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NEW YORK — Outsourcing deals in IT have long been marred by poor communications between buyers and suppliers, along with failures by customers to adequately manage the relationship and measure performance.
At the Outsource World conference here last week, users and analysts said outsourcing customers are now facing new challenges, including regulatory requirements and shortages of experienced outsourcing relationship and contract managers.
Joann Martin, vice president and director of solutions marketing at Pitney Bowes Inc. in Stamford, Conn., listed compliance with foreign and domestic regulations as a significant challenge for both outsourcing customers and providers.
For example, she cited the need for outsourcers to provide customers with Statement on Auditing Standards No. 70 (SAS 70) reports to attest that outsourcing firms have internal controls in place to help their customers comply with the Sarbanes-Oxley Act and other regulations.
Sometimes, outsourcers complete SAS 70 reports months before submitting them to customers, thus raising questions about whether they are valid and up to date, said Michael Corbett, executive director of the International Association of Outsourcing Professionals (IAOP) in Lagrangeville, N.Y.
On the other hand, said Martin, regulations can sometimes be beneficial. For instance, new patent-protection regulations in India prompted Pitney Bowes to change its stance on the idea of outsourcing product development to companies in that country, she said.
Pitney Bowes is both a provider of document management outsourcing and a user of IT outsourcing services, having redirected 75% of its IT activities to outsourcers, said Martin.
Examining the Issues .
"Ninety percent of outsourcing deals fail because customers don't measure the results of the work being done," said Keith Fiveson, managing consultant at ITESA, a New York-based consulting firm.
In addition, customers are having a "tough time" finding people with experience in managing outsourcing contracts or relationships with outsourcing providers, he said. The growing number of impediments to outsourcing appears to be forcing companies to rethink commitments to the strategy. According to a study of 210 outsourcing customers and 242 providers published by DiamondCluster International Inc. in June, the number of customers prematurely ending both domestic and offshore outsourcing contracts within a year jumped from 21% in 2004 to 51% this year.
Tom Weakland, a managing partner at the Chicago-based management consulting firm, said the chief driver for customer dissatisfaction is heightened competition for staff among suppliers, leading to increased turnover and "more issues and more delays" for customers.
Burnout is another problem, according to Tarun Mehta, a managing director at NeoIT.com Inc., a San Ramon, Calif.-based consultancy. Managers who oversee offshore-outsourcing deals often must wake up before dawn to connect with the offshore team. A few hours later, the manager goes to the office and puts in a full workday. That schedule "might work for a week or two, but after six months, the project begins to slip," Mehta said.
He said sponsorship and ownership of outsourcing deals will have to take place "at a higher level in the organization than it does today" to succeed.
Martin said another barrier to successful outsourcing outcomes "is the perception that it's all about reducing costs." Too many customers fail to recognize other business value that can be derived from the relationship, she said.
For instance, Nokia Corp. is considering outsourcing a substantial portion of its research and development in an effort to reduce R&D costs to less than 10% of revenue, said the IAOP's Corbett. In addition to cutting costs, Nokia is looking to outsource much of its extraneous R&D work in order to free up internal workers "to focus more on those areas that differentiate their products," Corbett said.
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