Outsourcing /

GAO report offers lesson on outsourcing management

By Tim Wilson
Network World Outsourcing Newsletter, 05/13/02

Last week in this newsletter, we postulated that many organizations were not doing enough to manage the service levels of their outsourcing providers. This week, the General Accounting Office has issued a report that proves it.

The GAO - the accounting arm of the U.S. federal government that tracks spending - recently published a report which shows that several different government agencies are not doing enough to monitor the performance of their desktop outsourcing contractors. The GAO's findings hold some lessons for the agencies involved as well as for corporations that use third parties for desktop IT services.

In the study, the GAO investigated desktop outsourcing at six government agencies: NASA, the Centers for Medicare and Medicaid Services, the Treasury's Departmental Offices, the Bureau of Alcohol, Tobacco and Firearms, the Peace Corps, and the Defense Logistics Agency. The idea was to find out whether the agencies were managing their outsourcing contracts adequately, and getting good value for their dollars.

The GAO found that, in most cases, the agencies had set specific metrics for their outsourcing vendors' performance, such as service delivery times. But according to the GAO report, many agencies failed to quantify the overall goals of the outsourcing contracts in a measurable way. For example, the goal of the Peace Corps' outsourcing pact was to cut costs and improve productivity, but no metrics were set forth for measuring the outsourcers' performance against those goals.

The Peace Corps is far from being the only outsourcing client to make this type of mistake. Many companies award outsourcing contracts as a short-term tactical solution, without giving them any measurable business goal. The contracts stipulate that the outsourcing vendor must provide service within a given number of hours, or that it will provide a given level of uptime. But in many cases, there is no way to measure the outsourcing vendor's value in achieving longer-term business goals, such as cost control.

The GAO also found that many agencies did not do a thorough job of assessing the costs and benefits associated with their outsourcing contracts. In one case, the Treasury Department did its cost assessment just one week before awarding the contract, according to the GAO. Such last-minute cost evaluations suggest that some agencies are not doing enough to weigh the cost of outsourcing against its benefits before choosing a contractor.

In the corporate world, outsourcing contracts should go through the same " return on investment " scrutiny that has recently been applied to new technology purchases. An outsourcing vendor should not only be able to provide up-front details of its costs and charges, but also some data on its longer-term value proposition. An outsourcing vendor must work with its client to create a solid ROI, especially in long-term contracts.

Government agencies should also do more to assess the risk associated with outsourcing contracts, according to the GAO. In its study, the GAO found that although some agencies did evaluate risks associated with contractor delays or failure to perform, most of them did not did not prioritize those risks or establish sufficient contingency plans for managing them.

Again, this is a lesson that corporations should heed. Any outsourcing pact should include not only a service-level agreement with financial penalties for noncompliance, but also a contingency plan for handling the trouble if the outsourcing vendor falls short. Such contingency planning may mean prioritizing groups of users or applications that must be handled first in the event of an emergency.

The GAO report, GAO-02-329, can be found on the accounting office's Web site (www.gao.gov/). The results of its research may not only be valuable for the agencies it studied, but for all companies that do outsourcing.