Retained organisation success factors

When concluding an outsourcing agreement it is not just the range, quality and costs of the outsourced services which are important. One of the main factors for the success of an outsourcing agreement is the control of the service provider by the customer’s personnel.
Photo: mlor/Photocase
Lighthouse. Photo: mlor/Photocase

The provision of IT services by external suppliers is still extremely popular even though the times of the “megadeal” are now well behind us. Nevertheless a small contract may have major financial and structural consequences if it is not adequately checked and controlled by the client. This work is the responsibility of the so-called retained organisation. However, this term does not just mean that these people have been left behind, and such a description hardly strengthens their position. In fact the significance of the work of this group of people even for small outsourcing deals should not be underestimated.

It is not automatically a difficult fate for IT personnel if they have to transfer from a user company to a service provider. Where small companies are concerned, the transfer to an IT concern can even mean an improvement. Most employees, however, regard moving to the provider in a critical light since there is a certain amount of risk that at some stage in the future the transfer will be followed by consolidation and redundancies. Furthermore, they fear that they will be relocated to a different location and to other customers in the event that the service provider undergoes any restructuring. The personnel who remain with the company will also have to accept some far-reaching change. Those who work in the classic infrastructure sector will have built up a certain amount of expertise to enable them to carry out their duties with the requisite understanding.

The retained organisation, however, generally requires a different set of skills than being able to maintain the servers and not every administrator is cut out to be an expert for contract negotiations or managing services. In the retained organisation personnel are directly confronted with duties which were previously in the marginal areas of their job description (if at all). Where IT skills were once the main requirement, the retained organisation requires management skills. This often results in friction and conflict.

Structure and duties

Generally the retained organisation is positioned in an IT department like the department which is to be outsourced. For example the head of infrastructure will probably take up a comparable management position in the control group after the outsourcing process has been completed. As soon as the contracts have been drafted the customer should place its trust in the counterpart personnel at the provider. One of the problems which occurs with alarming frequency is the fact that the personnel who worked on drafting the contract then leave the company afterwards. Their successors in the retained organisation then have to deal with the errors and loopholes that have been left for the term of the contract.

Working in a retained organisation can be extremely interesting as it is much more diverse and multi-level than purely technical work on hardware or software. It is also often the case that the personnel have a foot in both camps in that they act as the buffer between the business and the IT service providers and are responsible for directing and controlling both sides. If the retained organisation is small, it is likely that personnel with all-round skills will be required for it – financial and legal questions can be answered or escalated by them, products controlled and resources weighed up against requirements. Incident and problem management are also part of the every day job because the end users will rarely contact the provider direct in the event of incidents. In the world of project management a range of different services are also required, assessed, purchased and reviewed.

The review of invoices from the provider is one of the main duties of the retained organisation. To err is human and invoice errors running into millions are by no means unheard of. In addition discussions will time and again be held as to the date on which charges for a new service can come into force. This daily battle about invoices can soon result in hair-raising sums of money.

Expenditure

A retained organisation created by specialists in their relevant fields may be absolutely essential but also constitutes a high cost. This often results in providers complaining that the retained organisations that they have to deal with are often far too large. The reason for this is the overall purchaser of the services also has to pay to control the service provider. The additional costs of the retained organisation result in the product costs being much higher than the basic creation costs of the provider. As soon as the end customer cannot understand this, it will generally blame the provider for the additional costs. This means, in turn, that the provider will have to offer some justification for costs for which it is not responsible in the first place.

Several years ago, Forrester Research put a figure of three to six percent of the contract price on the expenditure for the retained organisation. This may be accurate for small deals if the retained organisation can access the classic functions of the company such as in-house lawyers, which results in the costs being incurred by a different department. In the case of large and fully equipped control groups (a sort of company within a company), how ever, the costs are much more visible because they are incurred directly by the retained organisation and therefore by the overall purchaser. In this case it is more realistic to place an estimate of around ten percent of the outsourcing price on the expenditure for the retained organisation.

Personnel and technology

The process of creating a retained organisation is often random. In the worst case scenario, the people “left behind” are simply thrown in at the deep end and assigned duties and then have to take responsibility for controlling the provider. In addition it is often the case that the wrong personnel are retained – technical experts who very rarely have the skills which are actually required in a retained organisation. Seldom does an IT expert succeed in turning his back on the technology and facing up to the management challenges.

In point of fact it is difficult to leave the admittedly more pleasant tasks of designing technical solutions to others. Their affiliation to the computer will always come to light if the outsourcing contract means that responsibility for the hardware is retained by the customer and is not handed over as well. Sometimes there are good reasons for this, for example the fact that contracts have not yet expired or licensing problems with the software used. Many managers, however, cannot provide any rational explanation for this situation when subjected to closer scrutiny. The idea of keeping technical expertise within the retained organisation so as not to lose sight of what is required and, if necessary, one day bringing the services back into the company, quite simply represents a waste of resources.

If the insourcing case actually occurs, a complete IT organisation will have to be created excluding the operative personnel. Therefore there is little point in retaining technicians in case the worst case scenario occurs. No company in the world would employ a car mechanic so that their company cars can be repaired and serviced in-house. In a retained organisation, the mechanic would have to work temporarily as a leasing expert – something that could work well but would only be a lucky coincidence. There can be no dispute that it is a good idea to retain special duties and skills within the company. This could include, for example, the basic architecture of the IT. If, however, the service equipment is outsourced and at the same time the expertise is retained within the organisation, this would not demonstrate a great deal of confidence in the provider or indeed the company’s own ability to purchase external services.

Management by targets

Managers tend not be able to let go, they want to tell personnel exactly what they have to do and also want to check their work down to the very last detail. The office has to be open-plan so that they can see that everybody is sitting at their desks. In an emergency the manager will do everything himself. Management by targets is more effective but requires a certain amount of abstraction ability and requires a readiness to provide personnel with freedoms. In addition managers find it hard to define and set targets. It is very difficult to find somebody who knows what price to set the provider for an abstract service. This leads to the idea that the service provider’s costs for hardware, software and personnel must be known in order to calculate the price. After all, the market for IT services is far from transparent and is also subject to continuous change.

Help may be provided in the form of a benchmark which can compare contractually negotiated prices with the current market average values for services of a similar complexity and quality. Benchmarks can be used as early as the negotiation stage to prevent subsequent surprises. And even providers are using this tool so that they can be sure that their quotations are not totally out of proportion. Those who dismiss the power of benchmarks will continue to tend towards buying technical services, in other words an SAP server or TB storage devices. This type of retained organisation have a massive need for technical expertise which they want to use in their discussions with the provider. This rarely culminates in a happy ending – if an IT department is to be outsourced to a service provider, it should be the latter which solves the technical problems for the client. There is a difference between whether you purchase an HR system or a payroll account. In the latter case it should be irrelevant for the customer which operating system and which hardware the provider uses. The main criterion for outsources is what services are supplied at what quality level and at what price.

Many retained organisations attempt to look behind the scenes and at the books of the supplier by means of restrictive controls. This will inevitably result in a minor war about every cent of the outsourcing spend, which ultimately achieves nothing. Those who insist on open books must necessarily increase the team available within the retained organisation simply to examine these books. It makes much more sense to draft service contracts and services on a more generic basis to reduce the maintenance costs of the deal. The service provider must also be given an opportunity to use its own creativity to solve problems. If you take the very lifeblood of the provider, there is no way that the provider can supply the highest quality services. We come back to a wise old saying about less sometimes being more which we can see is very applicable to the makeup of the retained organisation.

Hubert Buchmann, Managing Director, Maturity

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