Anupam Govil Founder and CEO, Global Equations LLC	Linda Tuck Chapman President, ONTALA Performance Solutions

The Outsourcing Q&A
Anupam Govil & Linda Tuck Chapman




Anupam Govil & Linda Tuck Chapman  Print    Share   Comments
Published January 2010

As the Sourcing profession evolves, so does the terminology and language. If Sourcing becomes the universal, overarching term, then thinking of Strategic Sourcing, Outsourcing, Procurement, Supplier and Supply Chain management as supporting disciplines provides clarity and a logical separation of the complex roles of Sourcing professionals. Strategic sourcing can also be defined as optimizing your service requirements using scientific and mathematical methods in procurement. Category Sourcing is a term that usually refers to Sourcing broad categories of goods and services that may be bundled or unbundled in different ways to create different sources of value.

Outsourcing is a complex relationship whereby a service provider becomes embedded in the operations of a company to the point where the outsourcer's service delivery is indistinguishable to the company's end client, either an external customer or an employee of the company. The risk profile is normally much higher than other types of relationships. In an Outsourcing relationship, if the outsourcer fails to deliver services or a loss of control over regulated information such as customer data occurs, it would be thought of as a failure or security breach by the company itself.

Over time, what matters is ‘strategic outsourcing’. This approach is far out from the traditional outsourcing approach revolving around cost. Outsourcing has become much more complex with a multitude of processes, service providers, locations etc. that a simple run of the mill solution will never suffice. Strategic outsourcing deals with coming up with customized models that ensure the best fit solution for the outsourcing needs of an enterprise. This includes taking into account multiple factors that play a vital role in ensuring the ‘best fit solution’

Organizations are now under increased pressure to outsource more and do it more quickly, but solely pursuing a cost-focused approach can invite danger. What would you describe as the “right” strategy for outsourcing which delivers business benefits without sacrificing performance?

This is the most common dilemma faced by CIO’s the world over. The so- called ‘right-sourcing’ strategy which balances both business and financial goals as well as performance is elusive but not difficult to achieve. The right strategy to achieve this would be ensuring a constant endeavour to evolve the IT strategy both in terms of technological advances as well as core business objectives. Honestly, with IT becoming a huge business enabler the office of the CIO has become all the more vital. Another key is having a long term vision for IT not as an operational necessity but an operationally inseparable asset. While others would aim at IT outsourcing delivering immediate cost benefits, it’s the CIO’s job to ensure that a myopic view does not affect the long term effectiveness of an outsourcing plan. A simple example may be to outsource a legacy system and continue with the same outside vendor, however, on a longer term an upgrade may save more money and resources even though it may be expensive in the short run. Also important is to set clear outsourcing objectives i.e. is it cost, agility, availability of resources and then benchmark the performance against the same parameters. Most often the management aims at achieving all the benefits, yet measures the return only in terms of cost savings. In short, the right strategy is the one which delivers both long and short term returns while balancing business and financial objectives. Hence today’s CIO’s strive to attain this balance through intelligent blending of “smart” IT purchases while relying on external “partnerships” to transition to new service levels or achieve the desired cost savings.

Looking from the other side, Sourcing professionals should understand the business and their strategic goals of their business partners, and align the Sourcing strategy and vendor or service provider relationship accordingly. In weighing the evaluation criteria to align with the business strategy and goals means that in most cases the weightage for price rarely exceeds 35% of the overall score. Other evaluation and selection criteria may include risk profile, track record, business flexibility and technology solution, etc.

Linda’s Commentary: A wise senior executive once told me that if I recommended a service provider or solution that was not the lowest cost solution, he would approve it as long as he understood what they were getting in exchange for the price premium.
Best price doesn't always mean best value.

Maintaining effective risk management and controls in outsourced operations can be vital to ensure targets are met and costs managed. What steps should be taken to ensure adequate controls are in place which enable corporate objectives to be met?

