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Your Major Internal Projects Fail, Outsourcing Fails  What Next?

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What do you do when your internal and outsourced projects fail? In this article by Brian Heywood, derived from The Outsourcing Dilemma, the author suggests creating Business Satellites along with other solutions.
This chapter is from the book

The 21st century did not begin with the feared Millennium bug meltdown, but it did introduce some market research findings that are potentially much more worrying than the worst Y2K nightmares, and the problems they highlight will be with us for the long term.

At the beginning of 2000, PA Consulting and others released research figures, which showed that the vast majority of ERP projects that began in the late 1990s had failed. Apart from those working in the major management consultancies and software houses, this was the first indication senior business executives had that the failure of major IT projects was so widespread. To some of us, this failure rate was not at all surprising—the IT project failure rate has always been high, and it gets higher the more complex the projects become. I believe that if targets were set for IT projects that reflected the true cost and disruption incurred, and above all the degree of competitiveness required at the completion of the implementation, a substantial proportion of them would be deemed failures.

When the extent of the failure rates relating to internal projects started to get publicity a few months back, it was noticeable that the IT outsourcing service providers started to get more enquiries. This is hardly surprising because the pressure is mounting all the time on senior management to strive for lasting competitiveness. When research figures show such miserable returns from internal projects, it is natural to assume that continuous involvement by external specialists is essential, and that normally means a full outsourcing. However, there is increasing evidence that outsourcing arrangements are also failing at an alarming rate. I accept that in order to achieve a true competitive position for any business function, it is clearly essential to involve specialists on a full-time basis. But getting these specialists to concentrate fully on your service is easier said than done if they are being provided under an outsourcing arrangement. In fact, there are strong arguments for claiming that in order to obtain a successful outsourcing, the client will need to take a substantial slice of the service provider's equity.

Recently, a senior management consultant suggested to me that the problems found with both internal projects and outsourcing arrangements were due to the skills shortage and the general lack of experience with the new technologies. The implication was that, over time, human beings are resourceful enough to find solutions to these and any other problems.

Putting aside the problem of what you do until the required skill and experience base has been developed, his comments started me thinking about whether other pressurised management activities might provide a clue as to the likelihood of senior management ever being able to manage major IT projects successfully. The key point to consider is not if there is anyone available who can manage these projects, but do such skills exist widely in every sizeable organisation in every location?

In the past, the largest projects were those involving major civil engineering work such as bridge and road building. However, these endeavours are fundamentally different from IT projects in that the goal posts tend to be static; i.e., the starting and ending points of the project are fixed. Furthermore, these projects usually take place free from competition. Therefore, success or failure in such schemes offers no real guideline as to the likelihood of success with major IT projects.

After considering the options for some time, I concluded that the business of war would provide the most interesting and pertinent comparison. If you ignore the fact that relatively few people are killed and traumatised by the general day-to-day world of commerce, it becomes easier to see that there are many similarities between war and business. To begin with, it will be obvious that to achieve success in either of these activities it is necessary to bring together human and other resources in a way that creates a competitive advantage. In addition, because the participants in both war and business usually do not know what the competition is planning, the strategy and tactics employed assume vital importance.

However, all the wars experienced by human beings to date have been finite, while business has, generally speaking, continued to evolve. The significance of this is that as soon as a war is over, the military historians are all free to analyse the decisions made by the various commanders involved. Typically, what they find is that commanders have always tended to make far more bad decisions than good ones, and as the use of technology increases, so does the tendency to make mistakes. Given the need to make decisions in rapidly changing circumstances, it is hardly surprising that bad decisions should outnumber the good variety. Independent analyses of past battles has often proved valuable to young commanders without battle experience, but it also helps the public at large to understand that in any war the goalposts are constantly moving, and consequently the strategic plan has to be adaptable.

For most commercial organizations, the struggle to achieve competitiveness is ongoing; therefore, mistakes, unlike successes, are company secrets that are not for general publication. Consequently, truly independent business analysts are never in a position to benefit the business world at large, in the same way that the military historians have benefited military planners. Given the ongoing nature of business and the importance of competition, it is clearly not possible, or even desirable to make all information freely available, but does that mean we should ignore all the lessons from recent military history? In particular, why should we assume that a business project set to run two or more years is still going to be operating in the same business world at the end of that time? After the major wars of the 20th century, no military man would consider keeping with a rigid plan, nor would he make assumptions about the condition of battlegrounds that far ahead.

