The customer/outsourcer relationship: benchmarking value
The relationship between organisations and their service providers is not unlike a marriage. All is fine until it isn’t – when communications break down and service delivery starts to suffer. Both parties feel unfairly treated so the marriage guidance counsellors come in and the contracts come out. When it comes to information technology things are even more complicated. Because the IT landscape is complex and multifaceted, inefficiencies and delivery blocks can arise anywhere along the process flow from the enterprise to the service provider.
The ‘Value for Money’ question
In our work with corporates, the public sector and their IT service providers, we find recurring themes. Customers feel they are not getting value for money and/or that they have lost control of the relationship. Providers say they are being forced to accept lower and lower margins while still being expected to deliver a premium service. In addition the cost to support customer environments is increasing due to the number of legacy systems or equipment that are in place where investment has not taken place for many years. Many information silos exist and poor communication is prevalent – these are issues that the end customer often underestimates or does not even consider need attention or investment.
We are often called in to assess the situation because both sides are looking for an independent view with no hidden agenda: someone who has enough IT expertise to identify where the problems lie and how to fix them, enough industry knowledge to know if corporates are paying fair market prices for IT services and enough business acumen to advise on procurement strategies, sourcing alternatives and contract governance. This last is crucial since service level agreements (SLAs) can easily misrepresent the requirements, favour the supplier or leave the door open for downstream “cost creep” – worded in a way that is less than clear to the customer.
One recent example we discovered when reviewing an SLA for a client stated that the provider could “either” deliver a cost-efficient OR a quality service. Which begged the question: what was their attitude towards delivering “Value for Money” as a code of good business practice and how would this be defined?
Fortunately such instances are the exception to the rule. For the most part we find that clients and their suppliers just want things to succeed (deliver to expectation) and to maintain a healthy relationship. While some call us in only at the point where services have failed and supplier dealings have reached an impasse, many others realise that the best way to ensure a fully functioning environment is by completing regular and proactive IT health-checks, routine relationship management and good overall IT governance.
One of our large company clients has made good outsourcer relations a science. Every 18-24 months they call us in to benchmark both their in-house teams and their main IT service provider against the previous baseline and peer comparisons to see:
- if recommended improvements from the previous study have been implemented;
- what benefits that has delivered;
- are they achieving an acceptable level of ‘value for money’ from their service provider? And
- what areas need to be fixed or optimised to ensure continuing outperformance.
While the client typically initiates the benchmark study, their provider co-operates fully and both work together to implement the recommendations, committed to the idea of continuous improvement. A fitting analogy is that the customer is the pilot, the outsource provider the co-pilot and benchmarking comprises a number of the dashboards used to guide the flight path. The reason it works so successfully for this particularly client, is that these bi-annual studies are based on evidence-based metrics that are delivered by an independent, non-aligned source.
A relationship reset
Looking at it from the outsourcer’s perspective, one of our service provider clients, who had been fighting an uphill battle with a large customer for some time, called us in to help rescue the relationship. Much of the problem lay with the contract which was littered with “sticks” and penalty clauses but few “carrots” or rewards (terms insisted upon by the customer who had been burned by a previous outsourcer) to the point where the supplier had become dis-incentivised. The client was counting every “bean” in response to which the provider was charging on a line item basis. The result was a mutual feeling of distrust. We were commissioned to undertake an independent assessment, and suggested the contract be rewritten on the agreed principle that both sides focus more on quality outcomes and less on itemised accountability.
What do we mean by that? If you want a house built you expect to pay so much for a particular specification, not to be billed for every brick and bag of cement along the way: you assess ‘value for money’ on the basis of an overall cost in relation to quality of result. Today the relationship is transformed and the service provider has value-added its way to an influential role as primary advisor, having taken the time and trouble to learn the customer’s business, and is now undertaking initiatives proactively.
