Gone but not forgotten

Managing today's outsourcing deals requires constant attention, big budgets and specially trained staff.

June 28, 2004 (Computerworld)

When Jon Carrow joined Wyeth Pharmaceuticals seven years ago as senior director of global IT sourcing, he faced a daunting task: Building a team capable of managing more than a dozen outsourcing relationships simultaneously.
Wyeth Pharmaceuticals (formerly American Home Products Corp.) was expanding its outsourcing agreements to include desktop and networking services and hosting operations for its multibillion-dollar businesses around the world. With the growing scope and length of those contracts, outsourcing decisions affected not only the IT department but business units as well. The division of Madison, N.J.-based parent Wyeth couldn't simply sign on the dotted line and leave day-to-day management to its suppliers. This new phase of outsourcing required serious contract management.
"IT sourcing is an emerging role within the IS function," and the job requires skills not typically found in the IT department, says Carrow, who now has a 13-member sourcing staff.
Most companies that outsource IT functions face a similar dilemma. As outsourcing contracts grow more complex, their impact reverberates throughout the organization. When outsourcing relationships aren't monitored closely, dissatisfaction can follow. Of 182 buyers of outsourcing services surveyed by DiamondCluster International Inc., 26% said they were dissatisfied with their outsourcing efforts. Moreover, 21% said they had prematurely terminated an outsourcing arrangement in the past 12 months, according to the Chicago-based consulting firm's 2004 survey.
Today, managing an outsourcing relationship requires upfront planning, a highly skilled management team, constant communication and an expanded budget.
Here's how some outsourcing veterans recommend going about it.
Planning
Experts say outsourcing decision-makers should choose a contract management team before choosing the supplier. The team should manage the request-for-proposal process, ensuring that the requirements in the proposal are met. Delaying that step may be "the biggest mistake that any client makes," says Don Flores, project director for the sourcing management practice at TPI, an outsourcing consulting firm in The Woodlands, Texas. An outsourcing transaction, he explains, is "an enterprise change event" that requires a change management program to make the appropriate adjustments and communicate that changes are coming.
The Team
The rule of thumb for contract management staff size is five to seven employees on the client side for every 100 people that are assigned to an outsourcing engagement on the supplier's side, says Paul Roy, an attorney at Mayer, Brown, Rowe and Maw LLP, which handles outsourcing contracts for Procter & Gamble Co., Motorola Inc. and Bank of America Corp.
Current IT staffers may not have the requisite skills for the management team. "Good vendor managers are very detail-oriented people who can get into the terms, conditions and nuances" of an outsourcing agreement, explains Barbara Gomolski, an analyst at Gartner Inc. and a Computerworld columnist. The team should also have negotiation, project management and issue resolution skills, strong communication capabilities and financial experience, she says.
Wyeth's Carrow looked outside normal IT circles for his sourcing team. "One of my people was a contracting officer for the Navy. One guy worked for a company that did outsource consulting," he says. "The biggest [requirement] was someone who understood IT but was not so into technology that they couldn't look at the broader business side of things."

Managing
Once the team is in place, it will need to monitor more than just the day-to-day operations of the supplier. Team members also need to watch for changes in their own company's business and technology and how laws pertaining to the industry may affect the outsourcing agreement. Good management requires constant attention to four areas:
• Performance. The staff has to monitor standards, policies and the delivery of services from the supplier. Team members must work with the business to understand its needs and communicate them to the supplier. They must balance the demand for newer, better, faster technology against the cost.
The staff should also closely manage service levels that could prove costly if the outsourcer let them slip. Collecting and managing performance data requires effort, says Bart Perkins, managing partner at Leverage Partners Inc., a consulting firm in Louisville, Ky., and a Computerworld columnist. But not doing so "can be a costly mistake."
• The relationship. The staff has to handle problems before they become catastrophes. "There will always be disputes," Roy says. "It's essential to have a mechanism that's going to address disputes at all levels. If you wait for them to bubble up to the top of the pyramid, you're creating a sense of dissatisfaction and antagonism at lower levels and a bottleneck at the top."
• Finance. The staff must ensure that invoices are correct, analyze consumption and forecast budgets.
• Contract administration. The staff needs to manage internal controls and contract compliance. A basic challenge, Roy says, is to make sure the contract doesn't "commit the customer to standards that are obsolete." So the team has to benchmark the supplier's performance against those of competitors and make sure it's meeting contractual commitments, particularly those that are adjustable. This requires the team to monitor the market and renegotiate as technology standards change.

Failure to do so can be costly. Perkins tells of a company that outsourced procurement and management for 30,000 desktops. The multiyear contract stated that as the PC manufacturer lowered prices, the outsourcer would pass those reductions on to the company. But the customer never checked, and the outsourcer kept the difference. "The company's failure to monitor its outsourcer cost it over $1 million per year," he says.
IT outsourcing veterans say building benchmarking into outsourcing contracts enables them to feel more comfortable signing longer-term deals because they know they're covered as the market changes.
Communication
As the performance, contractual, financial and relational data is collected, the information must be continually communicated throughout the business. The Web is a great vehicle for doing this efficiently, Gomolski says. "If you have this data available in a Web-based form, you can present different views to the people who need to know," she explains. For example, the person managing operations wants to see the day-to-day metrics, transactions and bottlenecks. The head of applications is looking for technology utilization. The CIO is interested in the cost and quality of the relationship. "It's all about getting the right information to the right people so they can make decisions," she adds.
Outsourcing vendors can often save your company from having to reinvent the wheel as it develops contract management systems. Electronic Data Systems Corp. and Computer Sciences Corp. offer online tools that give a dashboard view of service levels. Fieldglass Inc. in Chicago and Cendura Corp. in Mountain View, Calif., have developed software to manage the life cycle of an outsourcing agreement.
But no amount of technology can replace face-to-face visits. The frequency of visits to an outsourcer depends on its location and the scope of the deal. When Pavan Nigam led outsourcing efforts at Santa Clara, Calif.-based Healtheon (now WebMD Corp.) in the late 1990s, he learned this the hard way. His team quickly realized that semiweekly conference calls couldn't bridge the cultural and time-zone differences between the company and its offshore development center in India. So Healtheon increased its budgets for travel, communications equipment such as videoconferencing, and team-building events for its counterparts in India.
Budget
Depending on the scope of the deal and the location of the outsourcer, expect to spend 2% to 6% of the annual cost of the agreement to manage the relationship, according to industry estimates. "Be prepared to invest in the infrastructure, capital and people," says Nigam, who is now CEO of Cendura, which he co-founded. "Some people get so enamored with the cost differential that they don't want to invest in infrastructure."
And put aside money for training the sourcing management team, says TPI's Flores. "A lot of people who step into these roles are first-time sourcing management people," he explains.
Managing an outsourcing agreement is complex, but IT groups are getting better at it. "IT people are a lot savvier about this than they were five years ago," says Gomolski. "People are learning from their experiences and will continue to improve."
Collett is a freelance writer in Chicago. Contact her at stcollett@aol.com.