Keeping outsourcing on target

Chief information officers spearheading IT outsourcing deals with global vendors have been urged to invest up to ten percent of those contract values to keep project outcomes – and their careers – on track.

Industry experts speaking to iTnews in advance of the CIO Strategy Summit this month say CIOs should not overlook the value of developing and maintaining strategic vendor relationships as the IT departments of Australia’s largest enterprises become increasingly outsourced.

“Choosing a vendor and outsourcing is really just the tip of the iceberg,” according to consultant and former Westpac chief technology officer Sarv Girn.

“You may have outsourced your actual work, but at the end of the day, the accountability [for delivering IT services] lies with the CIO.”

Research from analyst firm Gartner indicates that organisations should expect to spend a minimum three percent of outsourcing contract values on the relationship each year, and up to three times that amount in cases where the outsourcer is expected to deliver more than a commodity service.

The money might be used to cover the costs of management time, travel, any dedicated relationship managers and communications – for example, telepresence systems or services.

"If you sign a deal for $5 million, $50 million or $100 million, some percentage of that needs to be spent on managing the deal and the relationship,” Gartner vice president and distinguished analyst Rolf Jester says.

"That percentage will vary, we think, probably from three to five percent for pretty straightforward sorts of deals - maybe sometimes even less it it's really just a commodity kind of service - through to more than five percent of the contract per annum, but still in single digits, if there are complexities like offshore services.

"If the deal is a little less structured because you don't know what outcomes you want until you've done a certain amount of work, then it might grow towards the very low double digits."

Westpac knows the level of investment required for the upkeep of its relationship with outsourcing vendor, IBM.

Girn recalls attending quarterly governance meetings with the bank’s group technology executive Bob McKinnon and senior IBM executives as part of a long-term outsourcing partnership, worth US$2.3 billion as of December 2010.

Despite the price tag, he sees the meetings – alternately held in Australia and the US – as a necessary part of outsourcing to global vendors, and critical to developing and maintaining visibility into IBM's strategy and product roadmaps.

“A lot of CEOs baulk at [the cost of meetings] but those vendors control your future as a CIO,” says Girn, who will address the CIO Strategy Summit on August 30.

“Because we’re so far away in Australia as a country, you need to go and reach out to [vendor partners]. Not many senior executives come through to Australia.”

Breaking innovation barriers

Gartner’s Jester says regular international meetings, such as those attended by Westpac's IT executives, are particularly important in contracts where some form of innovation is expected.

"We know a lot of customers sign up for what they think they're going to get in 'innovation'," he says, explaining that outsourcing deals tend to seek either efficiency, enhancement or transformative outcomes.

"We find that an enormous number of customers are unhappy with the fact that they are not getting, or think they're not getting, this elusive innovation."

Regular, scheduled meetings between the senior and middle-level executives of the customer and outsourcer are one way "to do something proactive about innovation".

"Some of the best practices [for outsourcing] involve innovation workshops where consultants are brought in, and the future, the needs of the business, what's coming down the pipeline in terms of technology, and what other people are doing, are looked at and discussed," Jester says.

"Sometimes you do that back at the ranch, sometimes you do it at the vendor location. Sometimes it helps to go to the vendor's headquarters or to one of their technology centres."

Girn says that Australian firms may find it challenging to influence vendor roadmaps without committing to regular meetings. He sees them being particularly worthwhile.

“Australian CIOs should not underestimate how much clout they have”, he says, explaining that vendors tended to group Australia alongside emerging markets in the APAC (Asia Pacific) or BRIC (Brazil, Russia, India and China) regions.

“If [business in those regions] grows, it makes [the vendor] look better."

Read on to page two for some tips on preventing relationship breakdowns.

Aside from investing in the relationship to achieve outcomes, effective vendor management is also about minimising the risk of the types of service delivery failures that fill highlight reels for outsourcing.

Organisations have been outsourcing business processes, applications and IT management for decades, with shared service provision falling in and out of fashion since as far back as the 1960s.

Whether fairly or not, outsourcers have borne the blame for service delivery failures in some of Australia’s largest organisations in recent years.

Late last month, Commonwealth Bank staff pointed the finger at HP EDS for a patch that brought down its customer service platform, desktops and servers.

Qantas blamed long-time partner Amadeus for a series of check-in system outages that delayed thousands of passengers in November 2009 and January 2010.

And in June 2010, Queensland Health reserved the right to seek damages from IBM for a payroll bungle likely to cost the state $1.25 billion to fix.

Girn says the spotlight on outsourcing has made supplier management a make-or-break characteristic of modern CIO careers.

He advocates a structured approach to sustainable vendor management, underpinned by four “golden rules”: maintaining a strategic relationship; operational oversight; commercial oversight; and having the right internal skills to get the most out of outsourcing deals.

While different parts of an organisation could be accountable for each of the “rules” – with the CIO overseeing strategy, human resources developing internal capabilities, and procurement teams overseeing operations and commercial aspects of contracts, for example – he says there should be a single point within the organisation responsible for the deal as a whole.

One such point could be the “vendor management office”, a multidisciplinary unit gaining favour in organisations like Westpac, HSBC and AT&T, and charged with managing and facilitating contracts on the basis of strategic relationship, service delivery and commercial obligations – three of Girn’s four “golden rules”.

Girn’s alma mater, Westpac, last year revealed that it had spent some $500 million over four years to establish a new “multi-sourcing” strategy that would replace a “dysfunctional”, all-encompassing IBM contract with shorter deals with a greater number of specialist vendors.

The bank spent about a year building up a new team of commerce, legal and finance experts for a vendor management unit that spun out of its chief technology office in late 2011. Its efforts were recognised this March, when Westpac and IBM won an industry award for the “best sourcing relationship in IT outsourcing”.

Don’t forget your staff

Girn’s fourth “golden rule” is one best addressed by organisations’ human resources experts: developing a suitable in-house capability to complement – but not duplicate – outsourced work.

Earlier this month, Qantas completed a major restructure that saw it redefine about 100 roles with a greater emphasis on procurement and supplier management, after recognising that it had come to rely on outsourcers for 80 percent of its IT, but still had staff duplicating what suppliers were contracted to do.

Girn warns that large-scale – and costly – IT organisational restructures are often the result of neglecting internal skill requirements when striking outsourcing deals.

“What usually happens is that you sign an outsourcing contract and the CIO quickly cuts the size of the team,” he says. “If the outsourcer isn’t performing, [the CIO will then] increase the size of the team to compensate.”

He recommends the establishment and inclusion of internal contracts as part of organisations’ IT outsourcing strategies, so business units’ areas of responsibility and any changes in scope are clear.

iTnews is the official media partner of the CIO Strategy Summit, which will be held at Gold Coast's QT Hotel from August 28th - 30th.