How to successfully switch IT outsourcing providers
Ten management capabilities for successful transitions and transformations
To simplify the reading of this article mainly the term transition is used for both transition and transformation. Transition projects where IT Outsourcing (ITO) providers are switched are highly complex, resource intensive, challenging and risky. Typically, the ITO customer has outsourced the required knowledge to the incumbent provider. The new provider has not yet the required knowledge to provide IT services as needed at the beginning of the transition. Therefore, both parties, the ITO customer and the new provider rely on the support from the incumbent provider. However, the incumbent provider has often no interest in supporting the ITO client and the new provider to conduct a successful transition. Research and experience has shown that there are ten management capabilities which are required to conduct successful transitions. These ten management capabilities are shown in Figure 1.
Provider switching transitions can only be successfully managed and completed with a sophisticated project management approach. It is a particular challenge for the customer to manage a project where all three parties (customer, new provider and incumbent provider) have different objectives. ITO customers need to ensure that detailed project deliverables will be defined at the beginning of the transition. However, this results in major challenges for all involved parties, since there will be usually thousands of project deliverables. This means that not all deliverables can be defined in detailed in the earliest phase of transition. The defined success and approval criteria need to be understood and accepted by all three parties. Business continuity need to be the overarching transition success criterion. The project plan needs to be jointly developed by ITO customer and the new provider, and the plan needs to incorporate all major project deliverables and needs to show interlinkages. There is the risk that the incumbent provider leaves the transition project, when the contract has reached the end, regardless if support is still required. The customer needs to manage ITO switching costs, since provider switching projects are so complex, that unbudgeted switching costs will arise. If not successfully managed then these costs can get so high that the business case for switching ITO providers is no longer valid.
Successfully transferring knowledge from the incumbent to the new provider is not only of critical importance for a successful transition. When the identified key knowledge is not transferred as required to the new provider, then the new provider will likely fail to deliver IT services as contractually agreed which in turn leads to issues for the business of the ITO client since business processes may not be supported by the IT as required. Knowledge can be transferred to the new provider in various ways such as by transferring documents, training by the incumbent provider, by work shadowing, and by transferring key experts. However, it needs to be clarified if the incumbent provider is willing to allow work shadowing or is willing to train employees of the new provider. Often, discussions about intellectual property need to be expected. Potential intellectual property issues need to be identified and resolved early, since these might slow down or interrupt the complete transition. Sometimes incumbent providers try to sell the intellectual property for a very high price. Another risk is that incumbent providers might conduct a hostile strategy. The challenge for knowledge transfer is that often a large amount of complex knowledge needs to be successfully transferred within a short period. This requires that the new provider has a high absorptive capacity to be able to integrate the transferred knowledge, quickly. Ideal for transferring knowledge is a trustful relationship between all three parties. However, it can be assumed that the relationship with the incumbent provider is disrupted due to the cancelation of the contract. However, even if the trustful relationship is impaired, the close cooperation between all three parties is necessary. Experience and research has shown that employees of the incumbent provider have often little motivation to support the knowledge transfer, since often reciprocity cannot be expected. The low motivation is even reinforced by the fear of job loss.
Transfer of key experts
The transfer of selected key experts is an important prerequisite for a successful transition since complex tacit knowledge cannot be easily transferred. Some knowledge, which needs to be transferred in a short period, is so complex that it cannot be transferred without the expert itself. The ITO client should identify the key experts to be transferred to the new provider. Based on a cost-benefit analysis the new provider needs to decide whether the identified key experts are required. The right timing for transferring the key experts is essential, since the experts often need to work for both providers at the same time for a transition period. The transferred key experts need to be quickly integrated into the new provider organisation so that they are able to work within the new context. There is a risk that the transferred key experts implement solutions which were appropriate within the old environment, but not within the context of the new provider.
