Governance: A Key to Outsourcing Success

Buyers need to adopt best practices to effectively manage relationships with providers over the life of a contract

March 21, 2008
By Bob Violino

Outsourcing governance teams should include people with hands-on experience managing a service provider relationship.
Ideally, the group should also consist of people who understand the needs of the buyer organization within the context of
outsourcing. Other members of the governance team should include someone who is expert in the area being outsourced,
such as IT, and representatives from areas such as finance, legal and sourcing.

Increasingly, buyers are relying on attorneys specialized in outsourcing to be trusted and experienced advisors not only
on the legal aspects of the transaction, but on value of governance, Sak says. “Outsourcing attorneys have an active
role in the creation, change, renewal, and demise of many outsourcing relationships, and can share the lessons-learned with
clients,” he says.

Outsourcing governance teams must be able to deal with change, in terms of the organization’s needs and how its
changing needs apply to the outsourcing arrangement. Governance “is an acknowledgement that change is inevitable over a
three-, five- or seven-year contract term, and instead of a futile up-front effort to contractually prescribe the result for
unknown events and market developments, productive relationship management focuses not on outcomes, but on the process of how to deal with change,” Sak says. “That’s effective governance.”

Information technology, particularly software that helps to automate the governance processes, can help governance
teams cope with change and should be a part of any organization’s governance strategy, Lepeak says. “We see a real need
for it; at a minimum information technology can help to automate a lot of mundane administrative activities such as tracking
service levels and reporting,” he says.

Typical outsourcing deals involve a huge amount of paperwork, and software tools can help organizations make the most
efficient use of information they gather as part of the governance process. Using software tools, organizations can “capture
data, such as contract information, and efficiently pass it to the outsourcing governance group,” Lepeak says. “Today this is
often done manually or on spreadsheets, and it’s potentially very error prone and not the best way to support governance.
Automating a lot of these activities frees up time and also reduces error rates.”

Effective governance can lead to several key benefits for outsourcing buyers. One is the ability to see whether the service
provider is consistently delivering on promises over the lifetime of the agreement, and whether the buyer organization
is actually getting what it’s paying for.

Another is that governance provides a set of guidelines for the outsourcing relationship. It also offers a forum for
dealing with legal and service level issues, and creates ways for buyers to measure the success of the relationship as business
conditions change.

Governance has become such an important factor in ensuring outsourcing success that some service providers profile
prospective buyers to make sure they have governance capabilities in place before signing a contract. “They don’t want to get
into a situation where the buyer doesn’t know what it’s doing,” Lepeak says.

What are the risks of not putting in place a strong governance program? Transaction failure and lost opportunity, Sak
says. “There are plenty of examples from early [outsourcing] adopters that did not know that governance was necessary for
successful relationships,” he says. “Many early generation outsourcing relationships are marked with misaligned commercial objectives, disincentives for collaboration, over-reliance on the contract, and mutual distrust—all leading to transaction
value leakage or worse, transaction dissatisfaction.”

Will Social Responsibility Ever Rival SLAs as Outsourcing Consideration?

Last summer’s recalls of products made in China — from pet food to children’s toys to toothpaste — had lots of folks pondering cultural differences in outsourcing relationships and how they relate to business ethics, as I blogged back in July.

But since then, such talk has died down. It still remains on the minds of decision-makers, however, based on the International Association of Outsourcing Professionals’ selection of socially responsible outsourcing as its top trend in the outsourcing industry for 2008.

Many companies will look beyond standard service contracts to include clauses related to how suppliers interact with their employees, their broader communities and the environment, predicts the IAOP. Says Jagdish Dalal, managing director of thought leadership:

More people are looking at the ethics statements of the companies they do business with to make sure their statements are congruent.

Some executives, such as Ron Kifer, the CIO of California’s Applied Materials Inc., are already doing so, reports Computerworld. Kifer says his company is developing guidelines as it goes along, making sure that its suppliers offer safe working environments and do not employ children. But he thinks standards will emerge, as more companies focus on ethical issues in outsourcing arrangements.

Not everyone agrees. Melissa Blakeslee, an attorney specializing in e-business and author of “Internet Crime, Fraud and Tortes,” tells Computerworld that few outsourcing customers are considering criteria other than costs, delivery times and data security. A few might ask about workforce diversity, says Blakeslee, because it’s standard corporate policy to ask all business partners about it. But, she says, “I have never seen it determine anything.”

Yet Kifer and several others interviewed in the article insist companies will pay more attention to ethical issues, as they do have the potential to impact partnerships. Companies that treat their employees well tend to experience fewer problems with retention, for example. Policies addressing ethical issues are “becoming a competitive advantage,” says Kifer.

