Orchestrating Outsourcing Success

By Binod Taterway

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Organizations outsource because they cannot be good at all things and still remain competitive in their core business. About one hundred years ago, during the automotive revolution, organizations tended to be vertically integrated -- from raw materials plants to finished products. Vertical integration hid the complexities and inefficiencies of numerous processes within the walls of an organization.

The forces of competition compelled organizations to focus on strategic processes of the supply chain and outsource all of the remaining processes to worldwide partners. Vertical integration was replaced by highly efficient supply chains.

Today, almost a century later, the manufacturing and retail world thrives on highly complex, interlinked supply chains that work in unison.

Business and IT services are undergoing similar transformation.

In their infancy, all of these processes were within the confines of one organization. But as the service organizations matured, they felt compelled to outsource competencies that an outside provider could perform better and be more cost competitive.

Starting with "utility" related functions that included help desk, call center, data center, desktop support, and network management, organizations realized that there is an economy-of-scale in utilizing highly functional and skilled providers that integrate well into their business and IT processes.

Today, organizations tend to outsource most of their back office IT and business processes that include data center services and HR. Focusing entirely on core competencies, these organizations are shedding processes that others can perform better, cheaper, and faster.

Outsourcing is the direct result of continuous improvement and globalization. As long as consumers demand products and services better, faster, and cheaper, products and services organizations will constantly need to innovate through the relentless and effective utilization of global raw materials -- from cotton producers in China to skilled IT programmers in India.Mix-Master

Business service/IT outsourcing is moving towards high-end, process outsourcing that involves multiple participants. Up until now, organizations have been outsourcing processes related to a single business function (payroll, help desk, etc.) that have been usually self-contained and these organizations have been able to manage their outsourced services/products because of clearly defined roles/responsibilities among all participants.

But, with process outsourcing going to more than one provider, organizations now need to wrestle with another layer of complexity that previously did not exist. This is called multi-sourcing; where organizations are increasingly mixing and matching various kinds of providers to obtain better services.

This approach mitigates the risks of outsourcing processes/data to only one provider -- a mistake that General Motors made with EDS in 1986 that has taken almost two decades to fix. Today, General Motors is moving aggressively towards multi-sourcing to foster innovation and agility by taking back the critical processes that were outside of their organization.

Outsourcing Discipline

But before an organization can be successful at multi-sourcing, they need a lot of discipline to become effective.

Globalization creates opportunities to become far more competitive if process outsourcing can be done effectively. Today, multi-national organizations are becoming brand organizations and they are even outsourcing manufacturing/production processes once considered core in an effort to become agile, real time enterprises (RTE).

Organizations in this transformational effort need to shed assets/capabilities and replace them with access to assets/capabilities -- essentially creating a virtual enterprise that is made-to-order instead of made-to-stock.

In made-to-order, process maturity is key because each product/service is uniquely produced. A real-time enterprise needs to become an orchestrator to deliver its branded products and services with worldwide links to the supply-chain, established and managed in real-time.

Being able to run an outsourced operation is a competency many organizations lack. In the services and IT industry, most organizations are outsourcing at a relationship level that Gartner calls the "utility" level. This usually consists of back-office functions that deliver business value to the organization in terms of revenue enhancement or cost savings.

To get the most value from outsourcing, organizations, according to Gartner, need to move up to "enhancement" and "frontier" relationships where their relationship with the service providers become highly complex, interdependent, and intertwined.

The benefits derived are enormous in terms of business value to the organizations that outsource at this level. By constantly shedding processes to providers, organizations essentially become brand organizations that can deliver business value utilizing a global pool of independent, but interconnected service providers.

Key Issues

Many outsourcing consultants focus on getting the best deal from their client's service providers. But the old thinking of getting the best "deal" (often price) seldom works over a long period of time.

Service providers need to become an integral part of the service supply-chain, to the point where they become extensions of an organization. Managing the relationship and aligning organizational goals for successful service delivery becomes more than just setting up the "deal."

The next generation of outsourcing will focus on IT process outsourcing. This embodies fine-grained outsourcing where pieces of business and IT functions are outsourced.

