Sourcing and Selection

A quick analysis of outsourcing research from any number of sources over the years reveals that the drivers cited by organisations for outsourcing their IT services does not vary greatly, irrespective of the industry, client, service or year. The qualification being that whilst they may not vary in context, they do vary in priority or relevance according to the specifics of the organisations business environment at the time. A recent survey (Figure 1) from Vantage Partners cites several such drivers.

Drivers for sourcing IT services

Move fixed costs to variable costs Avoid capital investment Easier for management Other Get the job done quicker Lack of in-house resources Cut costs Focus on core competencies internally Better expertise than in-house 0% 10% 20% 30% 34% 40% 50% 60% 70% 80% 58% 8% 18% 34% 74% 17% 17% 32%

Percentage
Figure 1. From a 2010 study by US-based consultancy Vantage Partners Managing Outsourcing Relationships to Maximize Value. 2010

The indicators are, therefore, that outsourcing is not a declining phenomena and that more and more clients are using outsourcing as a management tool to deliver services to its internal and extended user base. Despite this consistency of purpose and the appreciable increase in client understanding, experience and maturity in their implementation of sourcing solutions, many are still not fully satisfied with the outcomes of their outsourced arrangements ... sometimes, with dramatic results. Over 13% of outsourcing contracts are brought in-house within the first 2 years Contractors turn over 40% of their contracts each year, on average Nearly 70% of outsourcing organisations feel their service provider does not adequately understand what they are supposed to do Buyers replace 80% of their service contractors in the first three years

Cherub Consulting Group Pty Ltd enquiries@cherubconsulting.com.au cherubconsulting.com.au

In order to reverse these results, it is essential that those considering outsourcing as a management tool should understand sourcing trends during the last two decades and leverage the sourcing lessons learnt to date. CHERUBs research indicates that the following characteristics must be addressed by any future sourcing arrangement that an organisation may implement: Contracts must become more adaptive. There is a shift from rigid contracts to adaptive contracts. Rigid contracts have limited mechanisms to address new requirements without huge financial penalties. Forward-thinking organisations are negotiating adaptive contracts to address the changing business and IT needs in a timely and cost-effective manner. Contracts must become true 3rd generation sourcing contracts. Third generation contracts are outcomes based, but also permit IT organisations to influence the way that Vendors deliver services. First-generation outsourcing contracts were based on IT organisations telling Vendors what and how to do their jobs. As a result, these outsourcing contracts did not yield the desired outcome in terms of improving business performance. Consequently, second generation contracts were developed. These contracts were outcome-based whereby Vendors are accountable for the outcome but have the freedom to perform their duties in the way they see fit. However, CHERUB observed instances where Vendors ignored the need to address certain cost-inefficiencies (e.g. server proliferation) as this was not impacting service levels. To combat this issue, forward-thinking organisations are establishing third generation contracts that are outcome-based, but also permit IT organisations to influence the way Vendors deliver services. This is achieved by IT organisations controlling the enterprise architecture, driving service quality programs and guiding Vendors to deliver realistic valueadd services. At the same time, they still recognise that Vendors can provide valuable insight and input into the development of processes and procedures that support their objectives and corporate policies. (For example, recommending solutions to enable business strategies more cost-effectively). Contracts must account for a multi sourced environment. Managing a multi-sourced environment has made outsourcing governance more complex. To address this requirement, CHERUB use Multi Vendor Interface Controls (MVI Controls) to define the rules of operations in a multi-sourced environment. The MVI Controls are ITIL compliant, suitable to be attached to tender requests and able to be constructed as a contract schedule. Service levels must become more business centric. There is a shift from IT-centric Service Level Agreements (SLAs) to business-centric SLAs. Business-centric SLAs should reflect business operations and produce business outcomes.

