July 2008

IN THIS ISSUE

Common Shortcomings in IT Sourcing

Interview with a Certified Outsourcing Professional

Measuring What Matters – An Essential Governance Practice

Chapter Perspective

Outsourcing Governance Workshops

Available on Firmbuilder.com

Coming Next Month

Common Shortcomings in IT Sourcing – Governance and Change Management

Bill Hefley, Ph.D.

Associate Teaching Professor

Program Director, MSIT-IT Service Management Program, Institute for Software Research and IT Services Qualification Center, Carnegie Mellon University

hefley@cmu.edu

Our efforts at the IT Services Qualification Center (ITSqc) at Carnegie Mellon[1] have focused on eSourcing, where information technology is used as a key component of service delivery or as an enabler for delivering services. To better understand issues in eSourcing relationships, we conducted numerous focused interviews. These interviews were held in 11 different locations (covering seven market sectors and eight service areas) with both client and advisory organizations in the US and Europe. Our interviews addressed business and corporate roles in client organizations, and focused on critical incidents — what has worked well, and what has caused difficulties. A script, focusing on critical incidents, was used. The interviews focused on the entire sourcing life cycle.

Based on the results, we have identified fifteen common shortcomings considered important by the clients and the advisors who help clients in sourcing IT enabled services. Two common themes emerged: governance and change management. Each of these is discussed below.

Governance

1. Failure to align strategies: Client organizations often make decisions to source without considering how sourcing strategies align with long-term business strategies. Most often the response is tactical in nature. For example, if the mandate from the top is cost cutting, the first reaction is to outsource to reduce the fixed costs. Companies also may fail to gauge the short-term and long-term impact of outsourcing on organizational performance.

2. Passive involvement: Some clients tend to rely on consultants to conduct service provider selection without considering the consequences (e.g., there may be a lack of direct communication with potential providers). While external help can often be useful and provide clients with access to skills and knowledge, it can be a problem if clients abdicate their responsibilities to the consultants. Active participation by the client stakeholders was found to be very important in successful sourcing initiatives.

3. Lack of commitment: Some client organizations establish special sourcing projects to convey popular images to investors or staff, e.g., “right sourcing” or “global sourcing.” Most of these projects were found to have little commitment from the client executives and managers involved.

4. Passing the problems: As in a relay race where the baton is passed, some sourcing arrangements pass problems from clients to providers. We found that such "distress outsourcing" often leads to more distress. This can be caused by financial weaknesses among the players or by ignoring or passing off problems with the  hope that sourcing will make them disappear.

5. The service provider has “it”: This is an extension of passing the problem, where some clients abdicate their entire responsibility to their providers after sourcing deal is signed. Some clients have the perception that once they have selected the service provider, their own responsibility ends because the service provider will take care of all the problems, and they can sit back and let it run on auto-pilot. Some organizations do not understand or properly plan for appropriate ongoing governance activities during the relationship.

6. Limited understanding of current operations: Some clients do not baseline existing operations or benchmark the desired state for service provision. In some cases, they do not even know (or have) existing performance measures, making it difficult to set meaningful service level agreements with their providers.

7. Failure to examine internal options: Outsourcing may be an appropriate option for clients; others may find that reengineering or process improvement or shared services settings may be a better solution at that time for that organization. We found that clients are able to negotiate better sourcing deals when they involve internal team bids. However, clients typically did not solicit internal team bids. However, many clients and advisors concurred that if an in-house bid is invited, it results in clients getting a better overall deal, and they find it a useful exercise to know what they need, even if they contract with an external service provider.

8. Interpreting service level agreements (SLAs): Clients and service providers often are challenged when they try to interpret SLAs. Interpreting the service level agreements in a sourcing project remains a critical issue. In a related study, most clients and service providers ranked this very high on their list of issues, although clients focus on business results and service providers focus on the performance measures or numbers, leading to potential disconnects due to this difference in perspective.

9. Understanding scope: Many client and service provider teams interpret the scope of their engagements differently. This often is related to interpreting the overall scope of the project and a poor understanding of the contract, leading to long-term relationship management problems.

