Managing the Outsourcing Relationship

You’ve just completed a significant outsourcing deal and at this moment you are feeling pleased and perhaps a little complacent. Much effort has gone into executing the agreement. It seems ages ago since you first began the complex outsourcing process, but now the ink has dried on the contract and you feel as though you can relax for a while.

Well, not so! The prenuptials have been signed and the ceremony has been conducted. But as any married couple will tell you, the real effort of making this relationship work is just beginning.

Whether you have outsourced all or part of your infrastructure, the provision of application services, or perhaps a complete business process, many aspects of the outsourcing deal and the services it encompasses have to be managed for the duration of the relationship. Now comes the real work of extracting the promised value from this business strategy on which you have embarked.

The Management Model

The model shown in Figure 1 demonstrates three aspects of managing a successful outsourcing deal:

1. Managing the relationship

2. Managing the services

3. Managing the contract and financial considerations

This article explores each of these three areas and examines some of the keys to success. It also includes a discussion of aspects of the governance structure needed to successfully manage these practices.

Relationship Management

Relationship Management (Figure 2) addresses the long-term health of the deal. It is important for the focus to stay above day-to-day service difficulties and to fix upon on the trends (both positive and negative) and the future.

Key to this are the following:

Governance Process Management

Most significant outsourcing arrangements have some form of governance usually composed of senior-level relationship committees and any number of groups under such committees. Regardless, governance is a process that has to be driven and managed. Agendas need to be set, meetings need to be effectively conducted and kept on track, and action items require follow up. Too many times governance lulls into a state of atrophy with no ownership intent on keeping it alive and meaningful. With the right level of stakeholders involved, focusing on the right things, a long-term healthy relationship is likely to evolve.

Customer Satisfaction Management

Most outsourcing deals of any substance periodically administer customer-satisfaction surveys and publish the results. There is more to this aspect of relationship management than simply accomplishing these tasks.

First, user expectations need to be set – their historical service levels and relationships will change under outsourcing. Also, additional tasks, outside the day-to-day services that an internal department would typically perform with few complaints, may now involve additional charges. Therefore, user management understanding is very important and this requires continual communication.

Next, it is important to distinguish between the paying customer – those in senior management who sink or swim based on the degree of success with out-sourcing – versus the end user community, “consuming” the services on a day-to-day basis. It is important to survey the satisfaction of both, but the questions in the survey instrument are substantially different for each group.

Finally, measurement of customer satisfaction is most meaningful over the long term – indicating whether the trends are improving or not. This can only be accomplished through consistent measurement instruments used throughout the lifetime of the deal.

Vendor Marketing Management

Most vendors will not stop marketing after the deal has been signed. They will try to grow their business base within your organization through marketing additional products and services, both within and outside the scope of the agreement. Most vendor salesman are driven by attaining quotas; consequently, they will sell anything.

These activities need to be closely managed to ensure these vendor initiatives are consistent with the outsourcing direction you wish to take and the product standards you wish to set. Left to its own devices, the vendor, unknowingly, can play havoc with a healthy relationship through over-zealous marketing.

Vendor marketing energy, however, can be tamed into a positive attribute. Through keeping the customer up to date on emerging technologies, new applications and best-in-class practices, the vendor can add value and, potentially, increase business.

Services Management

Services Management (Figure 3) represents the guts of the outsourcing initiative where the so called “rubber meets the road”. No matter how well the other aspects – relationships, finances and contract management – are performed, nothing matters unless the services are stable and fit for business.

The key aspects of managing services are as follows:

Service Issues Management

Undoubtedly, problems will occur from the first day that transition is completed and the “steady state” services begin. Some of these problems will be solved as a natural part of service delivery, but others will become issues that need to be managed. It is most important that issues be identified (and agreed between client and vendor that indeed a given problem is an issue), prioritized and tracked through resolution. This ensures the vendor is focused on resolving the right issues. Almost as important is highlighting “aged issues” that may not be of extreme priority, but are languishing in the eyes of the users.

Each issue on the list (which should be regularly maintained) needs to have an owner and a target date for resolution. As well, key activities and their completed dates should be maintained as an audit trail. Computerized tools are readily available to perform any highlighting and alert functions.

Escalation Management

Typically initiated by service interruptions or lingering service issues, escalation management “percolates” through the ranks of both the vendor and the client, ensuring that the right levels of management are involved at the right time. The vendor and client need to clearly understand and document the escalation path and timing for service incidents, starting with the impact to mission-critical services through to the annoying issue which should have been resolved some time ago.

In establishing the policies, practices and timing for responsible escalation, one key question should be asked: who should know about this before being told by someone else? As an example, if there is an interruption to a mission-critical application or service, perhaps the CIO should be notified immediately so that she can be the first to discuss the business impact and potential bypasses with the CEO and those user executives who are most severely affected.

Again, record keeping is important to a successful escalation-management process.

Performance Management

Most outsourcing contracts have imbedded Service Level Agreements (SLAs) – whether they are meaningful or not is another issue. It is very important (if not crucial) to get these right during contract negotiations. Often, a vendor will display its favourite list and use that as the basis for negotiation. As the customer, however, you have to ask yourself the question: what is most important for the business?

