In the early days of the outsourcing industry, CEOs usually made the decision without input from their data processing organization. That created a situation where the very concept of outsourcing was adversarial, according to John Harris, corporate vice president of marketing and strategy, EDS. That scenario, he added, has now changed extensively.
“Today, outsourcing is very well accepted, both at the executive level and within the CIO community,” said Harris. “Where it becomes adversarial is more if you have problems in the relationship, but the concept itself is not adversarial.”
He contends that conflict does not have to occur in an outsourcing relationship if both parties follow a strategy to avoid it.
“To make this work, you have to be able to meet strategic objectives which usually are set by the CEO, you have to meet the business objectives which typically are driven by the CIO, and you have to be able to meet the service delivery commitment which is really dealing with the day-to-day users,” said Harris. “If they get out of balance, then that’s typically what causes contention.”
The stage for maintaining that balance is set in the beginning of the relationship. Both parties should have an understanding of the competencies of each company, a clear definition of the roles and responsibilities of each, and an understanding of the work that should be done collaboratively to produce the desired result.
Harris sees the customer as having significant knowledge of their industry, their own company and their own culture. They own their business strategy, understand their business processes and the linkages between business strategies, business processes and information technology. A change in recent years on the customer side is that the CIO now performs new roles by being a member of the executive management team and having overall ownership for the information strategy of the organization.
The supplier, he said, is more focused on providing their unique industry insight and their perspective on the industry. They bring to the table the ability to process knowledge, work in a consultative fashion, and deliver a view on how technology can be used in an innovative manner within the client organization to implement the strategies set by the CIO. The final piece of the supplier side is the ability to manage the day-to-day service delivery process.
“When all those things come together,” said Harris, “I think you have a very effective relationship.”
In addition to the individual responsibilities, Harris looked at the work that should be done jointly, such as strategy integration, change management, IT architecture, and joint management of the user relationship. Beyond that, said Harris, “you ensure that there’s a good benchmarking in place and that you’re both doing the right things around relationship management with each other.”
Those factors, he said, are the keys to having a successful relationship that is not adversarial.
Gerald Gallagher, vice president of market relations, EDS, concurs. “This is borne out if you ask whether CEOs who outsource would continue to do so,” he said. I think they would all say a resounding ‘yes.’ There have been studies done on the subject, and they’re saying they’re getting strategic value or they’re getting their business value.”
The Benefits of Benchmarking
Both Harris and Gallagher are strong proponents of early benchmarking to establish both service levels and costs of internal operations. That process should be one of the first collaborative efforts by the customer and vendor, according to Harris.
“Benchmarking is a good mechanism to prevent an adversarial relationship from developing later around service level agreements,” he said.
“The important thing here is that both parties communicate and reach common levels of expectation,” added Gallagher. “If you establish a benchmark to start, then you’re both starting from the same level of understanding and expectation.”
Choosing the Right Manager
Another important element in success is the selection of the right internal person to manage the outsourcing relationship, according to Harris. That person, he said, has to believe in the use of outsourcing and the competitive advantage it provides. The individual selected also has to be skilled at partnership and change management.
“From our point of view,” said Harris, “a critical success factor is who is sitting on the other side of the table from you each day.” That person, he explained, has to have the ability “to develop and communicate an information vision for the company and work collaboratively with the outsourcer, just as they would have to work collaboratively with their own IT function to bring about the desired change.”
One problem that can occur is when a customer makes staffing decisions on a direct head count basis for budgetary responsibility. When a function is outsourced, the internal head count decreases, but the manager still has responsibility for the function. In those situations, some companies can elect to place a less capable person in the relationship management role, based on the number of people directly supervised. “What we’re suggesting,” said Gallagher, “is that we need to have a person who is capable of doing lateral management, who has partnership managing skills.”
Identifying Adversarial Situations
There are two situations where conflict is most likely to occur, according to Harris. The first is when new executive leadership takes over and wants to move the company in a direction other than the one contracted. The second is when service level agreements have not been defined sufficiently and the user community is not getting the value they wanted.
“It’s also probably true that this is where you have angst with an internal organization,” said Harris. “So it’s not always the outsourcer, it’s the IT function, where outsourced or not, that has some contention with the user organization or the management team.”
While that potential for conflict may be present, Harris believes that outsourcing relationships are not inherently adversarial.
“Today, done right, an outsourcing relationship is a good partnership,” he said. “It’s collaborative; it’s fulfilling the strategic imperatives of the company, their business objectives and, hopefully, their quality of service…When that occurs correctly, you have a great relationship.”
Lessons from the Outsourcing Primer:
- Unlike the early days of outsourcing, today conflict occurs around problems in the relationship, rather than the concept itself.
- The supplier must be able to meet strategic and business objectives, as well as satisfy service delivery commitments.
- Both parties should understand the competencies of each company.
- Benchmarking is a key factor in achieving success.
- Selection of the right internal manager is elemental to creating a relationship without conflict.