Plugging the Outsourcing Value Leak with Governance
Author: Steven Zolman
Governance of outsourcing agreements can be complex and challenging. There are ways to simplify the governance process, however, by crafting agreements which take into account the business drivers, tolerances and environments of both the client and the supplier.
It is interesting to note that many (if not most) organizations seeking to (re)negotiate their outsourcing (and other IT-related) agreements typically only do so every few years. Changes in the marketplace from supplier tolerances and market value perspectives are fast and furious. That said, doesn’t it make sense to level the playing field? Bringing in an agnostic outsourcing advisor, such as NET(net), is one of the best ways to mitigate risk of the resulting agreement, and consequently, a dedicated effort to properly structuring a governance discipline can keep the relationship running smoothly for many years to come.
To simplify and streamline governance, several things need to happen from the beginning of the deal. Given the adversarial relationship that can be created, that is largely driven purely by the competing values over deal economics (i.e., the supplier is driven to provide the least amount of services at the lowest possible investment, but get the highest possible cost, while the client driven to get the most amount of services from the highest valued resources, at the lowest possible cost). At times, these value systems can seem diametrically opposed, right?
To make matters worse, a client’s key performance indicators (KPIs) are rarely (if ever) present in a supplier’s boiler plate contract. Also noticeably absent are any references to the client’s environment in terms the client might use on a daily basis. Here is where business goals can be clearly defined as part of the overall agreement, as well as service definitions which are organized around the client’s environment. For instance, if you (the client) run an ITIL shop, why not define the service in your terms (Service Strategy, Design, Transition, Operations, Continuous Improvement). Go ahead; put it right in the Agreement. Use your already-completed hard work to structure the deal – simple, right? Yes, but not always easy.
Working together with the supplier to define and simplify the deal in these terms, helps to ensure that the “catalogue” of goods and services is clearly defined in terms of price and performance and is well understood by both sides. Itemization is critical, as bundled agreements tend to be muddy, unruly and difficult to manage. Furthermore, when services are bundled, soliciting pricing from alternate suppliers for parts of the agreement becomes nearly impossible. Make sure your supplier knows that throughout the life of the agreement, you intend to inspect all its components to ensure the business value is justified, the market pricing is optimized, and the deal parameters are in line with expectations.
Now let’s take a look at how to structure the deal so that continuous improvement becomes a way of life as opposed to just a phrase. What if we were to structure variable SLAs, such that when service levels are exceeded, the client would issue service level credits, and if service levels fell below the median (minimum tolerance) levels, the supplier would issue credits (obviously within tolerances). An agreement structured in this way tends to drive the desired behaviors – e.g., better supplier performance. In a data center environment, there are certainly sacrifices on both sides of the table to make this work, but it has been done successfully and it generally works much better than conventional SLAs.
When these sorts of issues are addressed at the negotiation table as opposed to once the deal is inked, governance becomes much more manageable. After all, bolting the wings on an airplane already in flight can be problematic – even on a good day.
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