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Outsourcing - Letting Somebody Else Do Your Computing

Early in the history of business computing, many businesses looked to data processing and computing companies to handle their computing needs for them. Then came powerful computers in small packages, which led many businesses to bring computing in-house. Now, we've come full circle and businesses are again looking to contract out many of their information systems (computing) functions. Today, the buzz word for this is "outsourcing." Is it right for your business? How do you it?

Evaluating Whether to Outsource

Here is a basic rule of thumb: Never outsource core or strategic parts of your business. For example, Rolls Royce should never outsource car assembly because it's an essential, confidential and core part of its business.

Outsourcing is for the "commodity" parts of your business. It should only be considered for things that don't distinguish you from your competitors. For example, you might consider your payroll, accounting and billing for outsourcing. These are things that your customers don't care about.

Further, outsourcing should only be considered when the technology that you're outsourcing is mature, well understood and stable. There are several reasons for this, but the most important is that an outsourcer will generally want a lengthy contract. You don't want to get yourself locked into a five-year contract today, using 1997 technology, if new technology is emerging which will make your outsourced method look really clunky by 1999.

You also don't want to have to rely upon an outsourcer to work with immature, bleeding-edge technology. If (when) problems arise-they always do with technology that is so new that it's raw-you may find your business bleeding to death while your outsourcer follows the routine of moving your problem up the technical expertise ladder for evaluation and a fix.

If you must be bleeding-edge, keep that technology in-house so that you can control implementation, problem solving, and the constant upgrading that you will inevitably require.

Saving Money

One of the most important reasons companies choose to outsource is to save money. Outsourcing can be a seductress when you see the possibility of cost savings arising from economies of scale and data-center consolidation. Outsourcing can also offer cost savings by introducing advanced technology with no investment (no hiring and no new equipment) and the ability to swiftly alter your operation through centralization or decentralization as your needs dictate.

These are certainly all valid reasons to consider outsourcing some of the things your company relies on computers to do, but don't lose sight of this: You need to insure that outsourcing will improve service while it saves you money. A cost savings will quickly start looking like a hollow victory if you have a five-year contract, unacceptable service, and a morale problem because your people hate "the computers." The cost savings may be illusory if service is worse than it was when a function was done in-house.

Ask Your Information Technology Department

It may seem obvious, yet companies often don't really reach out to their own Information Technology Department when considering outsourcing. They may ask for technical help with an outsourcing project, but they don't think to offer the in-house computer department a chance to "bid" on handling the functions themselves.

When it comes to everyday functions like payroll, who's closer to the business than an in-house department?

On the other hand, they might be bad candidates for taking on short-term, but significant projects like major upgrades, since doing so probably means the department will have to shift manpower away from their everyday jobs.

I've seen several cases where Information Technology has "suddenly" been able to put together proposals that yield better service and significant cost savings than an outsourcer. Concepts like capitalism, lost jobs and competition have this wonderful way of fostering innovation. And isn't there an old cliche that reads something like, "Half a departmental budget on the line is the mother of invention?"

All I'm saying is, give your technical people a real shot at competing with the outsourcer for everyday functions.

How to Outsource

Never lose sight of the fact that when you outsource, you're giving some other company control over presumably a significant part of your operation. From both a business and legal perspective, you'll need to proceed cautiously.

Often, major outsourcing projects will begin with a detailed and lengthy "Request for Information" (RFI). A well-written RFI will essentially allow you to pick the brains of several potentially qualified outsourcers.

Writing the RFI will require input from your technical services department, users within your company, your attorney and often an outside computer consultant. At this stage, your lawyer should: (a) include questions which will elicit answers he can use to prepare the more formal Request for Proposal (RFP) and (b) include appropriate disclaimers about the RFI that make sure it creates no legal obligations for you.

After they've answered the request for information, you'll prepare a request for proposal. Your lawyer will use the RFP to get answers which will form the basis of contractual representations and warranties that will make your requirements and the outsourcer's capabilities clear and indisputable. While the response to a well prepared RFP helps you decide which company to use, it also gives your lawyer the outsourcers' own words to use against them in the contract that he will prepare.

This process works so well because answers to RFPs are usually driven by the sales side of the outsourcer, while the contracting stage is driven by the more cautious legal and corporate side.

When I'm representing the outsourcer, I always tell them that I must see their responses to RFPs before they send them. I do this because when I represent the company seeking an outsourcer, I know that I'll find all kinds of specific representations about incredible capabilities in the response written by the sales side.

Yes, I admit that I get perverse pleasure in watching the outsourcer squirm away from their own words. Nonetheless, they can't squirm from all of them, and they make for meaty contract clauses with lots of specifics about capabilities.

Your Contract Must be Specific

Most computer contracts that I see are poorly drawn documents. All too often, they're essentially conclusory statements of the intended result. So, you read through 25 pages of contract and it all boils down to something like: "Outsourcer shall process the data used for customer orders."

The RFP should be used to gather specific answers to specific questions that will become part of your contract with the outsourcer. You should seek answers to questions like: What type of reports will you see? When will the system be available? Who owns the data returned? What capacity is promised? Can you grow and can they handle the growth? What's the outsourcer's responsibility in case of errors or delays in processing?

These questions are only a few examples of what could be many questions depending on the scope of your project. Remember that the request for proposal is an integral part of your negotiation. Be sure to involve your entire negotiating team. Be sure that you get as many answers as you can at the RFP stage while the sales side is talking. They give better answers than the legal and corporate side.

Final Words of Advice

You should never give up all of your in-house computer capabilities. At the very least, you want somebody in-house who can lead you through the muddle of ever-changing technologies and who can evaluate whether what you're being told is fair and reasonable. This basic leadership is not something you can outsource-ever.

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