7 outsourcing nightmares -- and how to avoid them

Poor communication, shortsighted contracts -- don't get derailed by an IT outsourcing agreement gone awry

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Outsourcing nightmare No. 4: Poor quality, no recourse for refundMoney Crashers Personal Finance is another company that has struggled with offshore Web development work.

A few years ago the company, which provides online educational services in areas such as credit and debt, real estate, and insurance, decided to outsource a Web development project. Intent on keeping costs down, Money Crashers decided to go with an IT service provider overseas, says Andrew Schrage, founder and co-owner.

From what Money Crashers could tell, the provider was highly qualified. "But after we paid for the job in advance, we ended up receiving results that were nowhere near our expectations," Schrage says. "To make matters worse, the [outsourcing provider] simply refused to get back to us regarding what we felt was shoddy work. After quite a few hassles, we finally gave up and couldn't retrieve the amount we paid upfront."

What Money Crashers learned is that it's not always best to have cost as the No. 1 determining factor, as the company ended up paying far more in the end.

"I'm not saying I'd never consider outsourcing a project again, but I would definitely take a different approach," Schrage says.

First, he would never again pay for any job before it's completed. Next, he would require past referrals from reputable people who've hired the service provider in the past. Third, he'd ensure the people performing the work have a clear understanding of his business.

"And finally, I would provide a specific, detailed plan of the job and discuss it at length beforehand, while also explaining the full payment would not be made until I approved the work as being up to par," Schrage says.

Outsourcing nightmare No. 5: Unexpected overhead of outsourced managementJoe Infante, a onetime IT project contractor for a specialty chemical manufacturer, offers an outsourcing lesson in one-size-fits-none.

With nearly 30 sites around the United States, most of which operated with a high level of autonomy, the chemical company was well aware that outsourcing its IT support services would be difficult. Because of the magnitude of the challenge, the company brought in one of the largest global IT outsourcers, says Infante, who is now president of IT services provider Dynamic Strategies.

Once the five-year outsourcing engagement was in place, gaps that weren't identified in the discovery phase as well as minor projects outside the normal service-level agreements were constantly cropping up unexpectedly, Infante says. The outsourcing provider had difficulty addressing these issues due to its one-size-fits-all approach.

"A decision was made to continue to supplement with independent contractors to address these smaller, one-off projects and to fill service gaps," says Infante, who declined to identify the chemical company. "The arrangement quickly became difficult to manage and the outsourcer was removed."

One of the main causes for the failed outsourcing engagement, which resulted in both lost time and increased costs, were underestimating the effort needed to manage the outsourcing relationship, Infante says.

"Where the client thought it would take one or two individuals to manage the interface with the vendor, it actually took many more of the company's resources," he says.

In addition, the client's interpretation of what it was buying -- based on what it was told by the outsourcing vendor's sales team -- wasn't interpreted the same way by the vendor's implementation and service teams.

How could these kinds of problems be avoided? "Know thyself," Infante says.

"The hardest thing for many businesses to do is properly assess their real needs and, more importantly, their current position regarding the state of IT. Properly defining these two components will ultimately determine what can/should be outsourced and which company best matches their needs."

Outsourcing nightmare No. 6: Metrics without enough granularity to be meaningfulTodd Taylor tells tale of an outsourcing arrangement gone awry due to differing needs among business divisions.

Taylor, an attorney at Moore & Van Allen, who focuses on outsourcing and other technology issues and is familiar with the case, says the arrangement involved a large, multinational corporation and a large, highly regarded technology services company.

The multinational had multiple business units that provide services for consumers and businesses, Taylor says. It outsourced portions of its network operations and infrastructure to the technology services company to support multiple divisions, each of which had different needs.

The client spent time with the service provider coming up with service-level arrangements. But the service-level metrics were typically configured on a clientwide basis.

"In other words, in determining whether a service-level metric was met -- or not met -- performance was judged for the client on an enterprisewide basis rather than on a division or line-of-business basis or a specific service element basis," Taylor says.

In many cases, certain business units or functions weren't receiving acceptable services, and this potentially hindered the ability of those units to meet their customers' needs on a timely basis.

"The client had little contractual ability to demand correction of the problems, as the service provider was generally meeting the service-level metrics when such metrics were measured on an enterprise-wide basis," Taylor says. "Even when service levels were not being contractually met, the penalties often were not meaningful enough to incentivize the service provider to change behavior."

One lesson learned, in ensuring effective service levels for all, was to engage the appropriate business and technical people in all business divisions relevant to the outsourcing agreement, and to do so from the outset, Taylor says.

Companies should also define specific service levels at a micro level. "Representatives of the client receiving the services from the service provider [should] work closely with the service provider's representatives to define specific service levels that are relevant for each business division," and that address each service the client and its individual business units would receive, Taylor says.

In addition, penalties and incentives should be meaningful. "The penalties should incentivize the service provider to meet its obligations," Taylor says. Another way to address this issue is to provide bonuses or financial incentives for performance in excess of service-level metrics, he says.

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