The ‘4 Are’s’ of Value-Based Sourcing

In my last column, “A New Generation in IT Outsourcing,” I highlighted value-based outsourcing and why this new model is fundamentally different from traditional outsourcing. In this article I will look in greater detail at how asking some key questions can help yield continuous improvement in value-based outsourcing relationships.

Outsourcing is a well-established and accepted practice in the IT industry, and by all reports is the one sector that is predicted to enjoy continued growth in an industry suffering from a worldwide decline. Why? In these tough economic times, organizations still see outsourcing as the best way to reduce costs in an economy where tight and declining IT budgets are the norm.

Though many senior business executives may see outsourcing as a way to reduce IT costs quickly in the short-term, they are also concerned about how to deliver sustainable business value over time. If these two objectives are not “balanced” as part of the outsourcing strategy, the business may end up with unanticipated and unsatisfactory results.

So how do businesses balance cost reduction and sustainable business value in an outsourcing program? We have created the “Four Are’s,” – key questions that enterprises can focus on as they develop and manage their outsourcing programs:

Are we doing the right things?

This question is about focus, and it helps to ensure that the outsourcing relationship is dedicated to win-win objectives and delivering what is needed for the success of the business. One critical factor to supporting a long-term relationship is the sharing of responsibility for joint success. To answer this question, you need to know how well aligned your business goals and objectives are with those of you outsourcing service provider. The degree(s) of separation or misalignment is one key indicator about the “health” of your relationship. The clearer and more cohesive the common vision from a short- and long-term perspective, the stronger the bond between the two organizations.

Doing the “right things” not only requires focus but is also requires taking a portfolio view of the decisions and investments being made as part of the outsourcing program. Why? The answer is because the decisions and direction taken through an outsourcing program should directly correspond to the value and impact on the business. To test the portfolio aspect of “Are we doing the right things?” you need to understand how well aligned the IT and outsourcing program objectives are with your overall business objectives. Understanding this linkage and how it changes over time needs to be analyzed to allow for change in the focus. A strong linkage between the outsourcing program and business priorities will significantly increase the contribution of the outsourcing program to sustainable business results.

Are we doing them the right way?

This question helps clarify program management. Outsourcing program management needs to focus on balancing different forces such as cost reductions and investment for business growth; rationalizing or expanding the IT and application portfolio; maintaining technical currency while at the same time ensuring things are getting done cost-effectively; and managing end-user expectations as well as client satisfaction. When looking at an outsourcing program, consider the following: Does the service provider have a comprehensive approach and proven methodology for portfolio management that takes into account the ongoing day-to-day operations required to support my business as well as the tactical and strategic aspects of my IT-business initiatives? The more integrated the vendor approach and best practices in the day-to-day operations and service delivery framework, the more consistent and higher quality the results delivered. This requires discipline, risk management, and alignment with the your organization’s culture, supported by a program to communicate business and system changes consistently throughout the life of the outsourcing relationship.

Are we getting the desired benefits?

This question is about measuring that the right things are getting done and that business benefits are being realized. This means identifying, measuring, and reporting the appropriate results and linking them to business objectives. Why? You get what you measure, so it is critical to measure the right things. For example, if the outsourcing program measurements are focused only on cost reduction aspects of the deal, this is what will be reported and delivered. However, other business benefits may not be focused on if they are not measured and this can lead to dissatisfaction with the outsourcing program because the “desired benefits” are not being delivered.

Another aspect of getting the desired benefits is how outsourcing is approached. For instance, a short-term focus may compromise the ability to achieve longer-term business objectives by understanding where your organization is in the current business cycle and what the next cycle is likely to be. Are you reacting to the current pressures (e.g., reduce costs by 30 percent this year), or are you trying to get ahead of the game to facilitate creating business value and competitive advantage for the organization?

Defining “desired benefits” requires an understanding where the business value resides and how it can be maximized, as well as understanding the risks, the dependencies, and the underlying metrics necessary to determine value today and over time. A dashboard approach provides different reporting views or “snapshots” on progress and supports decisions to adjust the program to achieve desired results.

Getting the desired benefits also means having a governance process in place to “harvest the benefits” because benefits do not just happen on their own or by simply reporting IT metrics. Governance will play a strong role over a long-term relationship, as the business service levels need to be reviewed and changed in response to changes in business priorities, which may have an impact on the desired outcomes. This needs to be understood, acknowledged, and communicated to the stakeholders as part of the expectation management around the outsourcing program and ultimately leads to customer satisfaction.

Are we improving things?

This question focuses on “continuous improvement” and recommendations from the outsourcing service provider to bring IT innovation and industry best practices into the ongoing operations and program management. Ultimately continuous improvement has a two-fold focus: (1) A well run, cost-effective, and up-to-date IT operation that delivers sustainable business value; and (2) Collaboration to implement IT innovation for business-enhancing solutions. In a nutshell these two aspects of continuous improvement contribute to the transformational benefits of outsourcing programs and often are the hard-to-measure, “soft” aspects of the relationship. To evaluate the continuous improvement aspects of an outsourcing relationship, you need to look at how continuous improvement is handled as part of service management approach; if the service level agreements and contract terms encourage the vendor to bring forward value-add services; and whether the pressure to demonstrate immediate and significant savings jeopardize additional investments.

Case History Example

As stated earlier, the “Four Are’s” help a value-based outsourcing relationship focus on providing sustainable business value over time. As a brief example of this, we engaged in an outsourcing relationship with an enterprise that wanted to transform its IT organization into a more cost-effective, service oriented organization. This initial goal represented business value because the IT function was too costly and unproductive. About two years into the relationship the next transformational wave required fundamentally changing the business application portfolio by moving from custom legacy applications into a ERP solution covering the entire supply chain. This new goal resulted from ideas we provided that allowed the client to see fresh possibilities. Value at this point in the relationship was about collaborating on fundamental business process change, which included retiring legacy applications. Once the new ERP package was implemented, the nature of the relationship and business value changed again – this time to enhance the operational effectiveness and efficiency of the IT operation. This included linking our service delivery objectives to the enterprise’s business objectives. We reviewed the status and deliverables with the organization on an annual basis to ensure we were on target with what was important to the business.

Value-Based Outsourcing

Value-based outsourcing programs start with the clear definition of what value means to the business by creating an “Outsourcing Roadmap to Creating Value.” Understanding what the business wants to achieve from the outsourcing relationship and the priorities involved will establish the baseline for the services. To ensure the desired business results are achieved through the program, and continually adjusted with the changing business needs, a regular “value health check” on the outsourcing program is recommended. This allows the relationship partners to continually monitor the pulse and vitality of the relationship and make adjustments to ensure alignment and a focus on sustainable business value.