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ERP and other IT services has become a common practice for many
businesses. With OneNeck, each customer solution is uniquely designed to boost the performance of existing IT
systems while minimizing costs."
Source : OneNeck
Outsourcing Best Practices—A Primer on Outsourcing Governance
Outsourcing is also known as :
Outsourcing Best Practices,
Help Desk Outsourcing,
As described by Mike Atwood, Principal of the Everest Group in his
article The Art of Governance: “An outsourcing relationship is like a
marriage. The romance of the courtship or the airtight codicils of the
prenuptial agreement do not contribute to the ongoing strength of the
And when it comes to the vitality and longevity of today’s successful
outsourcing relationship — based on a mutual governance framework
— it is wise to fi rst look back on the evolution of outsourcing.
The escalating reliance on IT in the past 20 years has brought an entirely
new dynamic to virtually every business, regardless of size. The way in
which IT infrastructure is managed has taken on increasing importance.
So too has the relationship between managers of IT and managers of
operational business groups. Today’s CIO and teams of IT managers
need to run a cost-effi cient organization and build an infrastructure that
will ultimately help the company increase sales. It’s a classic investmentspending
scenario. Indeed, a fair amount has been written in recent
years about the differences between the mindsets of business managers
and the IT managers who work for or with them or their outsourcing
partners. Regardless of philosophical differences, it’s diffi cult to dodge
the inevitable question: “Who knows best?”
In their management-mandated quest to reign in IT costs, IT executives
turned to outsourcing as an effective way to run a state-of-the-art
operation without breaking the corporate bank. In many ways,
outsourcing is the optimal solution to the problem. In an effective
outsourcing relationship, IT organizations can focus on strategic issues
and goals, while the outsourcing partner takes on the operation and
maintenance of some or all of the company’s systems. With outsourcing
came the need for effective governance to ensure an appropriate level of
control and oversight of a third party provider.
This white paper focuses on ways to eliminate the dangerous question
of “Who knows best?” by suggesting ways in which companies can
effectively select a compatible outsourcing partner who understands
both parts of the equation — business and technology — and create
a governance environment that fosters a successful outsourcing
We believe that the recipients of services should be
able to trust the motivations of the provider of those
services. This sounds easy but is in reality, very hard
THE NEED FOR GOVERNANCE
As technology has evolved and become increasingly pervasive, there isn’t
a business function that isn’t in some way enabled by technology. The
point at which business fi nds itself today is one of “IT is the business,”
and vice versa. IT cannot be viewed any differently than the fundamental
business processes on which the organization operates.
In fact, IT is now as integral a part of business as is fi nancial reporting,
manufacturing processes or even chairs and desks. In the coming years,
it’s possible that the roles of CIO and COO will become one in the same,
and IT capabilities will ultimately dissipate into the organization as
fundamental operating skills required by any executive. This complete
integration of IT into the business causes information to become the
driving force, not any specifi c technology.
To ensure that IT outsourcing companies — who operate with a
tremendous amount of responsibility in our new age of compliance and
oversight — are indeed working to further the interests of their partners
and not just themselves, companies often create a framework within
which the outsourcing partner must perform. It’s within the bounds of
this outsourcing governance framework that many relationships will
either succeed or fail.
Since the 1980s, there’s been a great deal of discussion and posturing
on both sides of the company-outsourcer fence regarding the structure
of outsourcing governance. However, we’ve learned that all the rules in
the world won’t ensure the successful deployment and management
of an outsourced relationship. Clearly, the need for effectively defi ned
mechanics and service levels is important, but all those checks and
balances are only as good as the cultural alignment of the two partners.
OneNeck has developed a fairly simple defi nition of cultural alignment
through our years of providing outsourced information technology
services to mid-market businesses. We believe that the recipients of
services should be able to trust the motivations of the provider of those
services. This sounds easy but is in reality, very hard to achieve.
Although it’s often misunderstood, outsourcing is not a new concept.
The fi rst supply and demand relationship was effectively the outsourcing
of a specifi c set of functions. When you purchase a packet of frozen
peas at the grocery store, you have effectively outsourced the growing,
harvesting, packaging and delivery of those vegetables. It’s just another
case of demand aggregation equating to improved price-performance,
predictability and quality of service. Or at least that’s what it should be.
Many have read the historical and projected statistics for failed
outsourcing relationships, as well as the myriad of cited reasons. The
bottom line is that IT outsourcing is a maturing industry that requires
vendors and customers to recognize the fl uid relationship dynamics
required to drive a successful partnership.
The skills needed to manage an outsourcing vendor are most likely
different from the skills required to run your current IT department.
