Navigating the rough seas of IT outsourcing
By Eric J.Sinrod
There has been a growing trend for companies based in the United States to outsource significant aspects of their information technology functions to other countries, such as India, where the work can be performed more cheaply. While saving money in the short-term is an understandable goal, companies must not be short-sighted. Without proper care and advance thinking, outsourcing can lead to a host of intellectual property, security and privacy problems down the road. This week's column explains the current outsourcing climate, sets forth problems encountered as a result of outsourcing, and provides recommendations for successful outsourcing relationships. The column concludes by examining efforts, particularly within the financial services industry, to develop outsourcing best practices.
Current outsourcing contract
Application development and maintenance not uncommonly are outsourced to other countries by US companies. There also has been an increasing tendency to outsource business processes, such as claims handling. And, now, companies are starting to outsource technical support for information technology infrastructure and systems.
Companies fully understand that it is cheaper to perform the above functions outside of the United States. Indeed, McKinsey estimates that by the year 2010, the information technology industry in the United States will save approximately $390 billion as a result of outsourcing of software development. Forrester Research projects that 3.3 million information technology jobs will be lost in the United States over the next 12 years as a result of those jobs being handled in other countries.
Oursourcing problems
Notwithstanding short-term savings achieved by outsourcing, companies face serious risks in terms of protection of intellectual property and trade secrets, security and privacy.
For example, outsourcing of software-related functions could lead to an information technology vendor in a foreign country copying the source code to create its own competing and infringing software, and this could happen in a country where the laws are not terribly strong in terms of protecting the intellectual property of US companies. This is not just a hypothetical concern, as this already has occurred to the severe detriment of American companies.
And, of course, with the sending of information back and forth between the United States and other countries, and with the reliance on scores of people to handle outsourced functions overseas, it is not difficult to ascertain the vast array of security and privacy risks that come to the fore. There are greater opportunities for attacks, hacks, viruses, worms, not to mention the negligent or intentional revelation of personally identifiable details relating to individuals.
Building successful outsourcing relationships
Outsourcing still has value, so long as companies lay the groundwork for successful outsourcing relationships, and as discussed momentarily, they follow sound outsourcing practices.
To build a successful outsourcing relationship, it is important up front for both the outsourcing company and the information technology vendor to have a very clear perception of what they each want to achieve from the relationship. The contract between the parties, usually a service level agreement, needs to be plain in terms of required objectives. The contract also must be clear about the parties' specific rights, responsibilities and performance obligations. The contract also should be straightforward as to the incentive terms under which the vendor can earn a bonus, under what circumstances a penalty will be assessed for failure to perform, when the parties can terminate the relationship, and how unforeseeable events will be accommodated.
Before the negotiation of the contract even takes place, the outsourcing company should take care to think through exactly what it wants to outsource. Consideration should be given as to whether mission critical processes or applications should be outsourced, especially if they are unstable or volatile in any major respect.
In negotiating the contract, it is important to understand that a strong-armed negotiation that leads to "victory" on all points could be the beginning of a sour relationship, especially if that relationship is with an unknown or unproven vendor. Hopefully, the contract will build in a communications vehicle that the parties can use to openly work together to address and rectify any problems.
Best practices
Given the many problems that can be encountered when it comes to outsourcing, thought has been given to "best practices" to follow to avoid those problems. By way of the Financial Services Technology Consortium (FSTC), the financial services industry, which has been leading the pack in terms of outsourcing information technology services, has started to consider creation of a set of best practices to follow. The FSTC has been studying how to protect company trade secrets and personally identifiable information pertaining to customers.
These secrets and this customer information needs to be protected from being disclosed or taken by outsourcing vendors, their employees or contractors, and by competitors. Verification of a vendor's security program and background checks on personnel may be best to really will get the job done. Along these lines, some overseas outsourcing vendors prohibit their personnel from bringing certain items to work, such as handhelds, laptops and the like, in an effort to prevent the copying or stealing of information.
Another idea to protect trade secrets is to prohibit outsourcing vendors from working for competitors of an outsourcing company. Furthermore, in terms of protecting customer information, technologies can be utilized that disguise the personal data of customers.
Be careful out there
Given the cost savings, it is unlikely that the outsourcing trend is going to decrease any time soon. Any company about to embark on an outsourcing program would be smart to keep its eyes wide open, develop strong outsourcing relationships, and adopt outsourcing practices that will ward off future problems.
