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|In: Business Ethics|Last Updated:

When Cortez landed on the shores of became Mexico later on, he issued the famous order, “Burn the boats!” It’s testimony to either his leadership ability or his ruthlessness that his men didn’t shout back, “What are you, nuts?”

Through dumb luck (for the Spaniards that is) the Aztecs caught smallpox from Cortez’s crew and Montezuma despite his ongoing revenge, lost his empire. Cortez didn’t win because of his watercraft incineration but that hasn’t stopped it from becoming a symbol for total commitment to a result.

In business, burn-the-boats tactics are less useful than contingency plans. You can’t count on your competitors to fall apart all by themselves (they often do, but you can’t rely on it), and sailing back to Spain in an empty ship (that is, cutting your losses and trying the next idea) usually makes more sense than being either buried or eaten (filing for bankruptcy or being acquired at bargain-basement prices).

Many companies that have chosen to outsource IT burned their boats without realizing it. They signed a contract in which a change of heart is expensive, time-consuming, painful and risky — they can’t, in other words, go back. When negotiating an outsourcing deal, the business equivalent of a prenuptial agreement is essential. An outsourcing prenuptial agreement makes re-insourcing possible. Usually, it will include transition of both staff and intellectual property back to the client in case of contract termination. Otherwise the balance of power in the relationship belongs to the outsourcer, not the client.

That’s a very bad idea.

Imagine your CEO has decided to outsource IT and you’re part of the negotiating team. What do you need to know? Here’s one important fact: The outsourcer’s sales team is there because they love The Deal, not because they love running IT.

For the folks who sell big outsourcing contracts, closing a big deal is a rush. It’s a bit like a cocaine habit. When someone snorts cocaine, the user feels a rush of euphoria when the drug is inhaled (or so I’ve read). But when the drug wears off they sink into a funk, and to reach the same level of exhilaration they need an even bigger hit. The Deal has an equivalent impact on outsourcing companies: It provides a rush of euphoria as the deal closes, followed by something of a funk as the hard work of contract delivery starts … followed by the need for the rush of the next Deal.

These people don’t enjoy actually running IT. Running IT would interfere with pursuing the next Deal. If they’re smart, they’ll bring someone who loves running IT to their side of the table, but they might not be smart, because that individual … the future account manager … doesn’t love The Deal. The account manager has to deliver on the contract when it’s signed. That can interfere with The Deal.

That’s exactly why you’ll insist that the future account manager is part of the negotiating team. With this team composition, love of The Deal will keep the outsourcer at the table, unable to walk away, and the account manager’s need to run a successful account will prevent impossible-to-keep promises. (Don’t leave it to chance. When in doubt look the account manager in the eye and ask, “Can you deliver that?”)

There’s one other item to remember: You, not your employer, are your top priority. Look out for your own interests first.

Isn’t this immoral? Amoral?

No.

When your CEO decided to outsource IT he didn’t take your best interests into account. When the outsourcing company started the sales process, the process probably didn’t start in your office with your sponsorship. This is business, and altruism isn’t part of business. Nobody is going to look out for you except you.

So if you have any leverage at all, negotiate an arrangement that protects you. Have the CEO create a new executive position and promote you to it immediately. Or, become the outsourcing company’s account manager. Do what CEOs do and negotiate a golden parachute for yourself in exchange for your support during the transition.

While you’re at it, negotiate the best deal you can for the employees being outsourced. When they become employees of the outsourcing companies they’ll lose their seniority. It isn’t hard to insist on a contract provision that fixes this, but you need to ask for it — it won’t come automatically. If you become the account manager you’ll need their support. Even if you don’t, it costs you nothing.

And, it’s the right thing to do.

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|In: Industry Commentary|Last Updated:

Who wins when one company acquires another?

The shareholders do, of course. The point isn’t to impoverish the owners.

The acquiring company ought to win too, as measured by profitability and marketplace success. That, in fact, ought to be the reason for any acquisition. Whether the goal is increased economies of scale, elimination of a competitor, acquisition of customers, acquisition of skills or technology, or product line extension, the acquiring company ought to be stronger following an acquisition than it was before.

Guess who doesn’t normally win. The acquired company is one answer. It might benefit, but there’s no a priori reason to expect it to. Individual employees aren’t usually beneficiaries either, whichever company they started with.

Corporate acquisitions and large IT outsourcing deals are similar in many respects, with the outsourcer playing the role of acquiring company. That means it’s the only entity certain to benefit from the transaction.

How about the company that decides to outsource its IT? That’s a more complicated and uncertain question. The proponents of IT outsourcing rarely promote direct financial benefit anymore. As explained in last week’s column, an outsourcer can only reduce its client’s IT costs by reducing the amount of service provided, unless the IT organization being outsourced just wasn’t very good at the job.

So instead outsourcers talk about letting a company “focus on its core competencies.” This logic is something short of compelling. After all, from the CEO’s perspective the only differences between managing a CIO and managing an outsourcing contract are (1) unlike internal IT, outsourcers need to make a profit; (2) outsourcing contracts are likely to have loopholes beneficial to the outsourcer, and the outsourcer has much more experience negotiating outsourcing contracts than the CEO does; and (3) it’s a lot easier to replace a CIO than an outsourcing company.

So why do CEOs sign major outsourcing deals? The most likely answer is far simpler than the textbook ones: They’ve given up on internal IT. They buy outsourcing because in their eyes in-house IT botched the job and can’t be fixed. Their eyes are the only ones that matter.

Since an outsourcing decision on the part of your company is unlikely to advance your career, what steps can you take to prevent it?

Here’s one: Don’t botch the job. Let’s start with IT operations, since in most companies this absorbs more than half the total IT budget, making it the biggest outsourcing target.

Do you adhere to or improve upon industry best-practices? (Of course, if you don’t know what they are, the chance of improving on them is slim.) For an excellent source of information on this subject, check out the Information Technology Infrastructure Library (ITIL — http://www.itil.co.uk/). It’s the industry standard reference point, and friends who are experts in the field tell me it’s the right starting point for IT operations processes.

IT operations is where formal measurements work best, because it’s where you do the same things repeatedly. If you haven’t established formal service level measures, do that immediately. Implement a continuous improvement program for the most important of them, usually the stability and performance of specific, critical applications. You might be tempted to measure only platform performance and stability “because that’s all we have control over” but that would be a huge mistake. If a major application is down, nobody cares except your troubleshooters that the servers are up and running, after all.

Track service levels, but don’t negotiate them. The process of negotiating service levels provides no benefit and carries plenty of risk. There’s no benefit because no service level worth your time to negotiate will truly satisfy anyone. Regardless of what you negotiate, anything short of the telephone, where you always get dial-tone and always get it right away, will fall short of what’s wanted.

Here’s the downside: Negotiating service levels means you’re negotiating with the rest of the business. That separates you from everyone else, makes you look and sound like a service provider, and establishes precisely the gap between what you provide and what they want. It’s another way to make them customers and yourself into just another outside supplier. As mentioned last week, that eases the transition to an outsourcer.

So remember: Tracking service levels makes you professional. Negotiating them simply makes you vulnerable.

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