Outsourcing deals in seven steps

For an outsourcing agreement to work, managing the relationship between the customer and service provider is crucial — and that takes a lot of effort, according to one IT executive.

Dietmar Reiner, CIO of electricity generator Ontario Power Generation (OPG) Inc., said he realized the importance of maintaining such a relationship when OPG and Business Transformation Services (BTS) Inc., a subsidiary of Cap Gemini Ernst & Young, jointly created New Horizon System Solutions LP (NHSS), an IT services limited partnership, in February 2001.

This was a transitional step, with a plan to eventually hand off IT services entirely to BTS, Reiner said. In April 2002 OPG sold its 49 per cent share of NHSS to BTS, finalizing the two companies’ nine-year, nearly $1 billion service contract.

“When we first negotiated the contract, I received this document of 1,700 pages. I put it on the shelf, and said jokingly — but really I wasn’t joking — that ‘I hope I never have to pick this up again,’” Reiner said.

Enterprises outsourcing any sort of IT work have to realize that what they’re getting into is really a business relationship rather than just a bunch of stipulations on paper, he noted. “If you have to go back to the contract, there are some failures that ought not to be occurring … (and) you’ve gone too far in terms of trying to keep the relationship on the positive.”

Reiner’s comments echo the findings of a report released last month by consulting firm Accenture. The report, Driving High Performance Outsourcing: Best Practices from the Masters, identified seven steps to successful management of outsourcing relationships.

One of those best practices, said Blake Hanna, a partner with Accenture in Toronto, is to view outsourcing as a business relationship, not simply a contract, and to give as much attention to performance measurement and the quality of the relationship with one’s provider as one does to the contract.

“It’s like owning a thoroughbred race horse — once you’ve made the commitment, once you’ve got the right partner, you’ve got to pay attention to the relationship and not just turn around and say, ‘We will run just like we’ve always run,’” Hanna said.

For a company to foster a strong relationship with its service provider, the two parties have to sit down and discuss business outcomes, what the industry is doing and what types of opportunities both can capitalize on, he added. “(It takes) genuine commitment and mutual respect. You only get out of a relationship what you put into it.”

Paying too much attention to what’s on paper, on the other hand, forges a relationship that is “very litigious and contractual,” Hanna advised. “You spend more time with compliance in contractual terms than winning in marketplace. I don’t want to imply that you run the place willy-nilly and say, ‘Forget the contract,’ but you have to pay attention to the governance and relationship layers that go above that.”

The report also emphasized hiring a partner rather than a provider. The difference, said Hanna, is that a partner will bring a wide set of skills and competitive pricing. A strictly buyer-provider relationship, however, might be managed “with a dog-eared copy of the contract in your back pocket and beating each other over head on daily basis with (the phrase), ‘You said you’d do that,’” he said.

Reiner said that partner factor is definitely part of OPG’s relationship with BTS. “We have the ability to go to [them] and have them provide us with support to do demand and capacity planning, work with them on strategic business planning. They have operations and strategic experience they bring to table.” If it’s a purely vendor agreement, the customer is “getting and paying for a service, but all those other things rest with you.”

Using risk/reward arrangements as incentives for higher performance outsourcing was another best practice listed in the report. Reiner said OPG gives BTS the opportunity to earn additional fees for services. “That could be associated with exceeding expectations in certain areas or helping reduce costs in certain areas.” OPG has also linked the incentive compensation program for BTS’s management team back to the agreement “so we have a direct impact on their incentive compensation.”

The report was based on a survey of 565 C-level executives with a minimum of two years of outsourcing experience with a business-critical function. Participants work primarily in companies in North America, Europe and Asia-Pacific in the automotive, transportation and travel services, retail, consumer goods and services, industrial equipment and health and life science industries. The Economist Intelligence Unit, a London-based analyst firm, conducted the survey between January and February of this year.

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