All things being equal, we will select an organization that has a plan and demonstrates [a determination] to use a level of social responsibility that’s consistent with our goals and objectives.

Cultural differences are consistently cited as a cause of problems in outsourcing relationships, as in this Accenture survey from 2006. And business ethics are largely dictated by culture. So maybe looking for a similar level of social responsibility in suppliers, as Kifer does, is a good idea.

Offshore Management of IT Infrastructure Hot, Traditional Outsourcing Still Dominates Market, According to Everest Annual Report

Remote Infrastructure Management Outsourcing (RIMO) continues to be the darling model of the sluggish Infrastructure Outsourcing (IO) market, according to the Everest Research Institute’s IT Infrastructure Outsourcing (ITO) Annual Report. Despite the overall IO market’s slow growth, predicted to crawl at a four percent (CAGR) growth pace over the next five years, RIMO adoption is growing at approximately 60 percent annually and is predicted to reach US $8.6 billion by 2010. Although RIMO’s adoption rate is soaring, RIMO only comprises one percent of the overall IO market with the slow-growing traditional solutions making up 75 percent of all infrastructure outsourcing arrangements.

Eastern European Software Service Provider with Global Delivery Model

Luxoft, a global provider of high-end software application and product development services to clients such as Deutsche Bank, Boeing, IBM, UBS and others, today announced it has opened a new delivery center in Ho Chi Minh City, Vietnam. The opening marks the first time an Eastern European software service provider has established a presence in Vietnam. It also makes Luxoft the first outsourcing provider in its region to offer a truly global delivery model.

Platform-as-a-Service Even More Disruptive than SaaS; SMBs Likely to Lead Adoption

Posted by Ann All on April 15, 2008 at 11:28 am

I’ve often blogged about how SMBs were taking the lead in adopting software-as-a-service, which has been tapped by experts including Timothy Chou, author of “The End of Software,” as the most disruptive technology of the last decade.

Yet it’s beginning to look as if SaaS is just the tip of the disruptive technology iceberg. And SMBs will likely play a key role in the adoption of hosted software development platforms, dubbed “platform-as-a-service.” SMBs are expected to be big customers of such platforms, including Salesforce.com’s AppExchange, as well as creators of the applications sold through them, reports News.com.

Such platforms lower the barriers for entry for SMB software developers, since they won’t have to purchase servers and a software stack to run their applications. The CEO of Coghead, a new entrant to the platform-as-a-service market, tells News.com that his company’s Coghead Gallery service is geared more toward SMBs than AppExchange, which he contends is more appropriate for large independent software vendors.

Coghead’s platform is based upon Adobe Systems’ Flex and runs on Amazon’s Web Services (a pretty disruptive force itself, as I’ve blogged previously). About 30 Coghead partners are expected to offer apps for sale through the platform at its launch.

Salesforce.com is hardly Coghead’s only competition in the platform-as-a-service space. Where there is disruptive technology, Google will inevitably be found. IT Business Edge blogger Carl Weinschenk last week gave a detailed take on its new Apps Engine, calling it one of a growing number of services that “collapse the logical separation between a company’s internal structures and the world (or cloud) beyond.”

The industry will likely see more entrants soon. Colleen Smith, a VP at application infrastructure software provider Progress Software whom I interviewed earlier this month, told me her company is working with a number of large business service providers interested in offering vertical software applications to smaller service providers. She says:

So they have these business services, and maybe some applications they’ve acquired. In financial services, for example, they might want to offer loan origination, wealth management, some other types of payment processing capabilities. They are looking at packaging these software offerings – some of which they might own, some of which they may have built in-house, some of which might come from partners.

If I am the service provider, I can do the integration that’s required, bring together these solutions and offer them out to smaller customers that might not have been in my market before. I may have been selling complete BPO services before, but now I am also offering SaaS and giving customers the ability to say, “I will host and manage the app, but you can use it, and you can add and differentiate your own services to offer to customers of your bank.”

So in the model that Smith describes, SMB customers (vs. developers) would work with service providers rather than purchasing a hodgepodge of apps themselves through a platform like AppExchange or Coghead Gallery. This approach might be more appealing to SMBs, many of whom now enlist value-added resellers or systems integrators to help them handle any integration or customization chores.

The model is still developing, notes Smith, with questions remaining over branding, revenue sharing and other topics. But when details are sorted out, these vertical service provider networks could emerge as a logical new sales channel for SaaS, something that some experts (like Forrester Research analyst Michael Speyer, whom I interviewed last month) say is sorely needed.

Says Smith:

I think this will take off more in the 2009-2010 timeframe. It’s not really there today, but every vendor should be thinking about how they might play into this. The users, as they look at acquiring new applications, might consider whether there is another service provider they might look to for the applications they need.