The following (extreme) example illustrates this point. For a bank, which is most important: the meantime to answer the phone at the help desk or the availability of the automatic-teller-machine network? One is an annoyance, whereas the other can result in the loss of large sums of money. Bear in mind, however, that a chronically missed, moderately important service level can fester to the point that it becomes very disruptive to the overall relationship.

The vendor reports must be meaningful from the business perspective, and the review mechanism should ideally involve meaningful dialogue intent on rectifying performance issues. In addition, if the vendor is truly striving for continuous improvement, it should be asked to raise the bar on important service levels following a sustained period of attainment. Some outsourcing contracts actually contain provisions to ensure this is done.

Demand Management

Outsourcing costs can escalate unless demand is properly managed. Most outsourcing arrangements have thresholds of consumption (based on units of service) which when exceeded attract additional pricing at premium rates. Some vendors of course are hoping for excessive demand to increase their yield from the outsourcing deal.

Apart from monitoring the units of consumption and taking action well before thresholds are exceeded, there is another aspect of consumption that must be managed. Often, additional or “ad hoc” requests are accommodated within the scope of base services up to a certain threshold, following which changes will be levied. These are the types of requests that users were used to asking the internal service provider to perform. Now, under an outsourcing scenario, it is necessary to somehow strike the balance of ensuring that these requests are authorized before the vendor addresses them, without injecting the kind of bureaucracy that slows down business.

Usually, the key to successful cost management in the majority of outsourcing situations is effectively managing demand.

Contract And Financial Management

Contract and Financial Management (Figure 4) aspects of outsourcing management are usually well recognized by clients going into a relationship. Key elements include the following:

Contract Compliance Management

This ensures that the terms, conditions and obligations of both parties are met. Bear in mind, however, that both the vendor and the client can become overly zealous in managing this aspect of an outsourcing relationship. Often, successful deals rarely reference the contract contents (apart from annual or semi-annual reviews), but are more focused on doing what makes sense for the business.

One danger here is that often the procurement department of a client organization assumes responsibility for this aspect of outsourcing, and those within procurement are more attuned to acquiring products as opposed to ongoing services. Then there is a risk that those responsible become “blinded’ by contract adherence versus what makes sense for the business. As in many aspects of business management, a proper balance needs to be struck.

Budget Management

From an assessment of the key business drivers, annual budgets should be established for the services encompassed by the outsourcing arrangement. Further, actual costs need to be managed against budgets. This aspect relates very closely to Demand Management.

Joint planning between the vendor and client is usually the key to accurate budget forecasting. Ideally, the vendor is aware of key business drivers and strategies of the client organization and can assist in determining their impact on the cost elements of the outsourced services to allow accurate forecasting and monitoring.

Billing Management

This involves determining the accuracy of the vendor’s invoices in terms of costs that are fixed, costs driven by consumption rates (e.g., number of help desk calls), and costs driven by events (e.g., an installation, move, add, or change).

Often disputes arise based on a poor definition of cost structures used in the “event driven” category. For example, a request for a desktop device move (seen by the client as one event) could actually trigger two or more event requests in the eyes of the vendor. Only tight definitions of events in the contract can prevent this downstream difficulty.

Reward/Penalty Management

Often, outsourcing relationships contain penalty provisions for chronic under-attainment of service levels. Sometimes they also contain reward provisions for sustained over-attainment. Mechanisms need to be in place to track the service-level parameters and administer either billing credits or additional payments as required.

Change Management

Within the context of an outsourcing deal, the word “change” can take on a few complexions, but in this context it usually means managing changes to the scope of the services defined by the arrangement.

Usually the contract defines the process by which changes will be addressed. It is important for the client to judge if the change is justified from a business perspective, as usually extra billings are involved. Do not forget that often a vendor will initially price base services in the firm belief that scope changes will be forthcoming and/or threshold consumption rates will be consistently exceeded.


Usually, governance entails forming a senior level “Relationship Committee” and assigning individuals to manage the contractual and financial aspects of the deal. Often, the members of the Relationship Committee start to lose interest or become preoccupied with vendor service problems.

The word governance in this context implies assigning responsibilities from both the vendor and the client for all aspects of managing outsourcing highlighted above. The structures will vary from situation to situation and the full-time/part-time assignment of resources will vary depending upon the size and complexity of the deal. It is important, however, to think through all aspects of managing outsourcing when designing the governance structures and processes, and assigning responsibility.

Of particular importance is to set a framework for the tone of the governance process and relationship. Will this evolve into a “partnership” as time goes by, or will it always be “client/vendor”. Usually, for commodity services, the “client/vendor” model prevails, but for more strategic services, a “partnership” is desired. If, however, the contract is continually referenced and the governance bodies are preoccupied with service issues, you can rest assured that “client/vendor” is there to stay.

When the ink dries on the outsourcing contract, the work is just beginning. Long-term success will be driven by the competency of the vendor and how well all aspects of outsourcing management are understood and addressed by both parties.

Graham McFarlane, P.ENG., ISP, FCMC, is a Calgary based Director of Western Management Consultants, specializing in the management of information technology. As a result of his firm’s independence, he has been involved in several outsourcing feasibility studies, vendor selections, contract negotiations and transition projects. As well, he has been involved in trying to help clients and vendors rectify relationships that have fallen into trouble. He can be reached at mcfarlane