OUTSOURCING - PROPOSED INTERNATIONAL GUIDELINE ON INFORMATION TECHNOLOGY
Exposure Draft by IFAC Information Technology Committee
Comments from the Association of Chartered Certified Accountants
February 2002
Executive Summary
The Association of Chartered Certified Accountants (ACCA) is pleased to respond to the International Federation of Accountants (IFAC) Information Technology Committee exposure draft of the proposed International Guideline on the topic of outsourcing (the draft).Outsourcing is now an important part of organisational life. Current estimates of the world-wide scale of outsourcing range from $300 billion to $1 trillion. The market for IT outsourcing is smaller but significant. Outsourcing is evolving from being a solution to a shortage of a resource to having a fundamental influence on the business models of many organisations.
ACCA agrees that there is a need for guidance on outsourcing. The draft, however, does not clearly set out its purpose. It appears to have been written mainly for managers of organisations which are considering outsourcing for the first time. The draft will not help managers to manage outsourced contracts.
The draft concentrates on IT. It does not give a sense of the current and growing importance of outsourcing as a whole, nor of how IT outsourcing relates to the wider picture. It also concentrates too much on the tactical aspects of outsourcing and should say more about its strategic role in organisations.
Risk management is a vital aspect of outsourcing but this is not covered at all in the draft. Similarly, there is no consideration of the performance management of contracts for outsourced services.
ACCA recommends substantial revision of the draft. IFAC may also wish to consider whether it would be more appropriate to issue guidance on outsourcing as a whole, instead of covering IT aspects only. Specific Comments
PREFACE
1. The preface could usefully identify more clearly the audience which the document is intended to help. For example, it could state which of the following groups it was written for: purchasers or intending purchasers of outsourced IT services, suppliers of outsourced services, IT specialists or lay interested parties.2. It would be appropriate to include, either in the preface or introduction, brief details of the current importance of outsourcing. It could state that estimates of the world-wide scale of outsourcing range from $300 billion to $1 trillion and discuss the growing influence of outsourcing on the strategy of organisations and the place of IT outsourcing within the outsourcing market.
3. The implied link between outsourcing and resource planning should be made explicit. Alternatively, references to resource planning in the document should be omitted.
MAIN BODY OF THE DRAFT
Paragraphs 1 and 2 "Introduction"4. A clearer introduction is required. Paragraphs 1 and 2 should either be moved to a later part of the document or removed. The introduction would be made more helpful to readers by introducing outsourcing, defining it, explaining its importance in the world today, and setting out its scope (including the fact that IT is one, important, part of wider outsourcing). It should also explain the need for this guidance.
Paragraphs 3 to 5 "Resources to be managed"
5. These paragraphs appear to be about resource planning in general yet are not directly relevant to outsourcing. The main purpose of these paragraphs appears to be to support the definition of outsourcing given in paragraph 6. Paragraph 6, however, seems to say that this definition is in fact an inaccurate use of the term "outsourcing".
6. It would be more useful to define outsourcing by what it is rather than what it is not. One simple definition of outsourcing, from the perspective of an organisation procuring services, is:
"a long term, results orientated relationship with an external service provider for activities traditionally performed, or capable of being performed, within the organisation and involving the provider both having a degree of management control over the supply of the service and in taking some risk".
Paragraph 8 "Why outsource?"
7. The heading "Why outsource?" should be changed to "Why outsource IT?".
8. In considering whether net gains will result from outsourcing, in addition to the considerations already listed, reference should be made to the change in risk profile which will result from outsourcing.
9. In this section, we suggest beginning with a broader perspective of the reasons for outsourcing. We believe the starting point in considering whether to outsource, or whether to continue outsourcing, should be a consideration of the organisation's strategic intent and ideally its culture and values. This would provide a broad framework for considering the risks and rewards of outsourcing.
10. It has been suggested in other guidance on outsourcing that there are three types of outsourcing relationships between a provider and a purchaser: tactical, strategic and transformational. These relationships are relevant to outsourcing in general but are also relevant to IT outsourcing. We suggest that the draft should include, and ideally be based on, these three concepts.
- In a tactical relationship, outsourcing is usually a response to specific problems which the purchaser needs to address: such as a lack of competence in an area or function or a need to reduce staff numbers.
- In a strategic relationship the purchaser will be redirecting its resources towards maximising the value which it can generate from its core competencies. It will do this by giving up control of certain functions and outsourcing them. The premise is that, by giving up control over an outsourced function, organisations gain wider control over the business as a whole. For example, in the context of IT, IT executives outsourcing a data centre can devote more attention to meeting the needs of their internal customers.
- Transformational outsourcing is presently the latest generation of outsourcing. If tactical outsourcing is about working within the existing structure of an organisation and strategic outsourcing is about using outsourcing to achieve strategic objectives, it follows that transformational outsourcing is about redefining, or re-engineering, the business itself.
Paragraph 14 "Problems in outsourcing"
12. This paragraph could be expanded considerably. At present, there is no discussion on the considerable risks involved in outsourcing, or how these risks can be managed.
Paragraph 20 "Description of Services to be Outsourced"
13. It would be appropriate to refer to the advantages which outsourcing can bring through partnerships and sharing of information and ideas. To achieve such benefits, however, it is vital that there is a good cultural fit between the two organisations. The specification for the services to be performed should take into account the importance of achieving a working relationship which allows co-operation, such as sharing information and ideas.
Paragraph 31 "Contractual arrangements"
14. This section concentrates on legal aspects. It should also include the need for a sound performance management framework which will allow both parties to monitor the performance of the project and provide early warning of problems. The framework should include a consideration of the objectives for the outsourced service, the risks involved and intended controls, together with key performance indicators, which are both time-related and capable of measurement, against which the contract can be evaluated.