Outsourcing Tactics & Strategy
In an outsourcing arrangement you have one of two approaches: work up front to reduce potential disputes or be prepared to deal with the fallout.
The less aggressive you are with your outsourcing management the more profitable you are to the outsourcing company.
Does fallout mean you will be in court? Sometimes yes, but sometimes it means re-negotiating a contract or, worse still, skyrocketing costs which can exceed the original costs that were replaced.
Outsourcing Relationship or Arrangement
The sales personnel for outsourcing will push the idea of “relationships” and try to appeal to an emotional connection. Outsourcing is NOT about relationships; you build relationships with friends, family, and co-workers. Outsourcing is an arrangement, with specific objectives, expectations, goals, outcomes, and a profit motive. Outsourcing is secured through contractual agreements with the upfront specter of penalties, litigation, or other punitive action for non-performance.
REAL relationships don’t generally have a contract and profit motive.
Managing outsourcing arrangements are not about employee relationships which are handled far differently than vendor arrangements. This is about bringing an outsider into your organization, who has a profit motive and goals, which are far different than the displaced employees. Their profits come from your company or organization. The less aggressive you are with your outsourcing management the more profitable you are to the outsourcing company.
Just because outsourced service management is not a “relationship” does not mean it has to be nasty or adversarial. Ideally there is a positive working arrangement, there should be fairness and equity, even involving contract provisions.
1. DON’T BUY THE LIE! Outsourcing is not about relationships, it is a contractual arrangement with specific performance and compensation. Can it be a relationship? Maybe, but it is a contractual agreement and arrangement first.
Managing the Outsourcing Arrangement
If you are considering outsourcing the first and foremost criteria for success is strong and aggressive management. When it comes to SAP and IT Outsourcing – Vendor Management Considerations remember the outsourcing profit motive. There is nothing wrong with a profit motive but it does mean their profit comes from you as their customer. Realizing “cost savings” from outsourcing requires aggressively managing the outsourcing vendor.
Thomas Young is a partner and managing director with the CIO Services-Infrastructure at TPI, an IT consulting firm based in The Woodlands, Texas. Prior to joining TPI, Young was financial director at AT&T Labs.
Young said a big mistake people make is that after doing a yeoman’s job on the initial contract, they neglect governance and contract “maintenance” that will keep the contract fresh. Even CIOs with $200 million of external spend on 20 outsourcing contracts will put their “C” students on invoice verification. A $12 million per year contract that the CIO agonized over will creep to $18 million because managing the invoice and the contract was the employees’ “night job,”” an afterthought, Young said. “Vendors love the afterthought mode,” he said. (A dozen danger signs that your outsourcing contract is on the rocks).
A lack of post-award contract management clauses in your outsourcing agreement can create serious issues. If the contract does not allow sufficient management of the outsourcer, their activities, resources, processes and other key parts of their functions within your organization then you have little or no control over outcomes which affect your business.
Every contract (arrangement) must be designed for continuing oversight and management.
2. Strong, aggressive, clear, and direct management is required for outsourcing arrangements. Service provider contracts are different from product contracts–, oversight and active management must continue throughout the life of the agreement.
Governance of Outsourcing Processes
If you give up the management of the outsourcing processes you can be sure there will be disappointment and trouble. This does not mean their processes should not be used, it does mean you must retain control over the service delivery processes–, they directly affect your organization. Many of these processes should be reviewed in advance, and agreements must allow for periodic reviews and adjustments to ensure they are sufficient to satisfy the service recipient’s requirements.
As part of outsourcing governance, an outsourcer should provide key templates or document examples such as the following:
- Matrix of Decision Makers
- Org chart
- RACI lists where appropriate
- List of all service provider processes including: ownership, responsibility, and objectives or outcomes
- Individual task assignments within processes
- Methods for continuous improvement of the processes
- How process objectives or outcomes will be measured
- Record keeping requirements for monitoring the processes
- Process definition for prioritizing service work
- Evidence of changed service delivery processes requested by service recipient(s)
- Change management and change control
- Sample change order
- Change order triggers
- Change order processes (how are change estimates determined, what level of analysis is done, etc.)
- Issue, Risk, Decision, and Change register processes [FN1]
- Scope Management Plan
- Communication plan
- Quality Management Plan
- Periodic and ad hoc quality reviews
- Use of ISO/IEC 20000 guidance for service management
- Capture and incorporation of “lessons learned” (PDCA)
- Etc., etc., etc.
3. A successful outsourcing arrangement must include a service recipient’s ability to understand, monitor, and adjust any service provider process to meet their particular needs.
Scope, Scope, Scope, and Goals too (Your Service Requirements)
The most persistent pain point with outsourcing contracts, whether they are for maintenance or for implementation work, is related to scope and goals. This really shouldn’t surprise anyone. This has been a long-standing sore spot for IT projects for many years. So why would anyone believe that scope problems are going to suddenly be resolved by outsourcing IT functions or operations?
