The challenges facing the information technology (IT) industry into the next century are significant. Yet so are the opportunities. For the first time since the industry's inception in the 1950s, strategy-minded chief executives (CEOs) are beginning to break the industrial age paradigm and look upon their technology resources as assets instead of little understood and highly questionable expenses.
Senior executives are beginning to understand the "time value of information" and the strategic value technology can provide. Organizations are demanding higher-quality IT services that use newer technologies, delivered in less time and with higher impact on the bottom line. As a result, today's chief information officers (CIOs) must release the day-to-day management of some of their more sacred business processes to third parties.
This situation should not surprise the more business-oriented CIOs. They already share a common perspective with their CEOs. A partnership is evolving as CEOs order their CIOs to seek partnerships with the corporation's
business unit officers to improve processes, enhance customer service, and generate increasingly favorable financial results.
IT Worked for Us
The practice of outsourcing IT activities, while more common in competitive industries, is receiving increased attention by public utilities. Over the past year, many electric utilities have announced outsourcing agreements that range from small single-function activities to a company's entire IT capabilities. As electric utilities continue their journey through deregulation, outsourcing of nonstrategic IT activities will likely become the rule.
My own experience with outsourcing began five years ago in the international ocean freight industry. Outsourcing all of the planning, installation, and support for physical data and voice topology resulted in improved customer function. This, in turn, resulted in a 50-percent financial savings, a 300-percent increase in personnel availability, and a significant increase in overall technical competency.
My next projects were to jointly outsource a data center operation with one vendor, while upgrading and providing long-term support for a suite of financial systems with another. The result?
Significant operational improvements, implementation of a disaster recovery agreement, expansion of the technical support resource base, and financial rewards. A year later we outsourced the data center operation that supported the company's core business application, using the same processing service provider. Again, we achieved improvements in operations, support, and finances.
Joining Central Louisiana Electric Co. in October 1994, I faced a situation that led me to outsource a data center operation (including technical support). Again, we achieved operational improvements, developed a disaster-recovery arrangement, augmented maintenance issues, and stabilized short-term expenses. And since the company is drawn toward client/server technology, our contract's unit-pricing structure promises significant financial rewards in future years.
Following this experience, we outsourced the application support for the company's new Customer Call Center, using the primary vendor engaged in its development. At the same time, the company closed many of its local offices and outsourced payment collection activities. Next, we outsourced the utility billing, printing, inserting, and mailing activity (which is still in progress). Central Louisiana continues to review other areas for outsourcing:
processing of mailed payments, select IT Customer Service Center activities, client/server network management, distributed client/ server hardware maintenance, and network communications.
IT Can Work for You
How do organizations ensure successful results from outsourcing?
By taking things one step at a time. First, understand the outsourcing candidate's process. Then, establish a partnering relationship with the outsourcing provider. (If possible, use an IT provider used successfully on previous projects.) Most important, do the necessary homework:
s Establish Requirements. Assure all affected departments that there will be no loss of services. (They should notice little disruption, if any, in the change-over to a third-party provider.)
s Contact Vendors. Favor those with which the company has a previous relationship. (Just being a hardware vendor does not count.)
s Avoid Subcontractors. Make sure the IT resource provider is the principal for all supplied services. Do not let an IT provider
aggregate the resources of others. Your IT needs should be the provider's core business focus.
s Conduct Site Visits. Review a potential vendor's location, facilities, personnel, and processes in action. If you wouldn't take friends on a visit, this is probably not the right service provider.
s Follow Up on References. Review references. Visit with these companies, if possible, in person or by telephone. Discuss their experience with the provider.
s Finalize Contracts. Cover all of the issues in writing. Press the financial issues until the provider refuses to go any further.
s Develop an Implementation Plan. Ask for a sample early in your discussions. If the provider suggests developing one later, you might be talking to the wrong organization. This process should be routine for any serious provider.
Contemplating an outsourcing arrangement always raises issues. Usually we include them in the contractual language that surrounds any good outsourcing arrangement. Companies considering outsourcing also need to execute a diligent investigation of the vendor under consideration. Also, as suggested above, establish a relationship (i.e., using them in a consulting capacity) so that the outsourcer can be evaluated before making a major outsourcing commitment.
Some concerns commonly raised within organizations about outsourcing include:
s How does an organization protect its privacy and trade secrets? These issues should be covered
in the confidentiality and data- security clauses of a contract. There should be no reason for either party to divulge the secrets or private matters of the other party. Typically, financial penalties are included, and conditions that maintain confidentiality can be incorporated so that confidentiality clauses transcend the termination of the contract for such information.
s Can an outsourcing company use or resell data? Only if permitted under the terms of the contract. Generally, the client company
retains control over the security of its information. While the outsourcing provider maintains the security package, only bonded personnel are privy to the data. Include contractual language and financial penalties to address any breach.
s How does a company ensure performance? A good outsourcing arrangement will have specific performance conditions detailed in a Service Level Agreement, including formal notification processes, timeframes to correct deficiencies, financial penalties, and termination alternatives.
s How is conversion typically handled? In an outsourcing agreement for processing services, the issue is usually more migration than conversion. Typically, a company's processing simply runs on the outsourcer's processor. Moving the data and programs to the outsourcer's location is covered in the implementation plan, and includes an appropriate level of testing to ensure that the target environment is operating properly. This generally causes minimal disruption; most outsourcing providers make free testing time available on their equipment.
It is possible to successfully outsource many of the traditional and contemporary IT activities that we once viewed as critical to a company's operation. Progressive CIOs are leading their organizations into the center of corporate activities as real value-added
partners. They are making a
difference, both operationally and financially, as they focus their competitive resources on only those unique activities that
augment the organization's competitive advantage (em leaving noncore business functions to IT service providers whose core business is IT. t
Dr. David A. Miller is currently general manager of information technology services for Central Louisiana Electric Co. The company maintains outsourcing affiliations with Philips Communications and Processing, Inc. in South Plainfield, NJ, and Utility Partners, Inc. in Tampa, FL. Other providers are being considered for future IT outsourcing opportunities.
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