Series: CIO - A Year In Preview
Alternative Service Delivery
Submitted by Stuart Millar, Partner at Negenit, Consulting Without Boundaries

Alternative Service Delivery comes in many guises and flavours. It is most often referred to as “Outsourcing” but it also can include the formation of a consortium of organizations that come together to provide a service that each party uses; this may be provided by a jointly owned entity or by one of the partners performing the service for a fee. Irrespective of what it is called, it is fast becoming a key component of modern business philosophy. It no longer applies just to information technology but to all “white collar” services and functions. Today there are mature suppliers in the outsource market that offer a broad range of services. Suppliers of outsource service are gaining a better understanding of their clients' businesses and the market dynamics that they face. They offer sophisticated services that cut across an organization's functional divisions. They hold out the promise that outsourcing is a strategic partnership offering mutual benefits and sharing risks; while not acknowledging any apparent downsides.

Successful outsourcing arrangements can, and do, provide unparalleled advantage, but organizations that get it wrong face huge risks. Although many organizations are outsourcing, few are doing it well. The original objectives are often not properly addressed or the relationship between client and outsourcer has been mismanaged on both sides. The majority of these problems can, however, be avoided by taking proper advice at the outset and following a process that links a solid sourcing strategy with comprehensive tactical plans for the implementation of the strategy, and ongoing operational monitoring and managing. These three actions, when linked with clear service level agreements, will result in an effective operational experience.

Organizations that are clear about their outsourcing objectives and committed to managing the outsourcing relationship can improve their market position by leaving themselves free to focus on their core business. Where an outsource arrangement already exists and conflicts or performance issues have occurred, they can be resolved through review and skilled mediation.

Even though you might be considering outsourcing a business function, it does not lead to eliminating all the staff from that business area. You will still need to consider retaining management talent to monitor and manage the relationship during the life of the contract. This can require somewhat generic skills, but if adjustment is required to Service Delivery, and/or the contract, you must have the business skills available to ensure you will receive the required services.

The Approach
Outsourcing projects should be viewed as both business strategy and business operations; with a detailed and appropriate tactical plan for implementation. First the organization needs to clearly define and agree upon business needs and priorities, then determine the specific service requirements and select an appropriate service provider.

The approach must focus on the critical success factors and constraints as defined by the business units and leverage their knowledge and experience in the development of practical and effective service level agreements. The final contract must be negotiated to include operational measurements, periodic reviews, a transition plan and an exit plan. This is best achieved with the advice from experience through the use of a project team with overlapping skills that are important to the success of the initiative.

Developing Sourcing Strategy
Outsourcing any key function of an organization is a major undertaking. It should not be embarked upon without a sound business case and a clear understanding of the associated risks and implications. In short, you must have a strategy.

The development of sourcing strategy requires the business units to work together to:

  • Understand their core competencies and what are not.
  • Determine what can be outsourced and what cannot.
  • Clarify and document the reasons for outsourcing.
  • Benchmark the performance and cost (current and future) of target functions.
  • Assess the skills of current staff.
  • Assess the market for qualified service providers.
  • Understand the strategic, political and managerial implications.
  • Identify the business risks.
  • Determine the critical success factors.
  • Document the sourcing strategy.
Identify the objective of changing the status quo. If the overriding objective is to be cost cutting, then the accompanying service level erosion should be understood and accepted. If the overriding objective is to be improved service level delivery (reliability, availability, performance, etc.) then appropriate cost increases should be factored into the business case. If the overriding objective is to be increased capabilities, then user training and cost increases should also be factored into the business case.

At the conclusion of this process the project team will have a comprehensive understanding and tested framework in which the right mix of internal and external services can be brought together to achieve their desired business goals.

Service Level Agreements
Service Level Agreements (SLA) are key elements of any outsourcing arrangement. They describe and define a service or set of services that a vendor (service provider) will supply to service users and the service level to which it will provide that service. An SLA should NOT describe how the service is delivered. They identify: what the service deliverables are; when they are delivered; and where they are delivered. Many organizations, which chose not to outsource a function, have developed SLAs for internal functions to improve service delivery and accountability.

For each service deliverable the SLA should define:

  • Service Performance
    • The agreed service level measures, such as availability and response times.
  • Constraints
    • The boundary within which the service level will apply; such as the workload, and allowances to accommodate volume growths.
  • Price
    • Cost or charge for use of the service (yes, this can work for internal charge-back).

Using this process the project team will have a documented comprehensive description of the functions and service elements to be contracted.