Since the dawn of modern history, a significant proportion of all military encounters have been decided either by mistakes or factors outside the commander's control; i.e., disease and weather. There are a few examples that suggest some leader used a brilliant strategy to achieve the victory, but these tend to be in the distant past and are few in number when compared to the reported blunders. Even outstanding victories, such as that achieved by the Americans at Midway in World War II, are now considered somewhat lucky. In his contribution to What If (published by GP Putnam's Sons), Theodore F Cook, Jr., professor of history at the William Patterson University of New Jersey ,supplies the following sobering words:

There is a story, no doubt apocryphal, that gamers at the Naval War College in Newport, Rhode Island, have many times replayed the 1942 Battle of Midway—but have never managed to produce an American victory. How to duplicate the luck of our dive-bombers, swooping down on the Japanese carriers at the very moment when all their planes were down for refueling?

This and many other examples from the wars of the 20th century would suggest that at the commencement of hostilities, no human being is really capable of creating and implementing a strategy for a major war or even a battle within that war that will remain practical for any length of time. This is hardly surprising once we accept that in battle, the conditions are changing all the time. Instinctively, we all recognise the difficulties involved in military campaigns and don't expect our generals to guess correctly on every occasion—and we certainly do not expect them to keep to the original business plan.

In the competitive world of business, the major IT projects can be seen as the equivalent of military battles. Just like their military equivalents, these major IT projects exist in an atmosphere of constant change, they absorb substantial scarce resources, cause considerable internal disruption and frequently last for several years—by any standard, they are major battles. Yet the typical business plan is often far too inflexible to allow for changing circumstances.

In many ways, these IT projects are more difficult to control than the military equivalent. Unlike their military counterparts, the commanders or project sponsors in the typical business environment will often complete their projects not knowing whether the battle has been won or lost. In other words, they often have no idea if the organisation's competitive standing has been improved by the project and if the cost and effort has been justified. However, some consolation comes from knowing that their superiors will be just as confused.

Overall, there is little evidence from the management of war or any other human activity to suggest that major IT projects are ever going to be managed in such a way that true competitive advantage is likely to result. In fact, as the projects get ever more complex, they will become more difficult to manage.

The comparison between the management of war and the management of business does, however, provide a significant clue to a route that should avoid most of the major headaches of internal projects and outsourcing. No country is ever at war on a permanent basis, therefore during times of peace there is a natural desire to demobilise and reduce cost on military activities to the minimum. However, lessons learned during the two World Wars in particular have now convinced even the most peaceful-minded of politicians that the basic military structure should remain in place during times of peace, and key individuals in that structure should be given constant training. In this way, governments plan not only to be ready for future wars but to be strong enough to avoid them.

The business world does not have an equivalent set of plans for dealing with the ongoing problem resulting from rapidly developing technology. By and large, we adopt the out-of-date demobilisation policy of doing nothing because we can not be sure where the threat will come from, or even if there is a threat. But even if it is not always obvious, the threat is real because technology will continue to develop and demand change if competitiveness is to be achieved. Most major internal projects and almost all outsourcing of internal functions result from a failure to plan. In particular they result from the failure to understand the significance of rapid and continuing technology developments. Whatever the function, the odds are that technology is responsible for the internal project or the outsourcing. Virtually all business organisations are guilty of failing to plan for technology developments. Yet I believe that there is one simple solution to the problem.

In my book, I suggest that any organisation that cannot be certain that it will stay at the forefront of technological development should consider creating Business Satellites. This concept involves setting up one or more joint venture arrangements with small local firms of IT specialists and immediately transferring some work to them. In the examples provided, existing internal IT specialists also have the opportunity to obtain equity in the new joint venture satellites.

A Business Satellite (BS) programme is based on the following principles:

  • Most organisations will want to perform core functions in-house, but will be willing to consider the advantages of passing non-core functions to specialists in those business areas

  • In-house performance improvement projects for non-core functions tend to fall short of meeting the targets set for them.

  • However beneficial outsourcing might be in theory, it is not easy to be sure that the service provider will remain committed to ensuring the best possible service for each and every client.

  • The greatest chance of outsourcing success is likely to arise in situations where both client and service provider have a financial interest in making the arrangement work. This must go far beyond simply meeting the contracting details in order to obtain a specified fee. In most cases, some form of joint venture will be necessary.

  • The technology factor is the key element in maximising the performance of non-core functions.

  • The development of BS programmes should not result in too much extra pressure, financial or mental, being placed on management. In any commercial environment the best way to avoid pressure is to plan ahead. With BS, planning ahead is straightforward because having accepted that it is the technology element that is causing the problem, management is free to create one or more parallel IT organisations to duplicate and later take over the functions controlled by its current Information Systems. The time from creation of the BS to its takeover and control of existing systems can be flexible. Therefore, a BS could be set up for a function that is currently being subjected to a performance improvement project or is already outsourced.

  • Being empowered to do your own thing and working for an organisation in which you have a financial stake is an ideal incentive for producing excellent work.

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