DD Mishra, Partner, CIO Specialist Advisory LLP, challenges various myths and hypes around IT outsourcing and provides his views to counter some of them. As per Mr Mishra, a dedicated partner management competency at both consumer & partner end to deal with outsourcing can be extremely helpful in maximizing value from outsourcing decisions.
Over a period of time, every concept is surrounded by myths, which develop as folklores by practitioners from distorted facts of isolated events and outsourcing is not an exception. Many a times our outsourcing decisions or executions are impacted by these myths and result in expensive learning. While presenting these myths, I must admit that I faced these challenges and expectations constantly. While presenting this, I am sure many experts will agree to disagree but I would welcome a healthy debate and constructive criticism around the topic and will not shy away from the raising the veil. These are not the only myths but a subset of them.
1. Outsourcing Saves Cost from day #1: Outsourcing evolution has gone through the several stages. It started mostly in 90’s to exploit labour arbitrage and these days it has matured to leverage value. The cost used to be no #1 reason but now it has gone down in priority for many cases. While considering the cost savings, we should not look at the cost during first year. It takes both sides to mature over a period of time when we actually start comparing the cost of in-house vs outsourced. Generally 2-3 years is the time from first outsourcing we see the results in terms of the cost. The tendency to monitor cost from year-1 could be counterproductive as both provider and consumer need to invest in the arrangement.
2. Partner will manage the mess better than us: Many outsourcing decisions are based on “mess for less” concept. The understanding that the provider will be able to handle the mess better is incorrect as being a consumer, a better understating prevails where more informed risk taking and handling happens. Provider may not understand these initially and possibly the mess will result in bigger injuries to the consumer’s business if not handled properly. Outsourcing a mess is less advisable as it increases cost and reduces possibility of success.
3. Stringent SLAs drive performance better: Quite often we see a tendency to put stringent SLAs during contract negotiations to ensure better performance. This becomes counterproductive and at times unhealthy. This could result in resistance from provider to accept the SLAs and the discussion can go on for ages and opportunity for leveraging potential to improve might get lost. It is easier to draw a road map for expected Service Levels by conducting due diligence. The best advice here may be to look at SMART (Simple, Measurable, achievable, realistic & timely) SLAs rather stringent ones. One can also look at slab wise SLAs and with a well document list of exceptions, periodic progress and planned improvement instead to drive better behaviour.
4. Provider has an upper hand post outsourcing: This is commonly understood that post outsourcing provider gets an upper hand especially if the provider is larger in size. Understanding outsourcing and nuances of various aspects needs to be understood more. If the relationship is managed well with win-win situation, a fairly drafted contract which protects both ends and a partner governance competency from both sides creates more opportunities for healthy debate and mutual trust. My experience of dealing with success and failures tells me that biggest factors are failure to govern a relationship which drives to these myths that provider has an upper hand. The moment this feeling comes, it may be the beginning of the end.
5. By retaining more people, we will be able to manage the provider better: Quite often we see a tendency to retain more people or most competent ones in the retained team. This is driven by insecurity which is a deep rooted myth in our mindset that provider could be more smarter or could be that consumer thinks by retaining best people, they will be more in control. This is incorrect as the provider is going to use the resources for delivering the services and not giving them the best people could be akin to shooting one’s own foot. In addition by building a large retained organization, we create an opportunity to micromanage provider, which could be counterproductive. To protect interests of not losing the best people, providers can “ring fence” the employees for some time.
6. Displaying sympathy will drive incorrect behaviour & expectations: Empathy & sympathy plays a critical role in driving relationships. Human beings are more productive and get encouraged when we display empathy. By treating provider people as a part of our team, possibly we can get a lot more than other means can do. If the good news spreads in the provider organization, the best people would like to join the account. The tendency to consider provider as enemy who can eat up profitability and should be kept on the toes can be counterproductive.
7. More players will drive competition and provide better value: While this could be partially true, too many providers will be difficult to manage and cost may increase rather than decreasing. A chaotic setup for outsourcing impacts business agility and growth. Moreover it will throw challenges in integrating the work and internal cost will go high. The optimal number of providers could be 3-4 for a large organization with clear segregation of responsibilities. A good work needs to be done in horizontal or vertical slicing of candidate services.
