Gartner reckons recent outsourcing deals are not viable and the
future lies in shared management. Ross Bentley reports
This is shaping up to be the year of the poor outsourcing deal,
says Roger Cox, European vice-president for strategic sourcing at
analyst firm Gartner Group. The reason for this, he says, is
twofold. Current business pressures, primarily the need to reduce
costs, means that everyone is focused on outsourcing at the moment.
But in searching for a remedy to a short-term problem companies are
tying themselves into long-term outsourcing contracts. "Companies
think they are buying a service but they are actually buying a
relationship," says Cox.
This juxtaposition, he says, means that the majority of the
outsourcing contracts signed today do not have the built-in
flexibility to accommodate the inevitable changes to the business
that will occur over the next seven to 10 years. "In today's
climate the pace of business change is such that contracts are out
of date quicker than it takes for them to be negotiated," says Cox.
"One defence firm I worked with recently calculated there was a
critical change to its business every 15 seconds."
Many of today's outsourcing deals are also doomed to failure, says
Cox, because of a dearth of skills within the strategic sourcing
department of the average company. This is the part of the
organisation that Cox describes as the "corporate glue" - the part
that sits between and co-ordinates the business units within a
company and external service providers. "The strategic department
is not functioning and there is an inability to link services,"
says Cox. "People working in this area need to have a whole range
of skills be it business, commercial, legal or technical expertise.
There is no natural career path for people in this function."
These two failings are related, says Cox, and there is an obvious
need for a change in the way outsourcing contracts are created.
This new type of contract relies on a strong strategic sourcing
department to constantly manage and nurse the relationship between
the business and the service provider.
He says, "One of the emerging trends in contract innovation is the
development of long-term service agreements that are built for
continuous change. Traditionally, long-term, good old-fashioned
outsourcing agreements have a service solution, determined at the
start of a deal, built into the fabric of the contract.
"In contrast, we are starting to see what we call co-management
contracts. This is an agreement based on governance processes
rather than a service solution, allowing the solution to change
without having to undergo a major contract re-structure."
Cox has spent the past 10 years analysing some of the biggest
outsourcing contracts in the world both in terms of cost and
length. This is no mean feat when you consider that some contracts
stretch to almost 3,000 pages.
He says that usually 20% to 30% of what is required is buried
somewhere in these contracts while another 20% to 30% is achieved
"by good people getting together behind the scenes and making
things happen". But what happens when these people leave the
company or change roles? There is, Cox says, a real need to clean
these contracts up and organise all the good stuff.
The co-management contract model has come out of Gartner research,
which has revealed four key factors associated with the success of
long-term deals in fast changing or uncertain environments:
- Most major deal failures were due to a break down in the
overall relationship between the stakeholders in the outsourcing
agreement
- Successful deals were dependent on a range of interfaces,
between the service recipients and the service providers
- Six interfaces, that operate above day-to-day service delivery,
emerged as critical
- These interfaces were usually informal, often vested in
individuals, and frequently collapsed when these individuals
changed jobs etc. These interfaces, which are in addition to
day-to-day service delivery, are strategy, membership, integration,
equity, audit and feedback.
The key to success, says Cox, lies in a combination of relationship
management through the six co-management processes linked with
effective day-to-day service management.
All this, he concludes, will change the roles and responsibilities
of the strategic sourcing department. Whereas in traditional
outsourcing agreements a great deal of time is spent choosing a
supplier and developing the contract, Cox says new deals will look
more closely at sourcing strategies and relationship management.
The former encompasses business requirements, core competencies,
business case and buy-in from stakeholders. The latter involves the
six co-management processes mentioned above.
Cox says, "As organisations come under increasing pressure to
rapidly establish viable, flexible, long-term deals with a
portfolio of strategic suppliers, they will need to maintain an
effective sourcing strategy and an effective relationship
management strategy. Without these supplier selection and contract
development are pointless exercises."
What's more, with the average good, old-fashioned outsourcing deal
currently taking nine months to complete, Cox claims this new
methodology can halve the time it takes to emerge with a successful
deal.
The new-look IS department
Gartner says companies are
moving towards a slimmed-down, high-value adding variant of
information services, by which most of the work associated with the
supplying and supporting infrastructure will be outsourced to
external service providers.
Five key roles will remain in the new IS function:
- Strategic sourcing - management of the strategic
sourcing lifecycle that interfaces with service providers on the
supply side, and the business on the demand side
- Technology advancement - this straddles supply and
demand and focuses on proactive change and keeping ahead of new
technologies
- Business improvement - involvement with users on the
demand side
- Architecture development - a strategic level poised
between supply and demand
- IT leadership - a strategic level role directed at the
fusion of IT and business strategies.
Gartner's white paper, Strategic Sourcing 2002-2003: Change and
Uncertainty, will be presented by Adrian Quayle, lead consultant at
Gartner's Consulting Strategic Sourcing Practice at Outsourceworld,
London Arena, 24-25 April. For details go to
www.outsourceworld.org/