Finding A Supplier
In this process the organization can be both a “seller” and a “buyer”. Depending upon the size and complexity of the function to be outsourced they may be selling fixed assets, people, intellectual property and contracts. In all cases they are buying defined services. It is very important that an appropriate “package” be developed to attract the right service provider; one that will maximize the return on the function’s assets and deliver the services at the service level specified, in a cost effective manner. The objective of this phase is to define and quantify the services required, identify the assets to be included, select a service provider and negotiate a contract. The process to achieve this should:
  1. Determine the nature of the deal sought (very important if you have assets to transfer)
  2. Develop high-level statement of scope of proposition (a short clear description of what you want)
  3. Develop short-list of suppliers ( you may want to conduct a Request for Information process)
  4. Develop detailed statement of scope of proposition (this can be the Request for Proposal)
  5. Select suppliers for negotiation.
  6. Finalize the deal.
For a large outsourcing project you may divide the work into specialist streams, using both internal and external resources, with overall management shared between the project manager and the project sponsor. Some of the specialty area include:
  • Contract stream
    • Lawyers and knowledgeable function staff to create a “preferred” contract.
  • Assets stream
    • Function staff or a third-party to inventory all assets to be included in the deal.
  • Human Resources stream
    • HR staff and/or external “specialist” to determine impact on resources.
  • Finance stream
    • Internal finance group and/or external “specialists”, to do financial modeling.
  • Service Level Agreement (SLA) stream
    • Function-knowledgeable client staff and/or an external reviewer to develop or amend SLA.
  • Client-Side Operations stream
    • Senior, function-knowledgeable, staff to define services, develop the transition processes and post-implementation structure, and establish contract management procedures.
  • Negotiating stream
    • Senior client management and their advisors to negotiate with the selected suppliers.
As a rule, never sign a vendor’s contract.... it contains all the words they require to maintain a tight agreement, but little about how to keep them accountable and how you can get out if the arrangement doesn’t work for you.

Governance and Managing The Contract
Once the deal has been finalized the relationship between the company and its service provider changes. They are no longer “negotiators” on opposite sides of the table. They are now “partners” and the on-going relationship must be managed; by both parties. The “management process” must be structured, quantifiable and fully understood by both sides. There are two phases in the management process; first is Transition Management and second is On-going Management. If the Transition Management phase is completed diligently then the On-going Management will be a natural extension of that process. It is therefore important that client staff who will be responsible for On-going Management be actively involved in the Transition process. Key elements of the Governance process include:

  • Determining the roles and responsibilities of the Transition and On-going Service Management teams.
  • Finalizing the organization and membership of the On-going Service Management team.
  • Completing and resolving all outstanding contractual issues.
  • Developing transition plans for: fixed assets, people, intellectual property and contracts; as well as the introduction of the agreed upon SLA with an appropriate “ramp-up period” for the service provider.
  • Revising Business Resumption and Disaster Recovery Plans.
  • Establishing the service review periods and the review process.
  • Developing new business processes to reflect the use of a third-party service provider.
  • Developing the processes and procedures for On-going Service Management including Contract Management; Operational Management; and, Strategic Management.
Organizations may wish to engage an independent third-party to assist in on-going service management as an advisor and reviewer of the service provider's performance against the contracted SLA.

Contract Mediation
Not all outsourcing arrangements run smoothly. There is often the need for mediation services, usually using a third-party, to help resolve performance related problems between service providers and their customers, before the legal options are activated. There are a number of techniques and tools that can help both parties clearly identify the issues and resolve them through a facilitated process that creates:

  • Common understanding of the issues
  • Mutually acceptable resolution
  • Plan to implement changes necessary to avoid a reoccurrence of the problem
  • Commitment from both parties to work together to implement the plan.

It is often important to include such a process into the contract and develop a SLA that outlines the steps and timeframe.

Not all organizations have the skills or resources to plan and execute an outsourcing project; particularly while they are keeping the business operating “as usual”. This may be your first outsourcing project and it is worth considering that “The smartest Captains use a Pilot to help them navigate difficult waters”. It is often very beneficial to use an unbiased third-party, which has a proven methodology, to facilitate the process and to work with the business units as they move from sourcing strategy, through solution acquisition and into an operational environment.

Next Month
Next month we will focus on how business and support units should work together to ensure the appropriate solution is acquired at the most favourable terms. We will explore how the Request for Proposal process can best be used in an effective and efficient manner for both large and small projects.

By: Stuart Millar
Partner at Negenit Corp. (Outsourcing, Project Management, IT Strategy and Telecommunication)   

To Contact Stuart: 

E:  smillar@negenit.com or on LinkedIn

Negenit Corporation,
6021 Yonge Street, Suite 485,
Toronto, ON M2M 3W2
T:  416-421-2017
F:  416-421-5549
Website:http://www.negenit.com

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