8. We can drive better profitability by reducing the onsite component: In an offshore / onsite model we often see providers display a tendency to reduce the onsite presence to cut costs and improve profitability. By decreasing the onsite presence, providers loose connect with the business, overload onsite team and delay the cycle time as bandwidth is limited. It builds frustration over a period of time impacting business. Over long durations, these practices can be counterproductive. A 70:30 mix may be the best; an 80:20 can be optimal but any calibration beyond that may come with risk. The concept of more collaborative platforms however solves the problem to some extent.
9. Provider will understand my business better: Quite often we see a tendency from the consumer to expect a better understanding of business. This is incorrect as domain knowledge and the knowledge on the ground how a particular business is operating under the same domain could be different. Wherein we can expect domain understanding, we have to really handhold the provider on nuances of business which provider has gained through the experience.
In conclusion, the myths should be clarified or countered with better wisdom. Experience sharing could be one of the best practices, followed by research, due diligence and brainstorming with experts. Outsourcing is a different specialized stream and often we are guided by our own thought process which we consider as best. Building a separate partner management competency and involving experts to help during initial years of relationship building can reduce a lot of pain and unnecessary delays and expenses.
This article was first published in InformationWeek india by the same author
DD Mishra, Partner, CIO Specialist Advisory LLP, captures some of the experiences he thinks are necessary to understand in strategic outsourcing relationships to avoid expensive pitfalls. As per Mr Mishra, quite often a strategic souring relationship is driven in a tactical manner. This article is quite informative for all those who are either planning to go for such a relationship or are already managing it.
I thought of capturing some of my experiences on strategic outsourcing for the purpose of healthy debate. I may be right or wrong but will not shy away from expressing what I felt and experienced with a hope that it can prevent some of the expensive mistakes. The points mentioned below are not related to any particular case but is a result of discussions, experiences and studies on variety of cases.
I am not sure whether strategic outsourcing is understood by many as I see “outsourcing” and “strategic outsourcing” being used interchangeably. Strategic outsourcing is long-term partnership and not about meeting tactical objectives of performance through service level agreements; it is an arrangement between provider and consumer for attaining long term value creation and competitive advantage and gaining competitive position in market place by leveraging each other’s strengths. It is beyond cost and performance and based on shared value and vision of the provider and consumer. This makes strategic outsourcing a different ball game altogether and you will not find many examples for the same or even if you find, many will call it as strategic sourcing but drive it like a long-term tactical outsourcing based on IT SLAs. I have captured some of the secrets, which are necessary to visit in case you are going for a strategic outsourcing deal.
1. Partnership: If you have always dealt with vendors, it may be one of the most difficult transitions to treat your vendor as a partner. It takes years to change as you have to unlearn and relearn. This could be very expensive learning and considerable damage happens in the beginning. Based on my experience of going through it and knowing from my counterparts, this is inevitable and one will go through the learning curve. Eventually, as a consumer you will become more interested in “what” rather than “why” and as a supplier, you will feel the pain from customer’s side. The sooner this happens, better it is. Rather than having “vendor management” teams, one should have “strategic partnership” teams and competencies for the same are different.
2. Governance: Initially, during early days of strategic outsourcing, concept of governance is mostly not taken up seriously especially as you go higher. Lack of relationship at the top level increases the gap at the operational level. This continues till the gap is so wide open that it forces everyone to sit down and conduct retrospection. Eventually people understand the relevance of proper governance. Setting up a meeting at the top level and executing it religiously even if there is nothing much to discuss helps in keeping things under control. Initially people are tempted to escalate upwards which should be discouraged and much of the time at the top should be invested on discussion of value creation, collaboration, leveraging potential and creating win-win. If governance below works fine, this can happen automatically. The strategic relationship and personal chemistry at the top most level defines success of a SO deal. Most often we also see that we have a tendency to measure IT performance and not business performance. While we can start with business performance, we should quickly change gears to discuss business outcome and celebrate small little successes.
3. Trust: Initially, this has to be watched out as trust deficit, which mostly comes from the result of the failures to govern at the strategic level resulting in frustration, anguish and rage at the operational level. The habit of customer will be to blame the supplier/partner for failures without realizing customer is equally responsible to business for deliveries in strategic outsourcing deals. This also results in a negative perception building against the supplier/partner at the leadership levels and business which could counterproductive. In my view, this should be avoided. By the time the corrections happen, the damage is done. Differences aggravate when you take out empowerment at the local or grassroots level to make decisions. Maturity & honesty of individuals at important positions from both sides plays an important role towards maintaining trust and hence during the early days, it requires lot of care to nurture the culture and alignment of cohesive partnership and calls for a different kind of leadership to manage the show.