Change Management

10. Little focus on change management: Clients are seriously challenged by both internal and external change management efforts posed to accomplish successful sourcing.

11. Difficulty with expectation management: Managing expectations were considered very challenging by the client organizations.

12. Failure to effectively communicate: Many clients do not execute communication plans for internal and external audiences effectively, especially in projects dealing with global IT sourcing. Some clients did not have a communication strategy and others did not implement it effectively.

13. Managing stakeholders: The buy-in of management, power brokers, and other key stakeholders (e.g., unions or key employees) is very important. Clients and advisors feel that in addition to the top management, there are always some key employees whose buy-in is important. While they may not be very high in the organizational hierarchy, these individuals could potentially create hindrances and derail the project.

14. Understanding skill needs: Clients need to know the skill sets and competencies in their own organization and from the service provider's staff. In some situations clients may not consider the issues related to losing their internal resources, both human and physical, leading to loss of competencies. And their limited understanding of skill needs (vs. expectations), may give rise to a gap between what the client needs (or wants) and what resources are actually available from the provider.

15. Developing competent sourcing management professionals: Clients need to understand the numbers, skill sets, and training for their employees to manage the sourcing arrangement. They need to retain, develop, and deploy appropriate technical and managerial skills to manage, oversee, and coordinate with service providers. It also may be important to retain control of certain critical managerial and technical functions like technical architecture design. Problems arise if the clients do not have the staff or skills to take on these duties and responsibilities. One study indicated that most clients provide no training for their personnel moved into sourcing management positions.

Addressing these shortcomings can help client organizations plan and execute their sourcing arrangements, and better position them to maximize performance under their new sourcing arrangements.

 For more information about the ITSqc, an IAOP Academic Alliance Partner, and the eSourcing Capability Models (eSCM-SP and eSCM-CL), see itsqc.cmu.edu

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Interview with a Certified Outsourcing Professional (COP)
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Matt Shocklee is President and CEO of Global Sourcing Optimization Services, LLC, a firm focused on assisting buyers and providers of outsourcing services in dramatically improving the business value they receive from their outsourcing contracts/relationships. Matt is a Former Managing Director of PwC's Outsourcing Advisory Practice. 

Why is governance so important to successful outsourcing outcomes today?
Unfortunately, recent research has confirmed that more than half of all outsourcing contracts/relationships are not performing to client expectations.When you peel back the cover on outsourcing relationships, inadequate or improper governance of the relationship appears to be a major cause for the gap in meeting client expectations.

What are some of the areas of governance that appear to be major causes for concern?
The outsourcing industry is rapidly maturing with the outsourcing of not just non-core, but increasingly core business functions. And as we read about and experience everyday, the world around us is being affected by the globalization of businesses and their supporting business processes. Since outsourcing affects almost all business functions within an enterprise to some degree, it is increasingly important to have clarity of roles and responsibility regarding the management and governance of outsourcing relationships not only among and between you and your outsourcing suppliers, but also among and between your internal key stakeholders and affected user constituencies.The complexity and dynamics of today's environment cannot be understated, and unfortunately most existing outsourcing contracts/relationships were not originally conceived with an understanding of this reality. Also, as multi-sourcing increasingly becomes the norm and clients are now managing a portfolio of globally delivered outsourcing relationships, they are unprepared and unable to have the required degree of transparency into their outsourcer's operations and their respective service delivery supply chain. This makes it extremely difficult to understand real-time performance and to adjust your outsourcing relationship to respond to constantly changing business needs.

What can organizations do to address these issues and concerns?
First, when we work with clients that have successful and sustainable outsourcing contracts/relationships, we find that they on the five key value drivers of outsourcing business value: financial performance, capabilities, quality/SLA's, risk/compliance and absolutely... governance. For the reasons mentioned above, governance appears to be the real Achilles heel in many underperforming contracts/relationships.If you're just embarking on outsourcing initiatives, whether ITO, BPO or KPO, we recommend that the topic of governance be included right up front as you discuss the overall strategic implications and needs of your future outsourcing strategy.Then throughout the outsourcing life cycle, the topic of governance (both internal and external) should be continuously tested and refined so that when the outsourcing contract/relationship is executed, its not an afterthought and all parties involved have clarity of understanding of their roles, responsibility and expectations. All parties must be prepared to execute and respond to constantly changing business needs, as well.

