Are Savings Enough: A Framework for Deal Optimization

By Craig Nelson
Alsbridge Inc.

Summary
In the United States alone we spend over $100 billion per year on outsourcing and that number does not include transition and termination fees that result from deals that go south. If you are a CIO, transition executive or provider relationship manager you could be at risk if you are associated with a deal that does not deliver on the value proposition that precipitated the consummation of your contract. Alsbridge research demonstrates that while most organizations are satisfied with their provider’s performance, there are two factors that, if deficient, can spell disaster for any deal. These include governance and service level management.

The challenge with governance and service level management is generally focused around developing a workable relationship where hand-offs between the customer and provider organization are well defined and flexible. Where the retained organization has good governance processes that meet the needs of the partnership our research demonstrates that customer organizations are getting a bigger payback than organizations who flounder when in comes to governance. The frustration with service level management typically does not surface until a year or two into the deal and is further exacerbated when good governance practices are missing. In fact, Alsbridge data demonstrates nearly a one to one correlation between good governance and good service level management. Not really surprising. But what is surprising is the number of deals that continue to operate at significantly sub-optimal levels when there are tools and methods available to define the value leakage and to capture this value to the benefit of both the provider and the customer.

So what should you be looking for in a tool to help you optimize both your contract and your relationship? Any good tool will include three key areas of evaluation and metrics which are aligned to demonstrable market best practices

1. Contract Management,
2. Operational Management, and
3. Relationship Management.

Let’s take a brief look at all three areas of evaluation:

Contract Management
Contact management includes an assessment of:

Scope:

• Does the contract address the scope of services for each service area?
• Are responsibilities and key hand-offs between the client and the provider addressed in a responsibilities matrix?
• Are unit volumes defined in such a way as to make it possible to evaluate what is being delivered at what price?
• Are cross functional services by service area defined (such as security services coordination)?
  

Flexibility:

• Is the contract term specifically stated?
• Are the number and length of extensions clear?
• How are annual adjustments for inflation addressed and handled?
• Is there a specifically outline process for Additional Resource Consumption and Reduced Resource Consumption adjustments?
  

Governance:

• Are governance board responsibilities specifically defined?
• Are relationship management assessment processes defined?
• Are monitoring and reporting processes well developed and operable?
• Is there a requirement for an annual service alignment review?
  

Financials:

• • Are contract pricing mechanisms easy to understand, linked to unit volumes and transparent?
  • Are billing and invoicing processes developed and process in place for issue resolution?
  • Is there a feature for continuous improvement and price reductions?
  • Are regular external price benchmarking and SAS 70 compliance reviews included?
  

Operational Management
Operational management includes an assessment of:

Reporting:

• Are reporting process and data capture activities for all required levels of the organization required?
• Are there process for checking the consistency and accuracy of reporting?
• Do service level agreements (SLAs) define metrics for measurement and are SLAs limited to those that can truly be measured?
• Are fees at risk and earn back provisions included to create real incentives for service provider performance improvement?
  

Business Quality Improvement:

• Are quality improvement processes defined to align practices of both the client and the provider organizations?
• Is HR involved in improving the capabilities and competencies of the retained organization?
• Have retained jobs been redesigned and are employees clear about their new roles in the new organization structure?
• Are their process for transition and knowledge capture and transfer that include Lean Six Sigma champions?
  

Security and Compliance:

• Is the provider specifically required to implement and comply with security protocols?
• Are processes in place to evaluate security compliance as an SLA?
• Is there a process for identifying and mitigating risks?
• Are both the provider and the client motivated by real incentives to achieve business continuity compliance?
  

Relationship Management
Relationship management includes an assessment of:

Cultural Alignment:

• Does the relationship demonstrate and understanding of differing points of view?
• Does the relationship recognize and reward superior performance from both the client and the provider?
• Does the relationship focus on reliable delivery on commitments by both parties?
• Does the relationship reflect the ability to adapt thinking and approaches to business needs?
  

Operational Alignment:

• Does the relationship maintain clear lines of organizational operating authority?
• Does the relationship engage in team building to discover new ways to optimize the employee capabilities on both sides?
• Does the relationship promote an understanding of contractual terms and service requirements?
• Does the relationship require evaluation of interactions between the client and the provider?
  

Strategic Alignment:

• Does the relationship demonstrate high levels of collaboration in helping the business achieve more than cost reductions?
• Does the relationship promote attracting and retaining key talent and resources through joint talent management methods?
• Does the relationship promote the capture of intellectual capital and make it readily available to both client and provider employees?
• Does the relationship effectively use resources outside the company to achieve strategic objectives?
  

While the first two areas; Contract and Operational Management are more quantitative and tangible, Relations Management is a qualitative factor. IT and business professionals often struggle with the need for relationship management because anything to do with a relationship is often considered too soft to have any financial impact. Don’t be fooled. Our research shows that 20% to 40% of the value realized from the sourcing contract hinges on good relationship management.

As you read through the factors above, you most likely found yourself answering the questions within the context of your outsourcing relationship. If this is the case, you may have found that your Contract Management, Operational Management and Relationship Management practices could be improved. Don’t feel you are alone if your practices don’t fully stand-up to the best practices test you have just taken. The real question is; are you going to do anything about it and why should you?

Why should you is easy; because if you don’t your sourcing relationship could leave anywhere from 40% to 70% of the value potential on the table. This translates into millions of real dollars not to mention the intangible costs of operational and employee inefficiency on the both the provider and client sides.

It is well worth the investment to take a look at how you are managing your contract, operations and relationship. The rewards are significant.

About the authors
Craig Nelson may be contacted at craig.nelson@alsbridge.com

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