4. Alignment: Most strategic outsourcing deals are long term. Most often we fail to realize that strategic outsourcing is long-term arrangement and it lives beyond our existing business cycles. During tenure in a strategic outsourcing, our business will go through changes and the agreement must have flexibility to accommodate those changes. But most often this is an afterthought. Ideally one should have provision for renegotiation every two years and commit flexibility to discuss framework rather than being hostage to it to have an alignment. If this is not done, forced renegotiation becomes inevitable but this will not be without casualties.
5. Flexibility: Quite often this is missing in the beginning. Contracts are referred too early and people who are responsible for managing relationship show enough immaturity. Sometimes large providers have lengthy bureaucratic structures which eats flexibility and cycle time. In any deal, if contracts are being read too often and clauses are being pointed, this is not a good sign for its success. Having complete knowledge of the contract, its core principles and what it does not talk about is very good but that should be used as framework to guide discussions. In my experience, I had discussed most difficult topics over dinner to get breakthrough results for win-win. When you expect flexibility, you should also demonstrate it first and never forget to take the first step towards generosity. This is contrary to views of many experts who would suggest playing hard ball negotiations and I agree to disagree.
6. Innovation: Most strategic outsourcing providers talk about this in great length before contract is signed but focus on keeping the lights on during early part of the relationship. This creates the problems for them as well as the customer who does not see value. Let us not forget that Strategic Outsourcing is not for keeping the lights on for operations, but for generating the value for customer, bringing deeper engagement and providing customer’s customer strategic depth. We miss the big picture quite often and I know many insourcing happen because of this. Quite often from provider’s side, those who signed the deal leave once the deal is signed with their hefty cuts leaving behind the opportunities of transferring the whole ethos to the new team. The pain is felt in the 2nd and 3rd year where only operational parameters show signs of improvement at a huge overhead and investment. Once the realization happens, rather than thinking deeply, a knee jerk reaction happen which sets stage for another round of mistakes. Usually, Innovation is most important and least focused item in many strategic outsourcing deals. Many a times, strategic outsourcing deals happen between two large entities who themselves lack innovation because of their size as well! Thinking wisely can solve this problem as setting a culture of innovation is a different animal in itself.
7. Transparency: I have observed that while we intend to create partnership, we shy away from discussing our strategies with each other or create openness and transparency. Transparency is closely linked to trust and when one goes missing, the other is automatically lost. Ideally the whole purpose of a strategic outsourcing deal is to create strategic depth. In my view, eventually if the relationship has to succeed, the strategy should be discussed between consumer’s business, consumer’s IT team and provider’s team together and the information should be transparent. I also advocate a common knowledge portal for all. In any strategic outsourcing deal, one should also notice that the retained team should never be too large as it may defeat the purpose of strategic outsourcing as people would tend to micro manage the partner.
In conclusion, in my view, a true strategic outsourcing takes a long time to evolve. By the time it evolves, much of the opportunity to leverage the benefits is already gone. By that time consumer also runs out of patience. Theoretically it looks perfect and it is a good thing if organizations have culture, knowledge, experience and desire to make it successful within first year of outsourcing. In my view, Strategic Outsourcing should be preceded with performance based services outsourcing with 2-3 suppliers for large enterprise for first 3 years. Knowledge and experience from multivendor outsourcing should allow us to graduate towards strategic outsourcing partnership with one of them after a proper due diligence has been done.
This article was first published in InformationWeek India by the same author.
DD Mishra, Partner, CIO Specialist Advisory, shares some key tips on IT SLAs and some of the best practices which can lead to better negotiation or management. As per Mr Mishra, SLAs should be taken seriously and managed properly for a better working relationship and business efficiency.
Service Level Agreements are designed to drive service performance from providers. Sometimes overdrive to get stringent or relaxed SLAs, poor governance of SLAs, ambiguity in SLA contracts and inability to identify win-win situations from demand and supply side leads to catastrophic consequences for business and IT in many IT outsourcing deals. Most often I see we miss business in our IT SLA decisions. Since SLAs are much debated topic, I thought of sharing my views on this subject with the intent to uncover some good practices for a healthy debate.
