Just because you’ve outsourced your IT doesn’t mean everything falls on the shoulders of your partner.
As I wrote in the first two parts of this series on helping a client with an IT outsourcing deal, organizations have to think about overall governance of the agreement, managing the services and managing the commercial terms. (Links to the earlier pieces are below).
In this column I’ll look at managing the commercial parts of the deal.
Contract and financial management were well recognized by my client going into this relationship. Key elements included:
Contract compliance management
This would ensure that the terms, conditions and obligations of both parties were met. We had to bear in mind, however, that both the vendor and my client could become overly zealous in managing this aspect of an outsourcing relationship (most professionals are closet lawyers). 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 not the most adept at understanding the basic nature of an IT services deal. 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, we realized that a proper balance needed to be struck.
From an assessment my client’s key business drivers, annual budgets needed to be established for the services encompassed by the outsourcing arrangement. Further, actual costs needed 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. Therefore, we ensured the vendor was aware of my client’s key business drivers and strategies and assisted in determining their impact on the cost elements of the outsourced services to allow accurate forecasting and monitoring.
This involved 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, we realized, disputes arise because of 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. We ensured there were tight definitions of events in the contract to prevent this downstream difficulty.
In our case the outsourcing relationship contained penalty provisions for chronic under-attainment of service levels. However, they also contain reward provisions for sustained over-attainment. Mechanisms needed to be in place to track the service-level parameters and administer either billing credits or additional payments as required.
Within the context of an outsourcing deal, the word “change” can take on a few complexions, but in our case it meant managing changes to the scope of the services defined by the arrangement.
Our contract defined the process by which changes would be addressed. It was important for my client to judge if the change was justified from a business perspective, as usually extra billings would be involved. We did not overlook that often a vendor will initially price base services in the firm belief that scope changes would be forthcoming and/or threshold consumption rates would be consistently exceeded.
We realized that assigning responsibilities for all aspects of managing outsourcing that we discussed would be important. The structures would vary from situation to situation and the full-time/part-time assignment of resources would vary depending upon the size and complexity of the deal. However, we needed to think through all aspects of managing outsourcing when designing the structures and processes, and assigning responsibilities.
Of particular importance was to set a framework for the tone of the governance process and relationship. If the contract is continually referenced and the governance bodies are preoccupied with service issues, we knew that value extraction would be difficult as the continued focus would involve haggling in the present as opposed to focusing on the future.
In summary, 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.