The current economic downturn is forcing organizations to rethink their business strategies and cost structures. When it comes to cost reduction, CIO is one of the roles that come under severe pressure for lowering costs. Typically, the IT projects are put on hold and the IT strategy shifts from progression mode to “keep the lights on” mode. These days, when each organization has at least some part of IT outsourced to a service provider, CIOs can also look to their outsourcing service providers to further reduce costs and provide increased value from their existing contracts.
CIOs should not hesitate to challenge their outsourcers to find creative ways to reduce costs. Outsourcers can play the role of business partners and provide scenarios not previously contemplated by the CIO – for example, moving commodity type services to low-cost countries and reducing service-levels for non-critical applications.
In such scenarios, the last thing the CIO wants is a situation where the relationship with the outsourcing vendor is fractured and instead of partnering with the service provider and savings costs, IT is spending additional money and time to transition the work to a new service provider. In our experience, we think that CIOs can help manage the relationship better with service providers through the implementation of ‘outsourcing maintenance’, a set of activities customers can undertake to successfully manage an outsourcing relationship and realize increased benefits in the current economic situation. As part of outsourcing maintenance, one of the key activities for the CIO is to transform the relationship perspective with the service provider.
TRANSFORMING THE RELATIONSHIP
CIOs can influence the transformation of the way outsourcing relationships are viewed and managed within the organization. We believe that relationship with a service provider is not very different from a marriage of two partners, which often go through the following cycle: Forming: The association is new and both partners treat each other with care and love Storming: The honeymoon period has passed and difference of opinion begins to increase Norming: The relationship is not working out as anticipated and the partners refine the rules of behavior with each other Performing: Both partners better understand each other and they begin extracting greater value out of the relationship.
Outsourcing relationships can follow the same path. The challenge with outsourcing is that when most customers reach the ‘Storming’ phase, they try to break the relationship and start looking at new alternatives. They don’t realize that the relationship with an alternative service provider can again follow the same cycle of ‘Forming, Storming, Norming, and Performing’.
The success of any relationship depends on how much the partners are ready to change and how seriously they take the ‘Norming’ phase (where you set the rules of behavior).
This means that while doing outsourcing, customers should implement a strong change management program to allow modification of behaviours from doing work internally to getting it done by an external party. Customers should do their part of ‘Norming’ by providing financial incentives to vendors and maintaining the appropriate stay-back team. Last but not the least, they should maintain senior management oversight to manage the relationship.
MANAGING THE CHANGE
In order to manage the change, which is one of the largest elements of an outsourcing initiative, CIOs can design an effective change management program. In many situations, people have inertia and are not able to adjust to change in the operating model of the IT organization, which can lead to a strained outsourcing relationship. In a recent global survey on sourcing conducted by KPMG, we found out that only 12 percent of customer organizations report problems with their outsourcing relationships. Sixty percent said problems with their outsourcing service provider relationships are mostly “people related”. In an outsourcing engagement, people are a critical element in the delivery of the vision; they are the voice of the organization to your customer and they have the knowledge, skills, and behaviors to deliver the results you require. Failure to enable change in the human aspects of an outsourcing relationship can lead to delayed results at a higher than expected cost.
Some best practices around change management include:
• Creation of a change management organization
• Development of a specific change plan along a leading practice framework
• Development of a thorough communication infrastructure
• Putting a focus on high-risk areas first
• Lowering specific change barriers by building understanding, ability, and willingness within the stakeholder community.
OTHER POINTS TO CONSIDER
Consider adding gain-sharing clauses in the contract. These clauses can provide financial incentive for vendors to deliver value-added services while controlling vendor profits. Examples of gain sharing include volume discounts by the vendor, benefit sharing above a certain margin threshold, and transaction-based pricing rather than pricing based on full time equivalents (FTEs), etc.
Maintain the appropriate stay-back team. We come across many situations where organizations have transferred all of their critical skills to the vendor, which not only creates a huge dependency on the vendor to deliver the services, but also deprives the organization of the implicit knowledge of the services being outsourced. When vendors fail to meet service levels, organizations have a limited number of options to remediate these situations. Termination of existing agreements may prove difficult as transitioning to new vendors is difficult without detailed knowledge of the services being delivered. To prevent this situation, CIOs can structure an appropriate stay-back team to maintain control of the projects and/or services being delivered by the service provider. The stay-back team should also be held accountable for the overall project in order to make informed decisions and manage risks appropriately.
Maintain executive oversight with a solid governance model. Effective outsourcing is guided by good governance. Our experience shows that at the beginning of the relationship, or in the “Forming” phase, both parties are eager and want to give appropriate attention to each other. Senior executives from across the organization are involved in the project meetings and critical decisions. However, as the project goes on, initial enthusiasm fades out and relatively junior people are left to manage the relationship and make critical decisions. As a result, customers are not able to take the “Storming” phase (when differences of opinion grow) seriously and instead of doing the “Norming” phase (where partners set the rules of behavior), they tend to strain or fracture the outsourcing relationship.
In our experience, companies with successful outsourcing relationships involving multiple vendors tend to have a central governance model with appropriate committees (with resources from various levels of hierarchy in the organization) and process structures. Business unit personnel are heavily involved in performing tasks such as contract management and ongoing vendor interaction. For companies with captive centres, operational areas within the captive centre interact with the corresponding process owners of the sourced business unit via management personnel at the captive unit.
The captive unit in turn interacts with the sourcing governance organization. It goes without saying that customers should do adequate due diligence in selecting a vendor. Not only should the vendor have the ability to provide the required services and appropriate resources, it should also understand