Obviously, the more complex your needs, the harder it is to ensure
price-performance, predictability and quality of service on the part of the
outsourcer. That’s the primary reason for ensuring cultural alignment and
a clear process of governance.
THE GOVERNANCE PROCESS
Toward the goal of creating a powerful outsourcing governance
environment, we see three distinct phases in the lifecycle of building
a trust-based relationship: selection of a vendor, establishment of the
process and living within the ongoing partnership.
WHEN SELECTING A VENDOR
- Be informed on both sides. The process of governance needs to
start at the selection phase. When selecting a vendor be sure to
include criteria specifi cally targeted at governance. Also, work hard to
understand your vendor’s business model. If they cannot convey how
their business makes money, how could they possibly build a longterm,
winning scenario for you? And if you believe your prospective
outsourcing partner doesn’t understand your business, then keep
- Check your vendor’s references. Not the ones they want to give you
but the ones they don’t want to give you — tell potential vendors you’d
like to speak with ex-customers. Review the potential vendor’s recent
press releases and look at the dif-ferent stages of their customer
relationships: transitioning, steady state or contract term expiration.
Instead of asking for three references, ask for the complete customer
list and select customers that you believe most closely match your
- Look in the mirror — objectively. Consider how your IT department is
viewed internally. Is it a department of business-savvy IT professionals
who are aligned to the primary objectives of your organization? If
it’s not, is that what you’re looking to fi nd in an outsourcing partner?
Do parts of your team function more effectively than others?
Understanding what you have is the lion’s share of defi ning what you
It’s also important to fully understand what your customer — the end
user — wants from IT. Is IT viewed positively and as being successful
in your company? Is IT a strategic enabler or a necessary evil?
The answers to these questions are essential clues to fi nding the
best outsourcing vendor for your needs, and not simply taking the
recommendation of one company.
- Turn back to plan ahead. When considering how best to manage your
outsourcing services vendor, you should revisit why you decided to, or
why you are considering outsourcing in the fi rst place. This primary
motivation should then be able to be tracked through all aspects of
Is your primary motivation strategic transformation? Or is it improved
quality of service, cost containment, or a combination of the above?
With these factors in mind, does your planned or current governance
strategy support those objectives?
For example, if your primary motivation is strategic transformation, how
are you going to measure the success of that transformation? When are
you going to measure it? And what happens if your goals aren’t reached?
These are all factors that play a role in creating a successful, long-term
outsourcing relationship with realistic expectations and well-defi ned
metrics for measurement in place.
ESTABLISHING THE GOVERNANCE PROCESS
As you work to establish your governance process, align on the principles
behind specifi c goals. As with compliance, the best governance
structures are built on principles and guidelines instead
We believe the governance process should not just be focused on
the quality of specifi c services, or the contract terms and conditions.
It should prevent value erosion, and the preservation of the end
user experience. So, as you work to establish and maintain cultural
alignment, don’t build a structure that motivates your outsourcer to
merely satisfy the contract as opposed to satisfying the customer and
delivering value beyond the statistics.
That said, effective measurements are critical. But keep in mind that
these programs need to exist to support the primary motivation for
outsourcing, which in almost all cases will be to support the company’s
business model and overall corporate goals.
Following are a number of mechanical and tactical aspects that you
should consider wrapping within your governance process, and some
questions you should be asking in each area:
Customer care model — Be sure to clearly articulate your
expectations when it comes to customer care. How often will there be
communication? How many customer managers will be assigned to your
account? What kind of reporting structure will be in place? How fl exible
is the outsourcing partner in terms of adapting their structure and
processes to your needs?
Service Level Agreements (SLAs) — The foundation of your
services package will be the SLA. It should defi ne the process, service
levels, checks and balances, and reporting mechanism for your IT
outsourcing agreement. Ask how your SLA will be monitored, and if you
have independent access to a dashboard or other monitoring system.
Typical SLAs consist of various availability or performance metrics. Also,
consider the inclusion of softer SLA components such as number of end
user complaints, effective escalation adherence, etc.
Quality of Service reporting (QoS) — What kinds of standards will
your agreement be measured against? Are you able to defi ne your own
metrics for QoS, or are they all established by the outsourcing vendor?
What time frames are involved in the reporting process, and what kinds
of problem resolution structures are in place?
Adherence to IT best practices — Ask your prospective provider
if they adhere to IT best practices. If so, what’s the authoritative source
for these practices? All too often, IT providers will claim they follow best
practices when what they actually follow are the best practices they’ve
been able to develop internally, An example of an authoritative source of
best practices is the IT Infrastructure Library (ITIL), a globally recognized
series of documents that are used to aid the implementation of a bestpractices
framework for IT Service Management.
