Preparing to Outsource


Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published August 20, 2003

The decision to Outsource IT often begins in the area of corporate finance with a yearning to “save money”. It may be perceived that Computer Operations and hardware are costing the company too much in return for what’s received by top management. Add to this concept that the software business applications database and help desk staff salaries and benefits cost too much for what’s perceived by the Board of Directors. Remember the new world of ROI or beauty lies in the mind of the beholder. Management communication with trade journals or other company executives may have identified Outsourcing and its plaudits.

Keep in mind that the cost, activities and headaches involved in Outsourcing require documented substantiation. Documentation can be assigned to the Internal Auditors or select a reputable Management Consulting firm (not involved in the Outsourcing agreement) to validate or develop business systems policies and procedures. This documentation activity is known as Business Impact Analysis.

A comprehensive Business Impact Analysis requires a work plan and timetable. The work plan addresses the company’s Mission Critical Systems, as identified by the CEO, President, CFO or CIO. The results of the Business Impact Analysis can realistically identify the Mission Critical Systems; i.e. those needed to run the business and generate dollars.

Initial cost savings and/or monthly maintenance savings can be identified with spreadsheets. In creating the cost savings analyis, the need to maintain twenty-four hour computer room operations on company property is gone as is the computer room space. Support Staff, Customer Service and Help Desk space is gone and their respective salaries and health, 401 K benefit packages. No more Computer hardware software vendors phoning or visiting at all hours of the day. Wow! Doesn’t this sound wonderful? Say good-bye to IT headaches?

Are we ready to make the Outsourcing plunge? If management says yes, then let us proceed to prepare for its coming! We need to do a little more analysis work of IT operations, using another spreadsheet:
• Is the Computer equipment including peripheral devices – owned, leased or rented?

• The renewal contract date of IT vendors and their respective services is?

• Document the actual cost of computer room and support staff utilities.

• Is the Computer Room and Staff space rented, leased or owned?Is the Computer Room and Staff space rented, leased or owned?

• Document the calculated cost of space overhead in the staff and operations rooms.

The CIO is primarily responsible for the Outsourcing project and he/she reports to the CFO or CEO or President; from the beginning activity to the Outsource installation! The CIO selects a Project Team and leader to monitor the Outsourcing activities in conjunction with each Mission Critical System user Project Leader.

The best time to begin the Outsourcing can be at year-end-closing, quarterly closing or at the end of seasonal sales cycle. Selection can also be dependent on the industrial sales cycle. If Outsourcing is involved in a merger or take-over other salient factors need to be analyzed and discussed with management and leaders of the user community.

The Outsource Project begins with an IT game plan that is discussed with the CIO, Project Leader and IT Leader. The User Community Project Leaders (from the Mission Critical Systems) may be invited to this initial meeting. The key factor is start and finish Outsourcing as a company family. Modifications to the Work Plan and team duties may be discussed and/or accomplished at this meeting together with the project timetable of events.

The consequences of any major project can emanate from poor or incomplete planning or lack of communication within the teams. Top management and the user community are to realize that once started, the Outsource project is not to be “tampered” with major changes, additions nor deletions. Sufficient parallel testing time between each Mission Critical System and its Outsourcing System can be scrutinized and results documented accordingly.

IT elements such as Change Control Management and Help Desk activities may suffer during the transitional period. Users may encounter difficulty in requesting the Outsourcer for changes and responses to Help Desk problems.

Calculated or estimated Outsourcing savings or expenses can be anticipated to differ with actual time and money within the first 90 or 120 days; depending on month-end closings.

Mission Critical Business systems can vary depending on the Industry and the manner in which each company does its business processes. To name a few:
• Order Processing and supporting systems to process incoming customer orders
• Purchasing and supporting systems to obtain items to be sold or manufactured
• Employee and Human Resources systems – to pay employees and fringe benefits

Outsourcing may be too risky and complicated for most companies; unless members of your staff have had previous outsourcing experience. So you shop for an outsource service provider; i.e. preferably one with experience in your firm’s industry and understands its Mission Critical Business Systems. They will assist you in developing the Sourcing Strategy that identifies your desired functionalities plus what you need, how you plan to get it and the “associated risks”. Let’s not forget the big picture! Or what is your anticipated success in the next year or two. This element includes: dollars sav^ed; service levels met; outsourcer’s compatibility with your user community staff and management.

Since your IT systems are being outsourced, the CIO is expected to provide hands-on leadership; reporting directly to your CFO who is to provide stringent financial controls. The CIO will select your company’s project team who in turn will be working with the Outsourcer’s project team. This active relationship is to continue for the extent of the Outsourcing Contract. Keep in that a happy and knowledgeable team can function at its best and remain in tact for the duration of the contract.

Two documents can make or break the effectiveness of the Outsource Contact. A Statement of Work is required to describe all of the Service Provider’s functions, deliverables plus their team roles and responsibilities. The Service Level Agreement includes penalties for not meeting specific performance levels:

  • Help Desk response time
  • Change Control update elapsed time
  • Promptness in delivering appropriate outputs to the users

Next you may want your corporate legal counsel to review the Outsource Contract. Now is the time to dot the Is’ and cross the Ts’.

Good Luck in your Outsource endeavors.

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About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.