USA Today
There has been a growing trend for companies based in the United States to outsource significant aspects of their information technology functions to other countries, such as India, where the work can be performed more cheaply. While saving money in the short-term is an understandable goal, companies must not be short-sighted. Without proper care and advance thinking, outsourcing can lead to a host of intellectual property, security and privacy problems down the road. This week's column explains the current outsourcing climate, sets forth problems encountered as a result of outsourcing, and provides recommendations for successful outsourcing relationships. The column concludes by examining efforts, particularly within the financial services industry, to develop outsourcing best practices.
Current outsourcing contract
Application development and maintenance not uncommonly are outsourced to other countries by US companies. There also has been an increasing tendency to outsource business processes, such as claims handling. And, now, companies are starting to outsource technical support for information technology infrastructure and systems.
Companies fully understand that it is cheaper to perform the above functions outside of the United States. Indeed, McKinsey estimates that by the year 2010, the information technology industry in the United States will save approximately $390 billion as a result of outsourcing of software development. Forrester Research projects that 3.3 million information technology jobs will be lost in the United States over the next 12 years as a result of those jobs being handled in other countries.
Oursourcing problems
Notwithstanding short-term savings achieved by outsourcing, companies face serious risks in terms of protection of intellectual property and trade secrets, security and privacy.
For example, outsourcing of software-related functions could lead to an information technology vendor in a foreign country copying the source code to create its own competing and infringing software, and this could happen in a country where the laws are not terribly strong in terms of protecting the intellectual property of US companies. This is not just a hypothetical concern, as this already has occurred to the severe detriment of American companies.
And, of course, with the sending of information back and forth between the United States and other countries, and with the reliance on scores of people to handle outsourced functions overseas, it is not difficult to ascertain the vast array of security and privacy risks that come to the fore. There are greater opportunities for attacks, hacks, viruses, worms, not to mention the negligent or intentional revelation of personally identifiable details relating to individuals.
Building successful outsourcing relationships
Outsourcing still has value, so long as companies lay the groundwork for successful outsourcing relationships, and as discussed momentarily, they follow sound outsourcing practices.
To build a successful outsourcing relationship, it is important up front for both the outsourcing company and the information technology vendor to have a very clear perception of what they each want to achieve from the relationship. The contract between the parties, usually a service level agreement, needs to be plain in terms of required objectives. The contract also must be clear about the parties' specific rights, responsibilities and performance obligations. The contract also should be straightforward as to the incentive terms under which the vendor can earn a bonus, under what circumstances a penalty will be assessed for failure to perform, when the parties can terminate the relationship, and how unforeseeable events will be accommodated.
Before the negotiation of the contract even takes place, the outsourcing company should take care to think through exactly what it wants to outsource. Consideration should be given as to whether mission critical processes or applications should be outsourced, especially if they are unstable or volatile in any major respect.
In negotiating the contract, it is important to understand that a strong-armed negotiation that leads to "victory" on all points could be the beginning of a sour relationship, especially if that relationship is with an unknown or unproven vendor. Hopefully, the contract will build in a communications vehicle that the parties can use to openly work together to address and rectify any problems.
Best practices
Given the many problems that can be encountered when it comes to outsourcing, thought has been given to "best practices" to follow to avoid those problems. By way of the Financial Services Technology Consortium (FSTC), the financial services industry, which has been leading the pack in terms of outsourcing information technology services, has started to consider creation of a set of best practices to follow. The FSTC has been studying how to protect company trade secrets and personally identifiable information pertaining to customers.
These secrets and this customer information needs to be protected from being disclosed or taken by outsourcing vendors, their employees or contractors, and by competitors. Verification of a vendor's security program and background checks on personnel may be best to really will get the job done. Along these lines, some overseas outsourcing vendors prohibit their personnel from bringing certain items to work, such as handhelds, laptops and the like, in an effort to prevent the copying or stealing of information.
Another idea to protect trade secrets is to prohibit outsourcing vendors from working for competitors of an outsourcing company. Furthermore, in terms of protecting customer information, technologies can be utilized that disguise the personal data of customers.
Be careful out there
Given the cost savings, it is unlikely that the outsourcing trend is going to decrease any time soon. Any company about to embark on an outsourcing program would be smart to keep its eyes wide open, develop strong outsourcing relationships, and adopt outsourcing practices that will ward off future problems.
USA Today
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