SLA for business performance: IT SLAs should have direct or indirect relation with business performance. If changes in the SLA do not create any business impact, is it worth measuring it? If changes to the SLA, creates lesser business impact, it may become a candidate for negotiation/renegotiation if the expected level is difficult or expensive to maintain and outweighs the benefits from investment.
Number of SLAs: The number of SLAs should be few which are just sufficient to measure every aspect of the service. The number can be optimised by reducing redundancy. For example, if you have outsourced Applications & Infrastructure to the same provider, by measuring application performance, we can also understand server and network performance; hence there is no need to define Server and Network performance SLAs in addition. Too many SLAs not only consume lot of bandwidth, it does not help in driving the right performance either by diverting our attention. We can keep server & network performance as a part of infrastructure monitoring metrics rather than SLA in the above situation.
Divide SLAs between Critical & Key: Penalize provider for missing those SLAs which impact the business most. Dividing penalty amount into huge number of SLAs will lower the impact of penalties across important ones. By categorising SLAs into Key and Critical, we can penalize for critical and keep the key SLAs under close monitoring without penalty with a provision of shifting some of the SLAs from Key to Critical and vice versa during review periods.
SLA Slabs: At times an absolute number for an SLA target may not help. Under such circumstances, creating slabs for those SLAs could be a better alternative. The slab has to be carefully designed keeping end customers in mind. For example, if you have generally X number of records to be processed on a particular day of month but at times you get X+D which is higher, provider may try to guarantee a target looking at the worst case. Customer can get a better SLA by putting slabs e.g for first X records it should be 2 hours and the X+D can complete in 3 hours 30 mins with 99.9% target or something like first 90% in 2 Hours and 100% in 3 hours 30 mins. This can be a better bet for business than getting 99.9% in 3 hours 30 mins.
Provide escape route from defaults: Mistakes can happen but there should be mechanism for correcting those mistakes in a relationship. If SLA defaults happen, the mechanism to recover the penalty back should be available as a part of the SLA contract. For example, one can put exceeding the targets by X% in next 3 months after the first default; will put the provider on the toes to fix the issue. Overall, the enhanced target should be achievable. Penalty can never be a revenue stream as for every dollar obtained from penalty; the loss to business due to SLA defaults is manifolds.
Automation: SLA measurements should be automated and driven by tools. This reduces chances of error and reduces stress on manpower needed, time frame of producing SLAs and debate around its accuracy. The automation should be kept as an obligation on the provider within first few months of outsourcing for all SLAs where it is possible.
Grouping of SLAs: SLAs can be grouped in Pools under various categories such as Security, Availability, Performance, Business, Regulatory, Compliance, Customer etc. and accordingly one can allocate priority for the pools and factor pool contribution into calculation of SLA penalty. This helps in holistically managing the parameters and capability to tune the expectations as per needs.
SLA Improvement: SLA improvements should be clearly defined and should follow a time bound roadmap. The improvements should result in business benefits. It is imperative here that quite often the improvement does not mean revision of targets but other parameters as well. For example, rather than improving % of closure of calls within specified time of X hours, a better improvement could be to reduce the window of X hours to X- D.
Regulatory & Compliance SLAs: The SLAs which are regulatory & compliance related to continue in business needs should be should be at a higher performance level than what is required by agencies or external. The SLA contract or MSA should have provision of passing any fine or penalty which customer may have from such failures to comply where failures can be attributable to the provider.
Tuning SLAs: SLAs, irrespective of the categories, are important for business and should be met. The customer should make provision for calibration from time to time by reducing or increasing the impact of SLAs through calibration processes where it becomes necessary. This should be used very carefully and preferably during the improvement phase yearly or half yearly using proper governance mechanism. In addition, SLAs should be reviewed over a period for their relevance.
In conclusion, there are several ways of making better alignment with good SLA negotiations and creating a win-win situation. The SLAs should be SMART – Simple, Measurable, Achievable, Realistic and Timely for a better relationship with provider. Since SLAs have direct impact on relationship with provider and connected to business efficiency, it is imperative to manage them well through better governance.