Why Outsourcing Fails (Part 1): Capability and Maturity

Outsourced the movie posterThe IT outsourcing recipient’s IT maturity or what can be thought of as their readiness for IT outsourcing has been found to be the most significant factor in IT outsourcing failures. Combined with an IT outsourcing recipient’s IT capability and you have the two most common reasons IT outsourcing failures occur according to industry research. Make no mistake; IT outsourcing failure is a two-way street where vendor IT maturity and IT capability are also extremely critical to success.

So much of IT outsourcing today is motivated by only a few of the top 10 drivers – cutting costs, accessing resources not available internally and improving performance. When you dig into these drivers and the others you have to ask yourself why does an organization need to outsource some or all of IT in order to achieve the goals that have taken them to outsourcing? Often it is because of a low maturity or capability that makes it difficult or impossible to produce the desired results. Sadly, this makes these organizations especially vulnerable to bad IT outsourcing arrangements and failures to achieve the expected results.

We certainly find epic failures in IT outsourcing where the provider is to be blamed as well as those where the recipient is to be blamed. But like everything, any success or failure is the result of both parties. So a discussion of capability and maturity relative to IT outsourcing has to look at both sides of the table.

Just to be sure I don’t lose anyone this early in the post allow me to acknowledge there are a lot of people that put the provider-recipient relationship as the primary reason for outsourcing failures which I will address in a moment as part of discussing capability.

IT Capability

There is a significant body of research into the relationship between an organizations’ ability to exploit its information assets in support of its business objectives and the capability of its IT organization. This understanding came from the pioneering work of Feeny and Willcocks. Their initial findings were published in 1998 as the Core IS Capabilities for Exploiting Information Technology.

As the work of Feeny and Willcocks evolved they began examining the success-failure of IT outsourcing, eventually publishing several works including Evolving IS Capabilities to Leverage the External IT Services Market and IT Outsourcing and IS Core Capabilities: Challenges and Lessons at DuPont. Throughout their studies the nine Core IS Capabilities have been identified as being a cornerstone of what makes for successful IT outsourcing.

Capability

Description

Leadership Integrating IS/IT effort with business purpose and activity.
Business Systems Thinking Envisioning the business process that technology makes possible.
Relationship Building Getting the business constructively engaged in IS/IT issues.
Architecture Planning Creating the coherent blueprint for a technical platform that responds to current and future business needs.
Making Technology Work Rapidly achieving technical progress – by one means or another.
Informed Buying Managing the IS/IT outsourcing strategy that meets the interests of the business.
Contract Facilitation Ensuring the success of existing contracts for IS/IT services.
Contract Monitoring Protecting the business’s contractual position, current and future.
Vendor Development Identifying the potential added value of IS/IT service suppliers.

IT Capability Factors

Many argue IT project management should be added as a core competency.  However, the perspective taken here is that project management ought to be viewed as a core capability of the enterprise not something exclusive to IT. Further, a more radical view offered is that if these core capabilities are successfully meeting the needs of the organization there would only be business projects with IT dimensions, not IT projects. In what has come to be known as “The Feeny-Willcocks Governance Framework” (2006), the capabilities are arranged around four tasks in the model depicted here.IT Outsourcing Governance Framework

Note: Those working on developing their own IT Governance should ruminate on this idea before finalizing any model.

Having gone the long way around the barn on this, IT capability represents the set of skills needed by an organization to exploit IT in support of the organizations goals. These capabilities are required regardless of whether IT is in-house or outsourced, centralized or decentralized. Organizations with low IT capability that are already in outsourcing arrangements or are about to outsource, should put particular attention on improving their IT capability in order to maximize the benefits of the outsourcing arrangement or risk failure.

Organizations reluctant to address low capability often resort to bringing IT back in-house or worse, churning from vendor to vendor. This behavior will be particularly problematic as cloud computing becomes more prevalent and the ease of switching from one provider to another becomes easier.

On relationships, recipients should follow the capability model to maintain a healthy and objective view of the provider through a vendor management program. Providers prefer softer ideas of relationship management. CIO’s should recognize both can coexist. The provider can adopt a relationship view even though the recipient prefers vendor management view. If allowed to swing too far to the relationship view recipients risk recreating the internal IT issues with their vendor as a result of favoring the relationship over results.

CIO’s will do well to remember that as with all procurement activities the primary responsibility of the CIO is one of risk mitigation. So vendor risk management is a better point of view than relationship risk management. To use different terminology, the recipient uses outsourcing management which aligns to the provider’s service management practices.

IT Maturity

Extensive work has also been done analyzing the role IT outsourcing recipient’s maturity plays in the success of IT outsourcing.  Several models have been developed each relying heavily on the research of Feeny et al. The IT Outsourcing Maturity Model was developed at DuPaul University and identified five levels of maturity represented as stages along a linear progression of IT outsourcing.

Stage 1 Insourcing / Bystander Outsourcing between 1-5% of IT.  Mostly purchasing of select IT functions.
Stage 2 Forming / Experimental Stage Outsourcing between 10-20% of IT activities
Stage 3 Storming / Strategic Decision Point Organization Leaders share conflicting ideas about outsourcing and pursue different strategies to provide IT services
Stage 4 Norming / Proactive Cost Focus Beginning to form norms and actively focusing and proactively using outsourcing for cost saving including offshore.  Outsourcing 20-40% of IT.
Stage 5 Performing / Strategic Focus Not just focusing on cost.  Total outsourcing is common >80% of IT.

Diagram of the COMM system

Managing IT Outsourcing

Similarly, HP Labs developed the Client Outsourcing Maturity Model (COMM), in response to the need to create an assessment mechanism for the IT outsourcing recipient. COMM builds upon HP’s ITSM framework for the Process Dimension and adds the People Dimension using the Core IS Capabilities described earlier and the Governance Dimension using other reference models. The inclusion of the people dimension also reinforces the importance of the relationship capability.

Remembering success-failure is a two-way street; the importance of assessing every IT outsourcing provider’s maturity cannot be overstated. Recipients can use any one of a number of IT maturity frameworks including Gartner’s in assessing their providers.

Perhaps the most comprehensive model developed has been the eSourcing Capability Models (eSCM) maintained by ITSqc, LLC, a spin-off from Carnegie Mellon University. The eSourcing Capability Models are now offered for the service provider (eSCM-SP) and the client organization (eSCM-CL).eSCM diagram

As with other products coming out of Carnegie Mellon the eSCM products have extensive materials for download and formal training to support successful adoption. Although an initial review could be overwhelming, the models 95 practices for client organizations do follow the IT outsourcing lifecycle. This makes it easy to focus on where you are at today as a good starting point.

Regardless of which model or approach you decide to adopt, IT outsourcing recipients need to address the maturity of the IT functions and have active strategies to improve. That includes the role of any IT outsourcing providers in your internal work as well as the providers own effects to improve the maturity of their IT outsourcing service offerings.

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