You mentioned that governance is increasingly important given the proliferation of multi-sourcing. Are there any tools or technologies available today to assist outsourcing users to better manage in this new environment?
Fortunately, yes, there are; however, they've been relatively slow to adoption because of the lack of a strategic view of outsourcing and its impact across the increasingly globally extended enterprise.Most organizations today, especially the Fortune 1000, outsource a considerable amount of their business operations, whether ITO, BPO or KPO.What clients are all too often waking up to these days is the realization that they're managing their organizations in the rear view mirror as they traverse vendor provided support portals or their own organizations’ spreadsheets,  trying to make sense of the data and/or lack of accurate data they're receiving concerning outsourced business performance.We believe that there is a ground swell underway by clients to "take back control of their enterprise" as they realize that having not only access to, but control of the underlying data and algorithms supporting business performance management is key to visibility and transparency into their outsourced supply chains and resulting supplier performance. Tools such as Janeeva, Enlighta, Digital Fuel and others are now available for clients as they create their own "Sourcing Management Environment" (SME) to support their respective unique portfolios of outsourcing service providers.This new SME approach can dramatically simplify the governance process, enabling the client (and stakeholder community) to have real-time access to data/information across the outsourcing supply chain, which can stretch around the world and involve all forms of outsourcing.

Any other words of wisdom for organizations struggling with the topic of governance today?
You're not alone; it is a huge issue with immense opportunity for upside in improving the business value organizations receive from outsourcing.In situations where organizations have taken a disciplined approach to optimizing the value drivers of outsourcing, including governance, I've seen value improvement ranging from 10-30 percent plus.Given that outsourcing spending in some organizations is well into the hundreds of millions of dollars a year, that's extraordinary payback potential and all too often unknown improvement potential for most users of outsourcing. Getting your arms around governance may seem like a daunting challenge, but take it on as the payback and return to the business and it is well worth it!

For more information on the Certified Outsourcing Professional (COP) program, click here.

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Measuring What Matters – An Essential Governance Practice

By:  Danny Ertel, COP, Partner, Vantage Partners, and Chair, IAOP Governance Chapter

In this article, Danny Ertel, who is also chairing the upcoming IAOP Governance Forum on September 9, 2008 in Chicago (click here for more information), discusses the critical role that the right measurement system plays in outsourcing governance success.

Governance is a broad and multi-faceted topic. While there are many ways to define it, my own view is a relatively functional one: Governance consists of a collection of mechanisms that buyers and providers use to help them address the likely challenges of their outsourcing relationship. That fairly broad definition includes decision rights matrices and protocols to help parties make decisions effectively; it includes how buyer and provider monitor both operational and financial performance and how they address problems; it includes how parties deal with contract and scope issues that inevitably arise; it includes building the level of trust and the quality of communication necessary to implement the deal the parties negotiated; and, of course, it includes recognizing the need for changes in the way buyer and provider work together. 

One visual I like is a set of interconnected puzzle pieces, because usually when one component is missing, the picture of the relationship and what it is supposed to deliver tends to get skewed or fragmented. In the limited space we have here, let’s take a look at one governance gap that is often at the heart of many outsourcing problems: measuring and tracking the wrong things. All the tools in the world — whether they come from providers, advisors or independent tool vendors — don’t work if the data coming in and the reports going out focus on what’s easy to measure rather than what’s most important to the parties as they steer the relationship.

Historically, parties to outsourcing contracts have relied on functional, objective, easily quantifiable metrics — typically those things the buyer used to measure for themselves or those things the provider could easily point to as indicators that they were delivering what they committed to delivering. Providers understandably insist that if they are going to be held accountable for achieving certain levels of performance, the metrics used must be highly objective and quantifiable, so they are not at risk of being penalized over differences of opinion.

