Cost-cutting is a perennial pastime among Hong Kong businesspeople, and seeking outside help for IT operations is becoming a viable business practice. Many have done it. But few have maximized its potential.

While cost efficiency is often the major goal, outsourcing offers other hidden potentials. Outsourcing can help accelerate your business, increase efficiency, enhance the quality of IT services, the list goes on and on. But how do you achieve that?

"See your outsource vendor as an IT partner, instead of IT labor," said Cally Chan, country manager of managed services for HP. That?s a simple, powerful idea, but to achieve it will take more effort than simply signing a contract and shaking a few hands.

Building partnerships

Raymond Yu, assistant general manager of BUPA Health Insurance, echoed Chan?s philosophy. BUPA has 25 years of outsourcing experience, which started when Hong Kong-based IT services company COL Ltd helped roll out its claims processing system back in 1979. During that period, the relationship wasn?t exactly sailing smoothly.

"There were challenges, but constant communication was the key to developing the partnership," said Yu. "COL?s role in the company also changed from providing human and IT resources to supporting business enhancement."

In 1999, BUPA planned the development of Cesar, the company?s core system, through expanding its scope of outsourcing to the application development level. Cesar includes a suite of applications that issues insurance policies, handles accounts and processes claims. With a solid understanding of the company?s business, BUPA chose COL, who developed the applications and provided technical support and maintenance after the system launched.

?With an established long-term relationship,? he said. ?We?ve developed a mutual trust with COL and they have a clear understanding of our business.?

Apart from COL, BUPA has six outsourcing vendors, providing a range of services. They range from data center hosting and hardware maintenance, to the development and management of Cesar, and, recently, its business processes.

The extensive use of outsourcing not only won BUPA an award of Best Practice in Outsourcing from the Hong Kong-based association Best Practice Management in 2003, but also achieved a significant cost savings.

?We required each outsourcing project to achieve a minimum saving of 12 percent to 14 percent,? said Damien Marmion, managing director of BUPA in Hong Kong. ?Most of (the projects) were able to meet that requirement.?

The power from within

This achievement is built on a partnership is developed over an ongoing evolution process which often starts even before you have identified a vendor, according to Darren Tan, associate director of consulting at Gartner.

?Many companies choose outsource vendors without doing their homework,? said Tan. The homework includes not only researching what?s available outside, but also detailing and documenting internal structures and processes.

Companies should first align their IT strategy with their business objectives before determining their outsourcing strategy. The alignment will help companies to identify the right areas for outsourcing, as well as define the appropriate result and service level measurement.

In addition, the internal process will often be re-engineered during outsourcing. If the customers cannot align that process with business objectives, the service provider will not be able to deliver the required service level.

Thomas Ng, general manager and head of Dah Sing Bank?s information technology division, understands the importance of this alignment. The bank outsourced its data center operation to IBM four years ago. ?After a series of education on industry knowledge and business objectives from the vendor, we were able to develop a set of best practice techniques that fits the bank,? noted Ng.

Access to technical expertise and the capability to free up internal resources was BUPA?s major goal in outsourcing data center management. But outsourcing has allowed the company to achieve more than cost-cutting. The company looks for areas that are low value, but high volume for outsourcing, said Marmion.

?Sometimes it?s more reasonable to outsource even though the cost-savings aren?t vast,? added Yu. ?We chose to outsource our data center operation even the cost analysis shows it is not much cheaper to outsource that service.?

Negotiation

Like any business partnership, an outsourcing relationship is built on the foundation of a contract. A well-drafted contract should include a list of roles and responsibilities, service level agreements (SLAs), and a outsourcing management structure.

?They need to be listed and clearly defined,? Tan said. ?So when things go wrong, people will not start pointing fingers.?

Change management

While terms need to be detailed, the contract should also provide the flexibility to allow the vendors to cope with business changes.

?The change management mechanism is one of the most important areas in the contract,? added Chan from HP. ?This is a dynamic world, and therefore the contract should be drafted to prepare for changes.?

At HP, the change mechanism is developed through a set of guiding principles which identify the general goals and purpose of the customer?s executives, before working with the customer?s operational staff to identify the process flow and detailed roles and responsibilities in a variety of scenarios.

This multi-level governance structure allows the company to track customers? expectations from different levels, said Chan, allowing them to understand the rationale for changes and make appropriate adjustments easier.

Yu from BUPA noted the company?s outsourcing contract covers business changes as well as service scope changes. Enhanced communication between users, the IT shop and the vendors is essential to cope with the changing business environment. As for the service scope changes, a change control guideline?which lists a set of procedures to be followed from both parties?is included in the contract.

While it is important to define SLAs and change mechanisms that fit their needs, customers should also consider matters from the vendor side, said Tony Melloy, client executive of EDS Hong Kong.

?It is a common mistake among Hong Kong companies to negotiate [a contract] as a one-time deal and ask for the lowest price as possible,? said Melloy. ?Users need to understand that the service provider needs to make a profit as well.?

If the margin for the service providers is too low, they might take every opportunity available to charge the users, with resultant trust deterioration between both parties, suggested Melloy.

Employing a consultant

To structure a win-win deal, Tan suggested the use of a third party consultant. ?The cost of an advisor is usually about one to two percent of the total outsourcing contract value,? he said. ?But the benefit is significant to build a good foundation for the partnership.?

