Buyer’s Guide: The Importance of Governance in Outsourcing IT Services

Buyer’s Guide: The Importance of Governance in Outsourcing IT Services

While many Forrester clients are continuously developing and refining their outsourcing capabilities, they still struggle to get the business results they desire from their outsourcing engagements. In particular, Forrester clients tell us they have difficulty achieving innovation and creating sustainable business value. One of the principal reasons for this is that customers too often “go through the motions” when it comes to outsourcing governance. Thus, while standards and procedures are defined (and in many cases met), there are still major gaps between what is desired from the outsourcing relationship and what is ultimately achieved by vendors.

Closing this gap starts with addressing some of the basics of governance. Most outsourcing contracts have the typical standards in place, including a three-level governance structure, a set of SLAs, provisions for innovation, and even definitions of the interaction between the parties. Yet these contracts are typically less prescriptive about the details of what actually happens within the defined governance structure. For example, both customer and supplier alike will often gather data, generate reports on activity, and conduct their meetings — but if they only address the surface of governance challenges, the real cause of customer (and supplier) dissatisfaction remains unresolved. To achieve success in outsourcing, mature buyers know they must go beyond the contractual basics and breathe new life into today’s static methods.

One of the key lessons in outsourcing governance is that it does not, and should not, follow the same pattern of IT services delivery models. To think of governance as a “steady state” — the same way service delivery is expected to achieve very predictable delivery — risks stagnation in the outsourcing relationship. Injecting innovation into the outsourcing relationship is no small challenge given that customers and suppliers typically expend enormous energies on service transition, only to succumb to “engagement fatigue” once it is achieved. At this point clients are often left asking “where is the innovation?” while other customers err by either abdicating responsibility on outsourcing governance or avoiding conflict with their suppliers by adopting a passive postures. Although it may be difficult, customers need to set the pace in outsourcing by energizing the governance dialogue.

Oversight is suboptimised

Today’s approach to managing outsourcing suppliers is fragmented. The seat of outsourcing governance varies along with customer organizational structures and is typically divided across the responsibilities of vendor management, strategic sourcing, and procurement. The situation is even more challenging when business process services are involved. The continuing yet unspoken competition between these diverse groups is a primary way that unified governance can be compromised.

Although most clients are positive about their outsourcing experience, customer satisfaction remains mixed. In particular, customers continue to view suppliers’ ability to deliver innovation in a negative light. One of the reasons for this is that innovation is not always managed — it is often viewed by clients as an expected side benefit (despite the fact that there are few if any provisions for achieving it in the contract.) Senior executives are waking up to the fact that while outsourcing can deliver cost savings, they also need more from the outsourcing experience.

SLAs are one of the only things that outsourcing customers can hang their hat on for supplier oversight, but the limitations of the SLA to achieve desired results are becoming apparent. Why? SLAs are inherently backward-looking as a measure of supplier performance and are built on the concept of punitive penalties that are normally limited to 10% (more or less) of the supplier’s monthly recurring revenue. Plus, SLAs often entail significant administrative overhead for reporting and data analysis. As a result, the importance of the SLA as the sole element of outsourcing governance is decreasing.

Governance models

Despite the known challenges of traditional outsourcing, however, the complexity of governance is only increasing. The nature of outsourcing is changing dramatically, creating new governance challenges for sourcing and vendor management professionals.

Multisourcing means more strategic suppliers, at higher governance effort. More outsourcing customers describe themselves as embracing a selective approach toward outsourcing, one that relies on multiple providers.1 In light of this trend, many existing IT outsourcing contracts based on a single-provider model are now being “refitted” to reflect the multisourced approach. While multisourcing may not necessarily mean more vendors, it does result in the need to identify the most “strategic,” and most tactical, vendor relationships. If any shortcomings in governance are present, the stress of attaining value across these strategic and tactical vendor tiers will result in strained outsourcing relationships.

Outcome-driven models make true supplier governance a higher priority. Clients tell Forrester that they are looking to move toward more outcome-driven contractual models. In these models, however, customers must learn to “let go” and cede more end-to-end responsibility to their suppliers. This places a higher premium on mature governance disciplines, since the new models require customers to shift governance focus toward the business outcome, rather than the process itself. This is even more important as outsourcing customers look beyond their focus on SLA-based outcomes toward true business outcomes, which require SVM professionals to first understand business objectives and then help vendors focus on meeting those objectives.

Cloud-based solutions will tax today’s demand management disciplines. One of the major problems that outsourcing customers have is demand management. To this point, “cloud” technologies have had little direct impact on demand management within outsourcing contracts, but they will have an increasing impact over time. The rise of cloud-based services, coupled with uncontrolled spending involving non-traditional suppliers (by end users), will eventually complicate vendor management oversight. As end user expectations for on-demand resources increase, sourcing and vendor management professionals will need to adopt new governance practices to meet demands while still reducing their company’s exposure to risk.

Success in outsourcing governance requires addressing the strategies listed above, along with additional suggestions including:

Evaluating sourcing maturity

Not every sourcing organization is prepared to manage governance at the highest levels of maturity. When crafting your organization’s approach to governance, it’s important to start by evaluating your own sourcing resources and capabilities to determine your governance maturity. This can be difficult given that the industry lacks an objective measure of sourcing maturity, but organizations that start with this internal self-assessment can eliminate frustration down the road. Attaining sourcing maturity is a long-term process, but is an important step in contract negotiations — things that mature sourcing organizations can succeed with may backfire badly among less mature organizations.

Old-style outsourcing was often conducted as a “black box,” with data about the engagement only seen during scheduled interactions between customer and supplier. Today’s outsourcing environment is moving toward higher transparency, ideally when all such data is available to all parties all of the time. If you are not receiving the real-time data that you need to measure and assess the health of your outsourcing relationship, you need to push your provider for better reporting capabilities. Many providers are not proactively offering easy-to-use reporting capabilities, but will offer such services when asked.

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