But not surprisingly, highly objective, easy to monitor service levels or performance indicators lead to the all too common situation where the dashboard may be green, but the buyer is unhappy with the service provided. When that happens, things start to break down: service providers feel unfairly treated — they are doing what they promised, but their customer is still dissatisfied.  Buyers feel let down — those indicators were just their minimum expectations, something akin to “keeping the lights on” — of course they’re not “delighted” by what feels like minimum performance.

Measuring what the buyer used to measure, while reassuring, is also pretty arbitrary: the data required to manage a third party provider is different from the data required to manage infrastructure or business processes directly. Moreover, while those things that a service provider will agree to be held accountable to (and penalized over) may be objective, that does not necessarily mean they are important to the buyer’s business.

In a survey we conducted with the Cutter Consortium last year, we found that a bit over half of buyers and providers surveyed were spending time and energy tracking and reporting on performance indicators that didn’t particularly impact the business when service levels weren’t met, and that the vast majority (85.7%) said there are other things they wish they were measuring that they’re not. (See Cutter Consortium Sourcing & Vendor Relationships Advisory Service Executive Update, Vol. 8, No. 17, by Danny Ertel and Sara Enlow).

The problem with measuring the wrong things is not just that an opportunity is missed to measure more important things — it’s that real problems result. For example:

Ÿ     Micro-managing: The more that detailed functional metrics form a significant part of the dashboard used to manage the relationship, the more likely it is that someone in the retained organization or the buyer’s management is spending time reviewing, questioning, and worrying about those metrics. The time they spend on those issues is time they are not spending on other things that outsourcing was supposed to free them to do, and it is also time wasted on duplicated efforts.

Ÿ     Misdirecting resources: When service provider delivery teams are told that their obligation is to keep certain indicators green, they tend to put resources up against those things. But we all know delivery resource is limited; measuring unimportant or otherwise “wrong” things means other, more important things don’t get the resource they need.

Ÿ     Penalty-avoiding behavior: Service level agreements “with teeth” usually have some kind of penalties associated with failing to achieve the target. Penalties are expected to make the service provider take those obligations seriously. But penalties also have the effect of turning the relationship between buyer and provider into one in which buyers focus on enforcement and service providers focus on avoiding penalties. In practice, this often fosters a culture of blame and defensiveness, rather than effective and creative problem solving.

As might be expected, this kind of experience has led many in the industry to move from one guardrail to the other and advocate relying entirely on “outcomes-oriented” measures. Today’s buzzwords are “end-to-end” measurement and “contracting for outputs.” I heartily endorse over-correction of a long ingrained phenomenon of measuring inputs, activities, and operations. And I want to inject a call for some balance between outcomes or outputs, and the enablers of those outputs or outcomes.

Outcome or output measures need to come from the buyer’s purposes in outsourcing and from how the outsourced function(s) contribute to the buyer’s strategy. Such metrics can serve to measure whether the buyer is getting what they thought they were buying, and to allocate rewards (or burdens). Given the strong cost-savings driver in many outsourcing deals, it is usually helpful to divide outcome measures into two categories: financial (and quite tangible) metrics, and strategic (and potentially less tangible) metrics. Examples of financial measures might include net savings achieved, cost per transaction or per employee, IT spend as a percentage of enterprise operating expense, and more. Examples of strategic measures will vary more dramatically, but could include market share gains, customer satisfaction, or speed to market.

Enabling measures (as opposed to outcome measures) cover a broader set of issues, because they address a number of different purposes. Enabling measures can serve as early warning signals that some outcome measures will not be met. They can also help buyer and provider uncover the underlying causes of the problems they face, so they can be addressed systemically, before problems recur or worsen. Some of these measures will be fairly operational and tangible. Those that are probably the most familiar include defect rates, throughput, and transaction volume. 

But increasingly, buyers and providers recognize that the relationship itself is also a key enabler of business outcomes, and we’re seeing more and more interest in measuring the health and quality of the working relationship. Relationship health measures might include, for example, efficiency of decision making, degree of alignment, quality of communication, and level of trust.

Enabling measures should address not only those things that the service provider must do, but also what buyers need to do to enable effective delivery. Regardless of how these measures are used, it’s critical to identify what buyers need to do to ensure success, and to make sure those things are happening. As with the case of strategic measures, these metrics need to be carefully tailored to the deal and to what the service provider actually needs from the buyer, but they might include, for example, knowledge transferred, mindset/culture achieved, and customizations requested. 

Measurement of many of the items suggested here will require working hard to identify suitable proxies for necessary underlying factors. It will require making use of some subjective or qualitative measures. It will require doing things differently than how they may be spelled out in the contract. But the alternative is trying to complete the outsourcing governance puzzle by force-fitting pieces in that just don’t belong. 

To take action: Reach out to your counterpart and pose the question: how well are our metrics serving us? Are we measuring what matters? If the answer is “no” then it’s time to do something about it.

Ÿ   Ask yourselves – what do we want from our metrics? What purposes are we trying to serve? 

Ÿ   Whatever your answers, then broaden your menu — consider both objective and subjective measures; look at what both the buyer and provider are doing; consider both operational and business outcomes, and what those outcomes depend on.

Ÿ   Create a scorecard that is well suited to your purposes,

Ÿ   Most importantly: Use your metrics to help spark and enable good dialogue about what is working or not and why. 

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Chapter Perspective

The latest IAOP Governance Chapter Webinar was held Tuesday, June 10 and addressed the topic of “Making Governance Operational.”

Outsourcing governance is about much more than boxes and lines on an organization chart.Effective governance requires a clear set of processes for managing a myriad of activities from the contract, to performance, to consumption, to joint planning.While many companies acknowledge the need for some processes for managing their relationships, they often don’t do a good job at putting them into practice, or they don’t recognize the need for some processes until a problem has already arisen.

Special guests Paul Fox, vendor manager from ING Bank, and Ernie Zibert, South Pacific client delivery manager for Hewlett-Packard, shared their experience and expertise in defining governance processes and putting them into practice.

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Outsourcing Governance Workshops

A One-Day Intensive Presented by the International Association of Outsourcing of Outsourcing Professionals (IAOP)

The International Association of Outsourcing Professionals (IAOP) is pleased to present a one-day intensive Outsourcing Governance Workshop. Content will be based on the Outsourcing Professional Body of Knowledge (OPBOK) and the Outsourcing Professional Standards developed by IAOP and the Outsourcing Standards Board.

Whether your goal is to earn 15 points toward the Certified Outsourcing Professional (COP) designation or simply to gain comprehensive cutting-edge knowledge on all aspects of creating and sustaining successful relationships with your outsourcing partners — this workshop is for you!

Studies have found that more than half of all organizations spend two percent or less of an outsourcing contract’s cost on governance. However, more than 60 percent report losing 10 percent or more of the contract’s value because of poor governance between the customer and the provider. Given this, professionals involved in outsourcing clearly have an important role to play in helping their organizations plan, invest in, and execute a cohesive set of business practices for designing and implementing a strong governance program.

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Available on Firmbuilder.com: IAOP’s Knowledge Center

Operationalizing Sourcing Governance: Making Governance Real

Hewlett-Packard

Effective governance is a critical success factor in outsourcing. In this article, Ernie Zibert of HP discusses the three key elements for effective governance.

Contract Management

Vantage Partners

Paul Fox of ING (on behalf of Vantage Partners), discusses standard agreement methodology, gives an overview of governance and roles, and shares lessons learned. For the full article, please click the download button.

Governance – The Secret Sauce for Success In Outsourcing
JDalal Associates, LLC
Although the best time to plan for governance is during the strategy formulation stage, most companies wait until after implementation, when a problem arises, to address governance. But governance is not just about setting up formal reviews and periodic status reports; it is the act of managing the outsourcing engagement, and deals with processes that create success in the new relationship.

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Coming Next Month: Spotlight: Certified Outsourcing Professionals

We are interested in your thoughts on this topic. If you would like to submit an article for consideration or even a paragraph on how this topic relates to you or your organization, please send your material to Michael Forbes, managing editor, by August 18.

Outsourcing Insights is a monthly electronic publication of the International Association of Outsourcing Professionals (IAOP), delivering timelythought leadership to the industry worldwide.

Michael Forbes, Managing Editor

Jagdish Dalal, Chair – Editorial Board