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Where do these characteristics sit in an agreement

CHERUB has incorporated these characteristics into existing sourcing arrangements (usually at the mid-term stage of the arrangement) and whilst these efforts have been successful, the degree of success is often limited by the degree to which the current contract can be modified. This is useful as an interim solution to address an immediate business requirement (budget constraint, consolidation program, alignment of two or more contract expiry dates, broader sourcing strategy etc) prior to a complete redraft of the contract and its schedules. For the most part, CHERUB have noted that there are six main schedules that interlink to give the sourcing arrangement its teeth and which, if designed together will incorporate all four of the characteristics described above. These schedules are depicted in the figure below:
Contract
Service descriptions Service Levels Agreement Pricing regime Risk / Reward Governance Reporting / monitoring

Figure 2. The Contracts primary schedule

Service descriptions - What do you want? Service descriptions are contained within the Statement of Work (SOW). The SOW must clearly define the nature, quantity and quality of services to be sourced and comprises a definition of the services, description of the service environment, the roles and responsibilities of the individuals associated with the services and any associated links to other schedules, such as the service level and reporting schedules.
Contract
Service descriptions Service Levels Agreement Pricing regime Risk / Reward Governance Reporting / monitoring

Service Level Agreements When, where and to what standard do you want the services? A Service Level Agreement (SLA) identifies the key performance measures that will be used to evaluate a vendor's delivery of the IT services. The overriding goal in developing SLAs is to focus the vendor's attention on the enterprise's most-important business requirements. Where possible, these SLAs should be aligned with business key performance indicators, although it is not always the case that this can be achieved and measured in a Balanced Scorecard context to ensure the vendor is managing and supporting all aspects of the clients business, not a single dimensional aspects, such as availability of servers.
Contract
Service descriptions Service Levels Agreement Pricing regime Risk / Reward Governance Reporting / monitoring

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Pricing regime What are you prepared to pay for the services? The pricing schedule describes the basis for pricing in addition to providing a resource usage model to forecast resources to be consumed over the term of the agreement. The schedule should provide a mechanism for projecting year-to-year pricing for associated resource volumes (e.g. support costs per server), by resource consumption units (e.g. Moves, Adds, Changes, Deletes - MACDs), and by class of service (e.g. critical, moderate, non important). Risk / Reward model If something is wrong, how do you want to be compensated? The Risk / Reward model is a necessary element to positively drive the vendor behaviours. It is tied to the SLA schedules and the Pricing Regime to focus the vendor on spot failures. The outcomes that should be achieved from a Risk / Reward model are: The vendor has strong incentive to ensure it meets performance hurdles for Service Delivery.
Contract
Service descriptions Service Levels Agreement Pricing regime Risk / Reward Governance Reporting / monitoring

Contract
Service descriptions Service Levels Agreement Pricing regime Risk / Reward Governance Reporting / monitoring

The client receives consistent high level service and has Service Delivery that meets business needs and objectives. The client reduces need to go to market as they have a high achieving the vendor. The vendor incentives to meet performance hurdles is measurable through the course of the year, and over the life of the contract. The client has a mechanism to focus the vendor on removing annoyances before they become an inhibitor (spot penalties).

Governance - Who is responsible and what are they responsible for? The content of the governance schedule describes the governance framework that the client and the vendor will follow to oversee and manage the vendors provision of the IT services. It describes how the vendor will interact and support the clients business, and documents how the two organisations will jointly manage the relationship and make decisions and is a critical document to formally establish this working relationship.
Contract
Service descriptions Service Levels Agreement Pricing regime Risk / Reward Governance Reporting / monitoring

Reporting / monitoring - How will the services be tracked and monitored? The content of all reports are developed and included in this schedule. Depending on the time available and the vendors understanding of their requirements, report layouts may not be included, as these may be agreed to be developed during transition. The frequency of reports is also included in this schedule, along with the intended recipients.