Contract as culprit
We’ve mentioned that what is in a contract and how it is worded can lead to lack of clarity, suspicion and relationship breakdown – but it is also vital to look at what is not in the contract. A customer may be lulled into a false sense of security when potential extra costs are not mentioned, so it usually better to spell them out from the start. This is particularly important because any project changes or additions that not included in the original specifications may at a later date be deemed ‘out of scope’ and therefore subject to further charges, which in turn can easily lead to cost creep, negative surprises and relationship breakdown. Scope increases and decreases, therefore, need to be considered carefully within any agreement.
At the same time there needs to be some elasticity in the contact. For example, say the volume of calls into the Service Desk suddenly increases by 20 per cent (usually because the company is expanding). In such cases, the customer needs to know how much change the contract can absorb before prices need to be renegotiated.
Efficiency starts at home
Sometimes we find a client is paying more than they should for their outsourced IT services, or that service delivery levels have indeed fallen below par. This may not always be the outsourcer’s fault. The customer may have old hardware, applications and networking kit that haven’t been refreshed in many years and have become inefficient and expensive to maintain. Or they may have a hybrid in-house and outsourced IT environment but lack the resources and experience to ensure a seamless integration between both environments, which results in bottlenecks and poor communications. Smaller companies often have this problem and because of their low volumes of activity can find themselves moved to the back burner when it comes to responsiveness by their provider. In such cases general IT outsourcing may not be the best way forward and may be best confined to specific tasks like printer or telephony support – sometimes called ‘out-tasking’ rather than ‘outsourcing’.
Just as often, however, when we are called in to analyse whether clients are receiving value for money from their providers, it turns out that the outsourcer has lowered their standards, padded the contract with extra (and often unnecessary) items or have gone onto auto-pilot and allowed the hosted environments to become obsolete, cumbersome and inefficient – as can easily happen with long-term relationships. This is why we always recommend that outsourcers are regularly and independently benchmarked for price/performance and that SLAs are routinely reviewed by someone who can understand them and ensure that terms are customer-centric and positioned for optimum results.
M&A: sorting out the suppler jungle
There is one situation virtually guaranteed to provide headaches all round: when a merger or acquisition has taken place. The acquiring company finds itself inheriting a mixed bag of service contracts many of which are redundant and which – in the case of a large organisation – often involve many hundreds of different service lines. In these scenarios things can quickly fall between two stools, get spun off to different locations and/or become fragmented. Take for example, Hosted Application Services. Someone may be handling the hardware while a different provider is responsible for the communications platform. Another outsourcer may manage the data centre while yet another supports the applications. The problem here is that there is no overarching end-to-end ownership of the IT environment. The answer? One option is to appoint a single prime contractor and give them incentives to sort out the mess.
One of our larger clients recently found itself in a similar situation and asked us to help identity which of the myriad of inherited contracts they should a) break (and pay the penalty); b) allow to expire naturally – typically in two or three years’ time; and c) they actually needed to retain to support core services. Working out the ‘least cost’ outcome of these options was not a simple task given the complexities of two organisations integrating their IT environments, and the disparate nature of the suppliers and their contract specifics. Ultimately the problem was solved by crunching a lot of data and by creating a series of ‘what if’ scenarios using virtual modelling tools.
We began this article looking at some of the issues that can erode the relationship between organisations and their outsourcers and how to address these, including the application of independent evidence-based metrics to assess the question of ‘value for money’ – a loaded question that too often viewed subjectively, and very differently, by customers and providers. We’ve indicated how a neutral and knowledgeable approach to contracts and communications can defuse often complex and deep-seated problems and help both sides reset damaged relationships. We’ve also looked at how unbiased benchmarking can provide the fact-based guidelines needed for both organisations and their providers to first tighten up their own ship and then embark together on a journey of continuous improvement for the benefit of both.
Paul Michaels is Managing Director, ImprovIT Consulting, a UK-based independent business technology consultancy that specialises in metrics-driven analysis and price/performance benchmarking of IT costs, performance and quality aimed at providing evidence-based roadmaps for improvement.