Large provider switching projects will have a temporary phase of multi-sourcing. During this phase, the incumbent provider and the new provider will both provide IT services for the ITO client. This phase is characterised by a high degree of complexity. The ITO client and the new provider often underestimate this complexity. The phase of temporary multi-sourcing can even become so complex that business continuity is endangered. Therefore, the temporary multi-sourcing phase needs to be planned in sufficient detail. The planning typically reveals gaps, which have not been considered. A typical gap is that the incumbent provider is not contractually required to work with the new provider. It can be sensible that the existing contract is adapted to close the identified gaps. During transition, an effective IT governance needs to be implemented. An effective governance consists of clearly defined and implemented roles and responsibilities, boards, and meetings, which governs the IT. It is necessary that the incident management process will be adapted so that the particular challenges of the temporary multi-sourcing can be managed. Particularly challenging is that it may be unclear who is responsible for solving the incident. Often, all three parties (the ITO client and both providers) need to work hand in hand to solve incidents. There is the risk that the incumbent provider is unsupportive and pursues own objectives. It is essential for ITO customers to understand that agreed service levels can often neither be achieved nor enforced during the complex multi-sourcing period, since it is frequently not possible to determine who is responsible for the service level degradation.
Integration of new provider production team
The production team of the new provider needs to be involved early during transition. Otherwise, there is the risk that the transition team implements IT services and processes, which cannot be serviced by the production team. The early integration of the new provider production team enables the new provider to understand the customer environment, so that the team can provide IT services as required. All critical IT service processes need to be implemented and available before the IT service production by the new provider starts. These critical IT service processes are incident management, change and configuration management. If these processes are not available as required then this leads to serious business issues. Before responsible transition team members leave the transition it needs to be ensured that a structured handover process to the new provider production team is conducted.
Experienced external project resources
Transitions to a new provider are highly resource intensive projects with many potential pitfalls which can result in serious business issues for the ITO client. ITO client organisations have often not the resources to manage such projects. Therefore, it can be of great help that experienced external project resources support the ITO client. However, external resources cannot perform all tasks. Some tasks require knowledge and experience of the internal ITO client organisation. Therefore, ITO customers need to evaluate critically, which tasks external resources can perform. The advantage of experienced external resources is that they have experienced similar situations, know the typical pitfalls and can therefore support the ITO client to achieve a successful transition. Often, ITO clients underestimate the amount of resources and the capabilities required.
A trusting relationship between all three parties simplifies all activities. However, it can be assumed that the incumbent provider views the cancelation of the contract as a breach of trust. If there is no trusting relationship with the new provider then this can lead to a situation where the new provider needs to justify all activities. This might considerably slow down the overall transition and can lead to additional costs. Enduring distrust can be highly frustrating for all parties. Research and experience demonstrated that some incumbent providers conduct strategies with the goal to disrupt trust between the new provider and the ITO client. Therefore, it is necessary that the ITO client systematically facilitate trust.
In provider switching projects there are three parties with different or slightly different objectives involved. Provider switching projects are characterised by that the incumbent provider has lost its customer and that the new provider has not yet the knowledge to deliver IT services as required. Additionally, the new provider is dependent on the support of the incumbent provider. During the transition phase, service levels are often degraded. All this can potentially lead to conflicts. Conflicts can lead to legal disputes and in the worst case to an unsuccessful transition. To avoid this a comprehensive escalation strategy needs to be designed and implemented. Conflicts need to be deescalated where possible to avoid negative relationship consequences and free up required resources.
Project communication (communication of change)
Switching providers means that many things (contracts, processes, service level, provider, costs, etc.) will be constantly changed or adapted. Such changes often cause frustration and dissatisfaction amongst all involved parties. With an adequate communication strategy, the customer has the opportunity to communicate the expected changes and adjustments. The ITO client should communicate major transition milestones within the ITO client organisation, so that the employees know what to expect. If it is anticipated that service levels will be reduced, then this should be proactively communicated.
A transition strategy needs to be designed with the objective that the transition needs to be manageable and the complexity is reduced. Large ITO transitions usually require a phased approach. When designing a transition strategy then the term transition should be clearly distinguished from the term transformation. When both terms are distinguished than transition means that services are transferred in the current mode of operations (CMO). Transformation means that services are transformed directly into the future mode of operations (FMO). It needs to be decided which services are transferred in the CMO and which services are transformed directly to FMO. Transforming too many services at once to the FMO can be risky.