Contract
Service descriptions Service Levels Agreement Pricing regime Risk / Reward Governance Reporting / monitoring

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How to incorporate these characteristics into the agreement

These characteristics should not be considered mutually exclusive, meaning that the contract as a whole should be considered when implementing these characteristics into a future sourcing arrangement. The five major stages of the sourcing life cycle are depicted in Figure 3 below. One mistake we commonly see, is managers - including C-level executives - embarking on a sourcing initiative by interpreting the high-level stages of the sourcing life cycle as presenting a strict chronology of activity, that is Sourcing Strategy (1) through to Ongoing Management (5).
1 Sourcing Strategy

5 Ongoing Management

2 Go To Market

4 Negotiation & Selection Figure 3. Sourcing life cycle model

3 Evaluation Process

It is important to recognise dependencies between the major stages and to appreciate that excellence in stage 5, Ongoing Management, the longest duration stage of the cycle, will only be possible if the prerequisite capabilities are planned, prepared and established during the earlier stages. Figure 4 models our recommended order of activity as it might be represented in a high-level project network or flow chart. We highly recommend our clients consider the five stages in the order 1 5 2 3 4 when planning the work activities for an outsourcing initiative. We have found that doing so compels our clients to give appropriate early attention to the task of building the sourcing management capability.
Sourcing Strategy Activities

Go To Market Activities

Evaluation Activities

Negotiation & Selection Activities

Establish Sourcing Management Capability

Transition Activities

Ongoing Management Activities

Figure 4. Activities through the sourcing life cycle

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The diagram highlights the need to establish the sourcing management capability at the same time as progressing the Go To Market through Negotiation & Selection activities. Following the 1 5 2 3 4 mantra guards against the immediacy (and often, urgency) of activity for the other four stages causing deferment of action to build the sourcing management capabilities until too late. It helps to ensure adequate resource and time is allocated to planning, preparing and establishing the sourcing management capability.

Considerations to ensure value for money from your sourcing initiative

The cost of selecting a new vendor could, for some organisations, not only be a daunting activity, but may also seem to be a costly one. CHERUB research indicates that the total cost to evaluate and select a new vendor could range from 5 to 15% of the annual value of the deal. For a client, ensuring value for money from this investment comes down to focusing their efforts on a number of critical areas. Rigorous and relevant Go To Market document An incomplete or impractical Go To Market document (whether an Expression of Interest, Request for Proposal, or Request for Tender) can be a very costly component of the sourcing procurement process. More often than not, it's not the drafting and writing of the Go To Market document by a sourcing advisor that saves an organisation money. Generally it will cost a client considerably less to draft these documents themselves, however it's the reduction in cycle time that comes from issuing an accurate document to the market that is aligned to valid evaluation criteria that will ensure the greatest benefits to clients. Pricing intelligence Access to up-to-date benchmarking data will ensure an organisation can perform a "sanity check on fees, and appreciate the connection between the fees and service schedules. The ability to benchmark services also gives the client visibility of pricing that is out of line with the market; whether it is above market expectations, or a price that is irrelevant for the services being requested, usually as a result of a misunderstanding of the requirements, or assumptions being made that arent valid. Access to innovation The sourcing life cycle is indicative of a traditional approach to sourcing services. However CHERUB has also been involved in innovative methods and techniques designed to meet a clients less traditional needs. These techniques often accomplish the same results with less investment in time or money, but require greater client involvement or the use of new methods or tools, like collaborative vendor selection, dual negotiation, online RFP builders, evaluation tools, reverse bidding tools and business case templates. Focus For many clients, establishing an outsourcing deal is one of a long list of tasks and activities to be completed. It may rate high on their priority list, or, for the time being, not at all. For the most part, sourcing projects are time consuming and many times clients do not have the ability to dedicate sufficient subject matter expertise to the project. A clients internal team may be insufficient in number, may be inexperienced, may lack process methodologies, templates and

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tools or be unable to devote adequate time to the overall process. In this case, when they commence they find themselves at an immediate disadvantage and set their organisation on a collision course with any one of a range of sourcing problems later on that add unforeseen costs to the process. Negotiations If vendors enter into a deal that is very marginally profitable for them (or even worse, they are taking it at a loss on the hope of gaining profitable project work during the course of the contract), then often the outcome for the client is that over time, the vendor will provide minimal service in an attempt to recover their margins. A key element of successful negotiations is in developing a sound negotiation strategy prior to entering into formal negotiations. The negotiation strategy must: Identify the disputed parts of the contract and define the organisations position and alternatives. Provide fallback strategies. Establish an internal timetable of key events and dates critical to success. Determine the negotiation approach. For example, split negotiations into legal and commercial. Identify the preferred pricing model, opening price position and negotiation levels. Identify legal and commercial showstoppers that cannot be altered and those that can be negotiated.