Consider, for example, application development utilizing multiple service providers. From requirements to rollout, you could outsource many steps of the processes (such as development, QA, and hosting) to different outsourced providers and retain the requirements, design, and user acceptance in-house.

In this complex multi-sourced environment, all parties that are brought-in to perform application development must operate in concert. Operating effectively in this example requires a high degree competency managing your providers and executing the integrated business processes.

Organizations need to focus on key challenges when they consider outsourcing:

Maturity: An honest assessment of whether your organization can effectively outsource a function/process. Many organizations rush to outsourcing without understanding the infrastructure needed to manage the outsourced providers.

A critical requirement to move to outsourcing is an organization's maturity in supporting service orientations -- an internal orientation of who provides services to whom. Most organizations still operate in functional silos that would create problems when it comes to managing outsource providers.

Benefits: What benefits are expected from outsourcing? Is there a lack of competency/capabilities in-house that an outsourced provider can supplement? Are there long-term benefits to the organization in terms of cost, quality, and access to resources?

Also has the organization made a strategic decision to outsource this function/process because such competencies do exist in outsourced providers? Having a business case sets the economic expectations of outsourcing.

Proof-of-Concept: Have you done a proof-of-concept in outsourcing before embarking on massive outsourcing deals? What is the impact on your organization from an asset, people, and cultural perspective? Could the organization survive and support outsourcing which is generally associated with the transfer of such assets and people?

Sponsorship: Has the top management bought into outsourcing from the organizational growth perspective? If you are outsourcing at the utility level, do you have sponsorship to move higher up to enhancement and frontier relationship?

Investment: Do you have support for the right investment to manage external service providers on a global scale?

Answering these questions is critical to any robust outsourcing strategy.Orchestrating for Success

To manage outsourced services on an on-going basis, you will have take control of how things are done and invest in people and consulting dollars for the overall management of your outsourcing relationship.

Here are some high level goals and objectives:

Establish a Service Management Office (SMO). Many organizations manage outsourcing relationships at the procurement level and don't have an SMO. A SMO is an operating entity that works with your providers daily to ensure successful service delivery.

Depending upon the size of the deal and the number of participants, the level of your SMO could be departmental, inter-departmental, or enterprise-wide. It also needs to include representatives from the service providers.

The SMO combines common sourcing management functions that include:

  • Contract compliance -- Develop a common mechanism to manage all contracts as they come from procurement.
  • Contract renegotiation -- Develop a common process for contract negotiation in concert with your procurement department.
  • Vendor performance evaluation -- Perform quarterly evaluation that ranks vendors based on both objective and subjective measures.
  • Vendor SLA compliance -- Monitor and verify (implement checks-and-balances utilizing performance dashboard) vendor's overall compliance against their SLAs.
  • Quality assurance -- Measure and monitor overall quality of service delivery on a proactive basis.
  • Establish Program Management Office (PMO): While there should be one SMO, the number of PMOs really depends on the complexity and size of the outsourcing deal. The PMOs outsource their common contract functions to the SMO, and they provide governance for outsourced functions, such as desktop support, call center, and help desk.

    Establish an Integrated Performance Dashboard: While dashboard tools abound, organizations are still reluctant to make use of it for performance monitoring. Implementing a performance dashboard would give organizations a mechanism to perform checks-and-balances on their vendors' performance.

    Too often vendors report that they have met their SLAs with their own data. Having objective performance data would help organizations outsource work, while controlling the management and quality of such work.

    Develop Flexible Contracts: Too often outsourcing has become solely an exercise in contract negotiation. And getting the best deal can come at the expense of operational performance where vendors may agree to stringent requirements at first, but back-end the negotiation process while the work is being performed.

    Organizations need to allow for some latitude in their contracts. We recommend that you negotiate a general structure with your providers and then operate for 90-180 days before inking the final form of the contract.

    Leaving some maneuvering room allows both the service providers and the service recipient to make some adjustments before locking in the contract.

    Establish Process Governance: Organizations need to establish processes of outsourcing in collaboration with their service providers. Establishing a process network (process maps that cross organizational boundaries) that involves multiple participants is the starting point before any outsourcing should begin.

    Vendor processes are then mapped to this process network to determine what should be outsourced and what should be retained.