Risk management and controls are inseparable from professional Sourcing. Regulated and fiercely competitive industries with thin margins have made significant investments in this critical area in recent years and particularly during the recent economic turmoil. Anything less than prudent risk management and adequate controls over outsourced relationships is tantamount to negligence! Some important pointers:

• Maintain an internal locus of control especially in terms of strategic planning at all times.
• Have clearly defined SLA’s which includes agreed performance parameters as well as rewards and penalties.
• Ensure a cultural semblance with the chosen vendor, or better yet, choose vendors that have a closer cultural fit to your organization
• Have a continuous technology evolution assessment in place to ensure long term business survivability.
• Have clearly defined risk mitigation, escalation as well as communication channels
• Delegate responsibility at both customer as well as vendor levels
• Consider setting up a dedicated PMO to manage these engagements

All companies should invest resources into developing a "right-sized" risk and performance management program for all strategic, outsourcing and mission critical relationships, as a minimum. Most companies with Sourcing departments are doing a good job at identifying and mitigating risk during the Origination phase of Sourcing. Where it really falls apart is during the Monitoring phase, once the relationships are in place, particularly if the outsourcer handles regulated information such as that protected by privacy laws such as HIPPA, GBLA, PPIDEA, etc. Many of the same steps that Sourcing professionals execute during Origination should be repeated during the term of the relationship at one, two or three year intervals, with the frequency and intensity of the review differentiated according to the level of risk and the impact of a service failure or breach.

When outsourcing relationships run into difficulties it is often the result of flaws in the underlying agreement, which practical experience has revealed are incomplete, unclear, inflexible or simply not reflecting the real objectives and capabilities of the parties involved. What’s the key to getting the contact right how can this be achieved?

This is very true, while outsourcing is the byword to improve cost effectiveness and efficiency and help focus on the core objective of a business, most often a lot of top management energy is spent on correcting a potentially damaging outsourcing contract. The best way to avoid this is to conduct a complete internal IT assessment at the first thought of outsourcing. This is most often the stage where sourcing deals can go wrong and the mis-alignments can be magnified later on. By having a proper assessment of the existing IT infrastructure, potential inefficiencies can be brought into picture while drafting the contract. This ensures that both the customer as well as the vendor is aware of the ground level situation and base their requirements or services while provisioning for the same. As it is, any inefficient service or broken process that is outsourced will likely deliver inefficient services and heartburns.

Other important aspects to ensure a good contract include clear SLA’s in terms of goals to be achieved by the vendor as well as its interpretation both from a customer and vendor perspective. Establishing well defined performance benchmarks and mutually agreeable monitoring mechanisms is a key to success. Also important is to account for unforeseeable business developments while assessing expected savings potential. Finally, consider creating win-win relationships by sharing the long term perspective with the vendor to ensure a strategic partnership in which both parties benefit.

Outsourcing like any major transformation, requires a high degree of leadership and senior management commitment, a systematic and comprehensive approach, and a good deal of change management. What advice can you give to the CIO to assist in this transition so that it ultimately leads to success?

• Transitioning has many failure points and it is essential to have a very hands- on approach during this phase. Delegation of oversight and control to middle management who may not understand the big picture could result in loss of effectiveness or expensive delays.
• Have an overlap in terms of providing the services during the transition period, one at the vendor level and the other at the company level. Maintain the same till individual segments as well as the contract as a whole starts to work seamless from the vendor end.
• Establish clear communication lines at all levels during the period. Communication is a fundamental component of successful change management. If the transformation is significant no matter how often and how you communicate, it is rarely enough. People accept change at different paces, and acceptance is not a straight line process. Communicate, seek feedback, adjust your communication accordingly and do it again. Up the chain of command, across your peer group, among your leaders and across the troops.
• Entrust clear responsibility at all levels both internally as well as with the vendor
• It only takes 15 % of the population to lead successful change. Those leaders exist at all levels in your company. Find them, nurture them, seek their advice and feedback, empower them, arm them with the right tools, and invite them to support and help you on this transformation journey.
• Have a provision for on-site presence at vendor location at least till a major part of the transition is complete and the critical checkpoints have been successfully accomplished.
• Linda’s Commentary: The devil is in the detail . A useful framework that I often use is called Joharia's window, which has four panes:

  - You know what you know
  - You know what you don't know
  - You don't know what you do know
  - You don't know what you don't know

Those last two windows are the ones you should really pay attention to. Your business partners are the experts in their own domain. As a Sourcing professional, your role is to help your business partners express what they know about their business.....their requirements, their current challenges, what they must have, what they would like to have.....It is very difficult to surface one's hidden assumptions, so your job is to help them do just that.

You must also identify ways to shrink the size of the window pane that symbolizes “you don’t know what you don’t know”. This pane can hold many hidden surprises, not all of them good.