For commodity oriented services such as e-mail, cloud based storage, backup, telephony, and similar items the scope and the functions are well known and there is a healthy amount of market competition. These are true commodity services. Help Desk processing, such as addressing tickets and other items is a little more involved but the methods to measure progress are known and manageable. Enterprise applications can be a little more challenging and must be carefully addressed if you want real results in a timely fashion.
Post award, after the outsourcing arrangement has begun, it is crucial to aggressively manage the vendor change order process. Outsourcing vendors will frequently offer change order estimates that are heavily padded and skewed in their favor. After all, this is where they make up their revenue for any low ball initial bids to gain your business. To combat this it is critical to have clear processes to arrive at the scope and affects which determined the estimates.
4. Ensure you spend sufficient time addressing, creating, and reviewing the scope of what will be outsourced, as well as the scope of the outsourcing delivery. Scope which is clear and understood by all parties will reduce surprises, including the surprises of “death by a thousand change order cuts.” When changes are required it will be critical to have the internal resources to do “mini blueprints” for EVERY change requested. These “mini blueprints” form the basis of the scope and work estimates. Do NOT accept a vendor’s “thumbnail sketch” of the work estimate, more often than not this estimate will be padded in their favor.
What TYPES of Services Are Being Outsourced?
Consistent with ITIL processes it will be important to create a “Service Catalog.” Normally there would be two (2) key separations–, support / commodity or value / strategic.
By maintaining clear distinctions between the two types of services you will be able to make better decisions. Commodity services can be shopped around and consolidated, value or strategic services should be evaluated separately and on a case by case basis. Services that require special or higher-level knowledge are assigned to the value / strategic category.
Broadly, generic service delivery (commodity) would be almost exclusively focused on cost, where strategic items would have some measurable value creation. Generic service delivery tends to be the most price sensitive, after all, cost is the primary driver. SAP Service Delivery versus Value Delivery provides some considerations for defining the two “goal posts” for a service catalog.
5. The real key is however you define your service catalog the service choices should be binary between commodity options or strategic.
Handling Different Types of Service
After the binary division of your services the focus moves to managing the procurement processes and engagement functions for those services. It is important to NEVER, NEVER, NEVER, EVER mix these two service types in the same agreements, scope of work, or work orders. This does not mean the outsourcing provider cannot provide these services, but it does mean they should be treated differently.
For commodity services you can often get a fixed price and have some stability and knowledge of what is expected. As mentioned above, scope can be well defined and the outcomes are generally known by all parties.
When it comes to the value added or strategic services, the fixed fee arrangement may not be the best option. Fixed fee can work if you are a mature organization and know the application well. This is because you can reasonably clearly define the scope, processes, and requirements. If you are capable of creating an application specific “mini-blueprint” for your strategic services then a fixed fee bid might work. Otherwise you WILL EXPERIENCE the “death by a thousand change order cuts.”
Always remember who bears the scope management responsibility, in a fixed fee arrangement it is the service provider, and they have a strong incentive to “game” the scope and kill you with change orders to make up for a low bid. On a time and materials basis you as the client have the incentive to maintain scope to ensure the focus is on the right areas, but with enough latitude to deliver real business requirements.
6. Do not mix commodity services and value added or strategic type services. Whether you outsource one type or both. Mixing services makes tracking, monitoring, invoicing, and other activities very difficult for the client of those services.
Before You Engage in (Support) Outsourcing
I assume you will use an RFI-RFP process to determine candidates for your outsourced IT functions. The contents of that RFP cannot be more important. While there are mountains of possibilities for SLAs (Top Ten Service Level Agreement Considerations), and KPIs, the key considerations lie in outcome measures.
We’ve all heard the old saying “what gets measured gets done,” and when it comes to contract specifics this is an absolute. Since these measurements are so critical to your RFP and your ultimate vendor contract there should be a LOT of time and effort spent on this. Those contract schedules which contain all of that detail are the key to a successful outsourced vendor program:
In IT, outsourcers often bid low initially in the belief that they will later be able to improve margins by exploiting the contract’s or customer’s deficiencies. The obvious point to make is that once the contract is signed, it’s set in stone unless both parties agree [to] its variation. So, if contract development or negotiation is rushed, it’s guaranteed that many unpleasant and costly issues will arise after the paperwork has been signed. (see Contracting Ownership Remains A Core Problem).
As just one example, Michael Dell created quite a stir several years ago with a change to the way Dell Computers handled customer service calls. No longer were call metrics based on the number of tickets processed through simple open and close metrics – Dell’s created a new requirement that tickets were to be completed to the customer’s satisfaction on the first contact. First contact resolution rates (as well as 2nd, 3rd, etc) create meaningful results-based metrics for managing vendor performance. This type of approach ends the “open” then “close” shell game which does nothing but distort ticket counts and fakes “successful” close rates.