Problem resolution — Has your prospective outsourcing partner
developed clearly defi ned issue identifi cation, escalation, resolution and
communication processes? Is the extent of your desired involvement in
the problem resolution process understood and clearly documented?
In OneNeck’s experience, an exemplary problem management process
(and the customer’s trust in the process) is a key driver allowing IT
management to focus on “strategic” priorities. These processes should
go beyond what’s normally included as part of your SLA, and are a key
component of building and maintaining a harmonious relationship for the long-term. The outsourcing vendor’s approach to problem resolution
must align with your business needs.
Cultural compatibility — Beyond understanding the nature of your
business, your outsourcing partner must understand and be compatible
with your corporate culture, regardless of the size of your company. The
mechanics of governance are only as good as the cultural compatibility
between the customer and the vendor.
Resilience of communication — Another aspect of ensuring
continued alignment is a multi-level communications framework.
A successful communication structure is best served by multiple
interaction points at varying levels of seniority between the client and the
Face-to-face meetings — As in any good relationship, there’s
no substitute for frequent, face-to-face meetings. If the outsourcing
partner isn’t geographically close, work out a schedule in advance for
meetings and protect those dates. Video conferencing and collaborative
online meetings can also go a long way toward fostering open, honest
Senior leadership involvement – On both sides of the partnership
the involvement of strong, senior leadership is paramount to a successful
governance program. It’s only through this involvement that the needs
of the business can align with the service delivery program. Both parties
must communicate on a strategic, not cost-center basis.
Key functional users — Your outsourcing partner must possess
a fundamental knowledge of your primary business processes that
are supported by the enterprise systems your business uses, such as
enterprise resource planning (ERP). Unquestionably, you’ll want to
partner with an outsourcing fi rm that has a solid understanding of
the functional aspects of these complex systems, and recognizes the
strategic importance they hold for your business as well.
Advocacy — Does your outsourcing vendor have a separate
management structure for customer advocacy in addition to internal
operational execution? One person wearing many hats may sound
good for economies of scale and price-performance, but it will cost you
intimacy with your vendor.
Flexibility — A vendor needs to be able to react to the changing
needs of customers. While most vendors are very fl exible with regard
to expansion of services, few are equally fl exible when it comes to
accommodating change or reduction of services. This is a key factor to
the longevity of a relationship.
LIVING WITHIN THE PROCESS
The four critical components for living within the process are leadership,
cost, fl exibility and business metrics:
First and foremost, outsourcing elements of your IT infrastructure or
operations doesn’t mean that the need for innovative leadership goes
away. Too many businesses entering into outsourced relationships
underestimate the on-going management commitment associated
with governance. Ensuring the involvement of the same strong leaders who helped create the outsourcing agreement is critical to effective
governance and the continued alignment of principles.
Secondly, since lowering the cost of delivering IT services is often a
driver for outsourcing, the outsourcer must deliver services below
the cost of what a company can do for itself, while still maintaining a
profi t. Obviously, the reason a vendor is able to provide improved priceperformance
is demand aggregation and predictability of demand.
Major swings in demand present diffi cult business issues for the vendor
to solve. And their ability to take change in stride should be taken into
consideration when setting expectations or crafting the mechanism of
Also, keep in mind that fl exibility — along with customer intimacy and
effective governance — is a two-way street. An integral part of cultural
alignment is understanding the fact that you are effectively creating an
extension of your own business within the outsourcer’s organization. If
you treat it as such you will get signifi cantly more value than approaching
the transaction in an arm’s length manner.
Lastly, revisit your primary business objective for outsourcing on
a frequent basis. Create a non-SLA based score card approach to
monitoring those objectives and ensure that your business does not lose
sight of the original motivation. Without metrics in place, after many
years into a relationship it’s easy to forget those objectives and trend
towards a dysfunctional transactional approach.
The cardinal sin of outsourcing governance is one of focusing entirely
on the mechanics and the price. By doing that you’ll be missing the true
potential of the relationship. So spend the time and effort required to
ensure an effective governance process, but don’t lose sight of the fact
that without cultural alignment with your vendor, you’ll only be creating
ground rules for debate, not agreement.
At OneNeck, we believe that governance in and of itself will not align
IT to the business. Strong business leadership at the head of the
governance mechanism is key. You can view it in the same context of IT’s
role within business. The governance process — like IT — is a power tool
to be wielded by a competent business leader.
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