While the standard terms and conditions are best left in the hands of legal counsel, the negotiation of the business terms are best performed by the client, an experienced advisor or a combination of the two to balance the internal knowledge of the organisation, against the external knowledge of the tricks and traps a vendor can use to structure the contractSLAs, metrics, clausesto its advantage. Transition When the dust has settled from the negotiation process, and the vendor and client negotiation teams turn their heads to home or their business unit, thats when the hard work begins. Transition covers the move to the selected sourcing arrangement, whether the move is from one vendor to another, from the vendor to in house, or from the vendors current arrangement to a new or revised arrangement. It is one of the areas that is often neglected in the sourcing process. Broadly, an implementation plan must be developed that covers transition for staff, establishing mechanisms to monitor service delivery, transfer of assets where applicable and phase-in of the new vendor. Activities that need to be undertaken during transition generally include: Detailed reviews of termination requirements and exit plans with the incumbent. Defining the work plan for the operational teams to implement. Establishing the project structure including the steering committee and management. Identifying the skills required for the project team.

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Contingency plan developed and put in place in the event of some form of service failure occurring during transition. Selecting and mobilising technical and operational teams. Developing a risk management plan from a legal and project perspective. Defining infrastructure/asset contract requirements. Defining HR requirements. Preparing the overall Transition Out Project Plan.

The importance of this detailed process cannot be overly stated, particularly as formal handover may take some time to phase-in from the time of contract signing, particularly if the sourced service: Is to be provided over a wide geographical area. Is complex. Requires a large amount of information to be exchanged between the vendors or the organisation.

Finally, after the transition is complete, the organisation should conduct an independent review of the transition and implementation to ensure all aspects of the new arrangement are in place and operating as agreed.

Conclusion
CHERUB uses its robust, proven approaches to assist clients to undertake the selection of vendors, technologies and vendors as part of an overall sourcing strategy, whilst managing the risks associated with this type of rapid advancement and business transformation. Whether implementing new systems, sourcing business process or IT services to augment an internal capability or to simply deliver bottom-line improvements, CHERUB is in a position to provide a range of end-to-end Sourcing and Selection Services. Using CHERUB, a client can expect to: Leverage from our experience in dealing with clients across the entire sourcing lifecycle process. Mitigate risks through use of best practice statements of work that clearly outline requirements and terms and conditions that protect the clients interests. Reduce their internal effort and costs by leveraging our templates, tools and methods. Optimise price/performance with specific contract terms including remaining at market prices throughout the agreement. Reduce future evaluation costs through knowledge transfer and experience gained from working with our team, that can be leveraged for future sourcing initiatives.

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CHERUB is a specialist advisory and consulting firm that brings together a rich heritage of experience and expertise in business and ICT management.

Our clients rely on us to deliver solutions that address their complex and challenging issues. We are about practical solutions combining specialist skills in Governance, strategy, performance management, sourcing and organisational change to make a real difference for our clients. Success for us is measured by our clients success. We pride ourselves on delivering real world outcomes and value-for-money.

We have significant capability and experience in helping clients with:

Sourcing and Selection, including advice and support through the entire sourcing lifecycle of Strategy, Go-to-market, Evaluation & Selection, Negotiation support. Vendor Management, including Governance and Service Management. Sourcing Price Benchmarking Strategic Planning, including Business Strategy, IT Strategy, Sourcing Strategy. Program and Portfolio Management, including complete lifecycle program and portfolio management support.

CHERUB
Our name stands out...... but its our people you will remember
For further information please contact us on enquiries@cherubconsulting.com.au For further information www.cherubconsulting.com.au
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