in troubled deals and serves as an expert witness in outsourcing disputes, has identified the 10 sources of problems she sees repeatedly — a virtual how-to if you want your deal to fail. But these 10 steps to avoid also serve as guideposts in how to avert outsourcing catastrophe. "A forensics review of deals gone bad helps you figure out how to do better in the future," she says.

1. Don't define transformation. The majority of companies enter into outsourcing arrangement to get better IT service at a lower cost. Of course they know that will require change, but they usually haven't figured out how that change is going to happen. "It's the cornerstone of most problems," says Carco. The typical outsourcing contract contains a paragraph committing the parties to develop a plan for transformation — and that's it. Better than a promise to make a plan is an actual plan developed pre-contract. "It extends the time of contracting but it gets you to the end state faster," says Carco.

2. Assume billing and SLAs begin on day one. Unsatisfied outsourcing customers mistakenly assume that prices and SLAs written for the end state are effective in the first month, says Carco. "They don't have transition service levels or billing. The relationship starts in a very big hole."

3. Ignore retained costs in the business case. Cost savings are a big outsourcing driver. But many customers fail to conduct a fully loaded economic analysis when making their business case — and end up disappointed when the deal fails to deliver financially. "People forget the cost of the retained organization — or they forget to have a retained organization," Carco says. "There's also a lot of confusion about who pays for things like connectivity or the cost of disposing certain assets."


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