    Measurement metrics and key performance indicators (KPIs) are established in collaboration with your providers leading to better ways to renegotiate the contract and develop service level agreements (SLAs).

    Glass Pipeline Visibility: Processes and contracts establish the structure under which outsource agreements in a multi-sourced environment can operate.

    Glass pipeline visibility refers to participants' visibility to a common problem, issue, or incident. It is an early response system that allows any or all participants to understand the root causes of a problem and recover from them. Glass pipeline visibility is implemented on a dashboard that reports on KPIs -- also known as operational metrics.

    Establish "The Rulebook": Operating Level Agreements: Service level agreements define the structure of the contract, performance, and penalties, but they do not define how participants should operate.

    Operating level agreements (OLAs) take the SLAs as their source and define a set of agreed upon rules among the people who participate in the performance of the service.

    The rulebook is not a legal agreement, but it documents collective agreements among all parties and people that are developed over time and through collective learning.

    By establishing such a rulebook, a group of disconnected providers becomes highly integrated to the overall delivery of your service.

    The rulebook also provides a mechanism to recover from an incident. The rulebook describes an approach to triage and how to recover from it. Over time, the rulebook becomes the true "rules-in-use" by which the organization supports its service delivery.

    Measurement Metrics -- Checks-and-Balances: Many organizations have issues with their service providers' data. They require more granularity for root cause analysis and more data for continuous improvement, yet they do not have anything but a vendors' summary data.

    In the case of a problem, issue, or incident, organizations lack any objective way to perform the checks-and-balances necessary to hold their service providers accountable. Implementing a performance dashboard to report on measurement metrics is the first step to ensure that you have the proper operational control in place.Mixin' & Matchin'

    Multi-sourced environments (MSE) will benefit from applying the "mix-and-match" paradigm to outsourcing.

    Large providers' skills lie in their scale, repeatability and functional competency, which when combined with small providers' agility and innovation can give an organization the needed balance in terms of scale, rigidity, innovation, and flexibility in outsourcing.

    This mix-and-match, best-of-breed approach focuses not only on the structure of the outsourcing contracts, but also on how to best manage them on an on-going basis.

    Business and IT architectures are usually defined by their respective leaders, but to leverage each other (one in support of the other) organizations need to invest in relationship and service management architectures as well.

    By not defining this architectural framework, organizations tend to bridge gaps between business and IT utilizing ad-hoc, one-off ways to manage relationships and services that rely more on individual skills and situational advantages than a well defined approach.

    The results fall into a number of categories:

  • Over-reliance on a third-party service provider;
  • relationship and service management skills remaining tied to critical resources and managers; and
  • rotation of resources in long-term contracts creating hiccups in service performance.
  • Investing in a common infrastructure for relationship and service management would accomplish better alignment between business and IT. This is because the standardized approach to manage all elements of IT services would allow for multiple service providers to coexist through operating level agreements, glass pipeline visibility, operational metrics, and an integrated process network.

    On the relationship scale, developing organizational trust and co-management processes in an integrated SMO will allow organizations to better work with their providers.

    Empirical results suggest that organizations can optimize 25% by establishing a common service management architecture and an additional 20% by adopting a relationship architecture that fosters organizational trust in support of the business.


    Business agility is the reason why outsourcing contracts need to be flexible. Buildng a flexible and sustained relationship with your providers can help you deliver on your service promises to the business.

    The traditional approach to managing service providers needs to be replaced by a well defined architectural framework that includes business, relationship, service management, and IT.

    Organizations also need to move away from SLA management which tends to be rear-view, after-the-fact, learning to a more of OLA management focus, which tends to be forward-looking and predictive in managing incidents, problems, and issues that arise in managing a multi-sourced environment.

    By implementing glass pipeline visibility and operating metrics, organizations can improve service performance in cooperation and collaboration with their service providers.

    Binod Taterway is CEO of Blue Canopy Group, a business and IT consultancy located outside of Washington, DC in Herndon, Virginia. Prior to founding Blue Canopy, he was vice president, Automotive and Manufacturing at Sapient Corp. and managing director, Automotive and Manufacturing Practice at Proxicom.