Hon Hiu Ming, marketing director for HP, agreed. He noted some consultants will advise not only during the negotiation, but also stay on during the transition period to ensure the takeover is handled smoothly. Consultants are also helpful to maximize outsourcing benefits, added HP?s Chan.

Since many users may not understand the value of outsourcing beyond cost-saving, consultants should be able to identify the potential scope of service and their value, as well recommending offerings from different vendors.

?Some consultants raise issues that may not hit the user?s radar,? added Chan. ?But they should also be aware that sometimes the issues are too theoretical and [may] complicate the deals.?

?A consultant is useful if the person can provide us with insights,? said Ng from Dah Sing Bank. ?This is particularly true if they have previous experience in dealing with our vendor.?

The insights include not the vendor?s cost-calculating methodology, but also the expertise and corporate culture of the vendor.

While an independent consultant was helpful for Dah Sing Bank, it may not be necessary for everyone. BUPA did not hire a consultant during the negotiation with its vendors. Since they had clear requirements and a long term relationship with COL: ?We did not need a consultant,? said Marmion. ?We had a technical person from the UK to help detailed the technical requirements [of Cesar], plus a heavy users? involvement for business requirements.?

Help them to help you

The major challenge, however, begins at the initial transition period between the in-house IT shop and the outsource vendor, noted Ng.

?It is a critical learning period,? he said. ?Everyone was learning to work with each other, on both the corporate culture level and operation level.?

Although the contract detailed the requirements and penalties, it is not the only tool to enforce SLAs. The bank learned to handle those issues with other positive incentives.

?We focused on managing the team that work with us on a daily basis,? said Ng. ?They also have a career path, (so if) we help them to advance their industry knowledge and technical skills, they will then have the motivation to deliver a higher quality of service.?

Constant communication is also essential. Ng meets with the vendor weekly to discuss problems and challenges. Communication with vendors is particularly important when the company?s operation is supported by multiple vendors, said Yu from BUPA. The company has six outsource partners, supporting everything from core applications to web development and document imaging processes.

?We will update each vendor on the latest business initiatives,? said Yu. ?Meanwhile, we?ll also inform our outsource provider initiatives and services delivered from other vendors so they will have a better idea of the cooperation needed between them.?

As part of the implementation of Cesar, BUPA planned to outsource the data entry process offshore, said Yu. By updating all vendors on the initiative, BUPA?s document imaging outsourcing vendor (who Yu declined to name) was able to help in the process. Last year, with the help of this vendor, BUPA was able to bring in its first business process outsourcing partner from Guangzhou, where labor cost is much cheaper.

?The result was satisfying,? said Marmion. The Guangzhou-based outsourcing vendor met the company?s minimum cost saving requirement and sped up the process from seven to five days, he said.

Two-way communication

Communication is a two-way process. Apart from users, vendors are also providing tools to foster that understanding.

EDS provides a Web-based dashboard communication platform, which allows their clients to initiate surveys at any time to provide direct feedback without the involvement of EDS personnel. The platform is also used as a tool for semi-annual reviews between EDS and its clients. Melloy noted the platform not only allows clients to provide feedback on issues, but also informs executives on business-related issues.

?The dashboard has been around for four years,? said Melloy. ?It?s available to our 18,000 clients around the world.?

HP obtains feedback from their clients through its performance framework, which includes surveys and a maturity assessment, said Chan. The survey is done regularly, depending on the client?s request, to both business users and the client?s IT team. Their maturity assessment is a more comprehensive study on the readiness of the company to move to the transformation stage.

Chan noted outsourcing service is delivered in three major stages. The first step is the taking over of services. The second is the transition stage, when both parties adjust to each other?s practices. The third stage is the transformation period, when the vendor provide changes and enhancements to the client?s IT environment.

?Usually at the initial transition stage, both parties are still adopting the changes,? said Chan. ?After both parties becomes comfortable with each other?s practices, it is a good time to prepare for the transformation.?

The assessment includes surveying the position of HP?s service in the company, as well as setting new goals and expectations to prepare for the transformation.

The evolution

She noted outsourcing is not to replace the company?s IT shop, but to help transform the company?s IT environment to better meet business objectives.

For example, when companies have a timeline for the launch of new products, the outsource vendors should be able to provide enhancement to allow its client?s IT environment to speed up the product launch process, noted HP?s Hon.

?The outsourcing provider will not simply provide IT labor services, but also business enhancement capabilities,? he said.

Nevertheless, outsource providers will not be able to achieve this without client?s proper management over the outsourced area. Hong Kong companies tend to hold tight control over the process of the outsourced operation, added Tan from Gartner, possibly because they tend to confuse outsourcing with subcontracting.

?It is a common characteristic for companies that are cost-oriented,? said Chan. ?They often hold very tight control of the operation.?

Since the Asian outsourcing market is less mature than those in Western Europe and the USA, it is common to find users seeking cost-saving as the key purpose in outsourcing. But that?s a fundamental stage before users can evolve the adoption of outsourcing into the transformation stage.

Although few companies in Hong Kong have reached the transformation stage, more are expected to do so due to the dynamic and volatile business environment, said Chan.

?Events like 911 and SARS have changed the business environment dramatically in a short time,? she said. ?Enterprises choosing a proactive IT outsourcing partner will be empowered with the flexibility to overcome those critical times.?