1 management of it outsourcing relationships graham brown 19 th february 2004 winmark ltd
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Management of IT Outsourcing Relationships
Graham Brown
19th February 2004
Winmark Ltd
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The Research
• Research project comprised 30 Depth Interviews with CIOs in various UK and international companies
• Looked at all steps required to negotiate a successful and value-adding relationship between client and supplier
• Additional input from:
The IMPACT Programme – UK’s leading network of CIOs
Eversheds LLP – Law Firm with specialist knowledge of IT Outsourcing contracts
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“You must be absolutely clear on the outcomes you want to achieve, your expectations must be realistic
and achievable and behaviours must be incentivised to achieve
these outcomes.”
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Why Outsource?
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An external company carrying out a ‘business-usual’ activity, e.g Desktop Maintenance, Application
Development . In most cases implemented for cost reduction or to increase in efficiency
The opportunity to create a ‘leaner machine’, stripping away non-core activity and passing top a supplier who can
add value, allowing a closer focus on core skills
Why Outsource?
• Outsourcing fulfils a number of different needs through different levels of complexity
An external company carrying out a ‘business-usual’ activity while at the same time carrying out a programme of
‘value-add’ – a qualitative change in the way some processes and functions are handled
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Why Outsource?
• In a small but increasing number of cases, outsourcing is used to transform a company’s IT landscape – most or all of the IT function outsourced to effect a qualitative business change
“Transformational Outsourcing”
Traditional outsourcing can be adversarial in nature – clients attempt to reduce costs and vendor attempts to maximise profits – as a result – neither party can benefit
“[Company] wanted to effect a very large business transformation, and they saw IT as both an enabler and an inhibitor in it’s current state, so they needed somebody to
effect an IT transformation… It doesn’t have to be the cheapest – better rather than cheaper, and it’s a perfectly
valid business brief for doing so. It’s very much better, and better admin improves service and improves ability to deliver
projects”
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Preparing to Outsource
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Preparing to Outsource
• Key areas for consideration:
The precise package being outsourced
The ultimate business benefits expected from the relationship
How will the relationship be managed from both sides?
How will performance be measured and underperformance managed?
• The most successful relationships have been those most clear about their aims
• Even the most risk heavy can bring about exceptional benefits if handled correctly
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Preparing to Outsource
• Definition of the package to be outsourced
Offer a well defined and rounded package
Never outsource a mess
Ensure discrete functions are not split across vendors
Outsourcing non
-
specialised activities to a provider with productivity and costs benefits
Outsourcing non
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core skills to a specialist provider to allow greater focus on core activity
Improving an activity through outsourcing to a
supplier with significant and demonstrable capabilities
Outsourcing of
entire function to effect qualitative business
change
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Preparing to Outsource
• Ultimate business benefits expected from the relationship
• What is expected can be categorised on two dimensions to understand the supplier role
Business Value expected from the relationship
Risk being shared
• Important to be upfront about requirements early on
High
Business Value
Low
Risk Shared
Low High
© The IMPACT Programme 1999
Business Supporter
Business Partner
Maintain Service Quality
Best in Class IT Service
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Preparing to Outsource
• How will the relationship be managed from both sides?
Effective channels of communication are critical
Routes for escalation need to be well established
Relationship management will take considerable time and resource on the client as well as vendor side
“We are in it together; to me it is about a partnership. The one thing I am clear on though is the relationship has to work and you have to have
the right account director, you have to have the right service delivery manager. And actually,
typically, I think this is a big weakness of outsourcing… generally they don’t pay enough
attention to matching those people at the outset.”
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Service Level Agreements (SLA) – what are the minimum levels these measures must achieve to
guarantee continued corporate support?
Critical Success Factors (CSF) – ‘qualitative’ measures of what
success should look like
Key Performance Indicators (KPI) – how
will CSFs be conceptualised as a
measure?
Preparing to Outsource
• How performance will be measured and underperformance managed
Important part of any deal
Must be jointly developed by both vendor and client (plus 3rd parties?)
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Preparing to Outsource
• How performance will be measured/underperformance managed
Some feel that penalties can cause bad feeling
Continuous
Service Type
Demand -led
Measurement Strategy
Fixed Performance
Service Level Agreements
(SLAs)
Client Satisfaction
Time & Resource Provision
Target Performance
“We tend not to go along for penalties. Because for us, it doesn’t really solve our problems... In many ways, penalties are an admission of defeat. That we tried to make it work and it failed and now we can have a little bit of fun with the contracts and all the rest of it – it has
nothing to do with the business.”
