A New Generation in IT Outsourcing

IT outsourcing has generated a great deal of interest in recent times, but has in fact been around in several different guises for more than 20 years.

As with any relationship that involves people and technology at multiple levels within a business, there have been challenges and the results have been mixed. The challenges typically raised with outsourcing are driven by situations such as poor client-vendor relationships, unclear and unrealized expectations, and inflexible or "locked-in" contract terms.

As outsourcing vendors and their clients gain experience, the relationships have matured, and we are now seeing the emergence and implementation of a value-based outsourcing model. More than an evolution, this new model is fundamentally different from traditional outsourcing, and increasingly focuses on enterprises partnering with vendors to boost value within their business.

Nine Hallmarks of Value-Based Outsourcing

Traditional outsourcing has been aimed at stabilizing and standardizing the IT environment and offloading non-core business processes. Value-based outsourcing builds upon this "offload to supplier" practice in order to deliver a business-focused solution with the client that leverages the IT environment for increased business benefits. To achieve these goals, value-based outsourcing includes the following key attributes:

  1. Partnership based
  2. Mature service level agreements
  3. Mature program governance
  4. Flexible and innovative structuring
  5. Cultural compatibility between client and vendor
  6. Business and IT experienced management
  7. Value focus rather than cost focus
  8. Multi-vendor involvement
  9. Product independence.

1. Partnership based

Many of the current outsourcing "partnerships" can more accurately be described as purchaser-provider relationships. True partnerships are those where both the client and the vendor are focused on common business objectives and accept outcome-based compensation.

2. Mature service level agreements

Service level agreements (SLAs) are a critical component of value-based outsourcing as they determine responsibilities within the business relationship. Traditional SLAs typically are based on indicators such as: MIPS, systems availability, fix times, etc. While these metrics are essential to running an effective IT shop, they do not deliver functionality, availability, and business benefits to the organization.

Value-based SLAs are based on business drivers rather than technology. They focus on measuring results based on a Value Scorecard linking IT service delivery to business requirements. Therefore, in value-based outsourcing, SLAs evolve into a service management approach tracking functionality, availability, and applicability that are meaningful to the business.

3. Mature program governance

This is possibly the most important differentiating factor between traditional and value-based outsourcing. Growing from the management of SLAs and resources, the new generation of outsourcing projects deliver governance of the overall IT solution, covering the relationships, systems, policies and procedures needed to manage, deliver, report, and continually refine the outsourced processes to deliver value to the business.

An effective governance structure ensures that the business goals and objectives of the outsourcing partnership govern the plans and actions for service delivery. Another key aspect of a mature governance program is to structure the service delivery organization to be flexible and responsive to the changing business requirements.

4. Flexible and innovative structuring

Clients have a fundamentally different approach to contractual arrangements in value-based outsourcing. Contracts are structured to deliver business-enhancing solutions through:

  • Clearly defined business arrangements and commercial undertakings
  • Focus on business outcomes
  • Joint work teams
  • Flexibility around scope and term
  • Evolution and change as the business changes over time
  • Innovative pricing, including risk/reward sharing arrangements

5. Cultural compatibility

The importance of cultural alignment is critical when it comes to outsourcing. There must be recognition within both organizations that this is a business relationship, not just a project. The interactive and longer-term nature of outsourcing engagements requires the vendor's staff to work at client sites and involves significant interaction with the client's employees. Organizations that have conflicting values and norms of behavior have trouble adjusting to each other's expectations. Culture clash can result in unhappy staff, which leads to unacceptable staff turnover, affecting service quality, delivery times, and overall costs.

6. Business and IT experienced management

In traditional outsourcing scenarios, the emphasis is usually on getting the infrastructure right, with IT managers often leading the engagements. Experienced value-based outsourcers will always have a senior business manager, experienced with the technology and running complex multi-stakeholder businesses, to oversee projects. As a matter of course, they have an understanding of the business and the industry in which the business operates. This ensures vendor-side management can have meaningful dialogue with client-side management on how IT should be leveraged to achieve

business goals.

7. Value focus rather than cost focus

The prime driver for traditional outsourcing is the need to control IT costs. In fact, the client often has no idea of the real cost of in-house IT and only becomes aware once the outsourcing option is pursued. The prime driver for value-based outsourcing more often than not is the need to leverage the investment in IT for business value. This means the outsourcing vendor must be capable of demonstrating a value focus over the life of the project.

8. Multi-vendor involvement

Value-based outsourcing projects strive to deliver the right solution that fits the client's business needs over the short and long term. Clients need to know that they have the flexibility in the outsourcing relationship to leverage and tap into new skills and solutions on an as-required basis without disrupting the existing service delivery relationship. This means a single point of accountability where the prime vendor needs to manage a number of other organizations to deliver on a unified set of services with SLAs and focus the other vendors on the business value sought. A strong and effective governance model is vital for this to occur. In fact the governance model should be such that it easily allows new vendors to be plugged in or existing vendors to be exited out as the business needs and requirements change.

9. Product independence

While vendors often claim they are product independent, few really are. If they do not have a preference for a product, they often have a preference for particular technology architecture. While following a consistent set of technologies does have some benefits in driving down the total cost of ownership, there are often benefits in having a vendor who is product or technology independent, as cost may not be the prime business driver.

Value-based outsourcing engagements are about enabling the business, and sometimes that enablement is best achieved through having multiple technologies at play within the environment. It means bringing forward an integrated solution to help the client leverage existing investments in IT to deliver business results and improve the IT ROI rather than focusing on changing the technology architecture because it is not the vendor's preferred solution.

Challenges to the Integration Process

The key challenges with value-based outsourcing include:

  • Defining and implementing a business-driven commercial arrangement
  • Establishing and driving a partnership approach to outsourcing
  • Managing the migration of existing staff and managing change with regard to the new service delivery arrangement
  • Tracking and measuring the change in business value over the life of the business arrangement

Each of these is mitigated through the execution of a well-planned, tried and tested transition plan, executed with precision. While each environment is unique, there are repeatable stages and processes common across engagements. Effort expended in the transition phase ensures maximum gain with minimum pain.

Once the engagement is under way, there are further challenges to contend with, including the need to clearly demonstrate business value.

Aligning IT with the business priorities and objectives must precede any demonstration of business value: vendors must understand what outcomes the business is seeking to achieve and then align the current environment with those outcomes. Only then will current gaps be made visible. This alignment is also vitally important when deciding what projects must be pursued to maximize the business value.

Keys to Success

As enterprises realize that outsourcing is the right business solution for their organization to deliver business results, traditional outsourcing relationships will be replaced by value-based outsourcing partnerships. As they move toward new-generation outsourcing solutions, organizations will want to ensure that their outsourcing relationships meet the value-based outsourcing criteria that will provide maximum business value. They will want to consider outsourcing vendors that offer international experience in such areas as application management and IT value-management programs. As with all critical relationships, they will want to choose wisely.

Copyright © 2003 IDG Communications, Inc.

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