7. An RFP and eventual outsourcing contract should focus on items which measure results or outcomes more than just simple activities.
When Results Matter…
If you have a hard time articulating specific outcomes or end-state-results from an outsourcer you will not be able to effectively develop the SLAs and KPIs which are critical to success. When it comes to those SLAs and KPIs be very careful about how the metrics are structured, for example while some averages make sense they should be used very sparingly in defining SLAs and KPIs. Averages can distort bad results or poor performance and make them look good.
“Too many times SLAs are structured around things that can be measured, simply because they can be measured, and have no relationship to the success or
failure of the business line,” Kenneth Adler (IT Outsourcing: Why You Need to Reengineer Your SLAs).
Commodity resource availability numbers (e.g. 99% uptime) only matter during key business operation hours. This frequently means the up-time number in the middle of the night is meaningless and only distorts the impact of the “uptime” metric. The distortion is created by diluting the affect of downtime when the resource is actually in use or needed.
8. A focus on results will always win out over busy work. Agreements, SLAs, and KPIs must address the outcomes you want to achieve.
Our Off$hore Rate$ are Fabulou$!
So says the outsourcing company. Generally it is true, offshore rates in various parts of the world such as Malaysia, India, Argentina, China, the Philippines, etc., can be enticing. The sales pitches will have you believe your cost reduction dreams will all come true… And they can, with the right approach; otherwise they are just a dream.
Undermanaging offshore outsourcing vendors results in underperformance… Undermanaging internal stakeholder’s results in erosion on offshore outsourcing ROI. (Offshore Outsourcing Vendors, Customers, and Advisors: They Should Know Better).
Consider this, if your local employees (or outside resources) struggle with communication, coordination, quality, collaboration, parallel work streams (day to day delivery requirements), then how will moving those functions thousands of miles away, to different time zones, with different cultures or languages, resolve these issues? As 360° Vendor Management notes, if you had an “internal business unit or department of 250 FTEs responsible for a mission critical business or IT process” you would be far more directly engaged in managing those delivery functions. All too often with outsourced operations, to remote locations, there is a lack of direct involvement. As good as they are, a WebEx, conference call, or e-mails just won’t do.
9. Offshore resources require direct, regular, and constant on-site interaction far beyond screen sharing, conference calls, and e-mails. If your outsource arrangement uses an offshore presence at least one local full-time employee may be required (or plan for the expense of regular, frequent, FRONT LINE employee visits).
Risk Sharing and Penalties with Earn Back Provisions
One of the latest (and very effective trends) is to use both penalty and earn back provisions. This provides both sides of the incentive equation for ensuring vendors are really optimizing the provision of their services.
Risk sharing and penalties with earn backs tell vendors you expect their best effort.
Together with the penalties and earn back provisions there are risk sharing options emerging for results oriented or outcome based service delivery.
One method of risk sharing which has been used effectively is the “hold back” option employed by some parts of the U.S. Federal Government for some contractors. Some government contracts include a provision that “x” dollars will be retained from each invoice until the completion of the service delivery. At that point if certain outcomes, goals, or objectives are realized then the payment of that hold back is released to the service provider.
Penalties and Earnback Provisions
Every strong outsourcing agreement should not penalties for failing to achieve certain goals or targets. These penalties should be consistent with the severity of the failure on the part of the outsourcing party. One thing to remember here is that things do happen which no one can anticipate and it will periodically cause some key metric or important provision to be missed. In this case earn back provisions help. You may structure a contract so that if “x” goal is not met, then the penalty shall be held in abeyance so long as “x” SLA is not exceeded for “y” period of time. Should the service provider meet the requirement for extended delivery of the SLA measure then the penalty would be dropped at that time.
10. The most effective risk sharing, penalty, or earn back options are designed to incentivize a service provider to deliver results with both high quality and quantity.
Conclusion on Outsourcing Management
This is not an exhaustive list and there is much more detail required to address each of these items carefully. This guidance will provide insight into important areas for success in an outsourced arrangement but they can come across as one-sided and harsh. One of the most important considerations which must support each of the items on this list is fairness and equity.
In our modern business world there can be a tendency to be too aggressive. In an outsourced supplier arrangement this can occur on either side, either from an unscrupulous service provider or from an overly aggressive service recipient. This is a real risk that must be managed because a long term successful arrangement requires–, reasonable expectations, fairness, and equity.
[FN1] My personal experience with a “best practice” for an Issue, Risk, Decision, and Change register is to have all of these items in one document, generally a spreadsheet or through SharePoint form processing. On projects I’ve managed an Issue is a Risk that has been realized (whether it was originally logged as a Risk or not), and ALL Issues or Risks must be converted into either a decision or a change to be closed. For some risks, depending on the client, it is acceptable to log a decision that the risk is acceptable and will be addressed if or when it is realized.