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Selecting a Vendor
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Selecting a Vendor
• Expertise
Must display relevant core skills – no room for mistakes as vendors learn on the job
“We will be looking for established players in the market place who have a proven track record”
Credibility
• Evidence of similar work
Have they done it before?
Competence
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Selecting a Vendor
• Pricing
In some cases, cheapest will win through. In other cases, not so – the price paid must reflect the value being added to the business
Comparison of prices early on from existing suppliers, and benchmarking against potential new suppliers
Cost
• Financial Sustainability
A financially struggling company can elicit undesirable core behaviors – unwillingness to invest and work proactively
Build in rights and warning mechanisms to be able to walk away before financial problems affects the client’s business
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Selecting a Vendor
• Proportion of business being accounted for
What will happen to the contract if other areas of the business fail?
• Softer measures
Cultural fit / Similar values
Comparative level of plushness (site visits)
Are the corporate goals in line
Commerciality
Compatibility
“You really need to be of similar size, in order to ensure that you are important to them.”
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Selecting a Vendor
CredibilityWill the IT dept
have confidence in them?
CompetenceDo they have the skills we
need?
CapacityDo they have the
resources and are they
scaleable?
CostAre we getting Value
For Money?
© Winmark 2003
The Six CsCommerciality
Do they understand
ultimate business objectives? Now and in the future?
CompatibilityIs there a cultural fit? Can we work
together?
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Managing the Relationship
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Managing the Relationship
• Relationship issues cited by many CIOs as a critical area to ‘get right’
Establish early on with whom the day-to-day relationships will be
Involve them in the initial negotiations
Ensure they can work together:
Ensure that a close relationship exists right through the hierarchies of both companies
Ensure that the vendor keeps any sales approaches separate from account management
Some companies set aside time for separate and controlled sales meetings
“We have paired off people from both organisations who will be working together, to get them to understand how the
relationship will work a bit better.”
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Managing the Relationship
• TUPE (Transfer of Undertakings (Protection of Employment) Regulations 1981)
Staff transfer issues can be potentially very sensitive
Handle with care and ensure communications are clear and frequent
Ensure expertise is not lost inside the vendor organisation
Keep relevant day to day knowledge on board
“We have a very strong and open senior board - close to what's happening and helping tremendously. A great
internal communications department filters everything down and through very well. [Vendor] themselves did a very
good bit of staff management PR. The people that moved [to the vendor] probably felt better than those that stayed!”
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Managing the Relationship
• Be aware that business objectives will change over time – flexibility needs to be built into the contract
• Many CIOs note that it can be difficult to state in a contract how the relationship should react to technological or business change – but keep a close eye on the business objectives
“I write into contract that I will get 24 days of technical design consultancy - the bloke with the big brain is going to come and we are going to talk networks - so the resource is
already banked. You can’t contract for what you don’t know, but you can behave in a way that will anticipate this. It’s about creating the climate for commitment, and putting
together the business plan effectively.”
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Exiting the Relationship
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Exiting the Relationship
• Occasionally, there is a need to exit from a relationship
Some examples perfectly amicable
Some extremely messy
• The vendor may be sold, acquire new businesses, or perhaps even become a competitor in some way
• The key is to get processes right in the contract in the first place
Generally the cost of exiting reduces over time as the vendor has had the opportunity to make a return
Often, a percentage of a company’s capitalisation or the value of the contract seem attractive, BUT;
As the economy turns round, a fixed sum may be more attractive
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Exiting the Relationship
• All bases must be covered:
Handover, training, documentation
• Transfer of assets must also be carefully planned
• Diligent preparation of contract terms ensures no surprises from either party – allowing both to move apart without enmity
“I don’t actually like the idea of asset transfer, I think it’s a hindrance. If your assets are owned by another party and you want to move or change or do something else as life moves on it’s a hindrance to exit. So a lot of the emphasis that we place
on is how do we avoid being tied into the organisation that we’re outsourcing to? The tie-ins can be assets, knowledge,
contracts, termination and so on and it becomes a problem for us because we don’t know where we’re going to be in two
years time.”
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Thank You
• If you would like a free copy of the detailed Winmark report, please email: