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Sourcing Management: What’s the Problem? A CHERUB White Paper byMark Probyn and John Liburti CONTENTS Introduction .................................................................... 3 What do we mean by ‘Sourcing Management’? .............. 5 Who‘s to be Managed? ................................................... 9 Critical Success Factors ................................................. 10 Conclusion .................................................................... 10
Sourcing Management: What’s the Problem?Introduction Second Generation Sourcing DealsThe Australian market for outsourced IT These deals were outcomes focussed andservices has grown significantly and matured began to move away from the constraints ofsince outsourcing gained wide-spread the monolithic contract. Second generationacceptance as an operational business tactic deals no longer attempted to dictate what toin the 1990’s. The pre-eminent IT industry do and how to do it to the provider. Instead,research and advisory firm Gartner has they focussed on specifying what wasforecast growth to continue in calendar 2008 required in terms of service levels andwith the Australian outsourcing market performance outcomes, leaving it to theexpected to grow by 4.7% to a total value of provider to determine how best to deliver toA$10.9 billion1. those requirements.Outsourcing is also gaining increased Enterprises also began to unbundle theacceptance in Australia for business functions service portfolio into discrete domains ofbeyond IT with Business Process Outsourcing service such as desktop services, service desk,forecast to expand significantly in the coming applications development services, etc.;years. creating the option of awarding each to (potentially) different service providers. InIn Australia, as in other countries, first addition, the contract period has in manygeneration IT outsourcing deals were mostly cases been shortened to five years or less.monolithic in nature. The contracts focussedon codifying what to do and how to do it. Unbundling the service portfolio allowedTypically the deals were high dollar value, smaller, specialist service providers to bid forsingle vendor contracts for a range of bundled contracts; increasing price competition andIT services over a long-term (5 years or more) providing an avenue for more tailoredcontract period. services to be sourced. The multi-vendor approach has removedDissatisfaction much of the inflexibility of the first generationThese first generation deals often ran into deals. Shorter term contracts for individualproblems over the life of the deal with the service domains can be more readilycontracted work proving too inflexible to renegotiated in response to changing businessrespond to changing business needs. The needs than can monolithic long-term deals.monolithic nature of the contract also made it Too often however, enterprises found thatdifficult for individual service lines to be second generation deals fell short ofrenegotiated or removed from the whole. expectations. Providers often lacked incentiveThose and other problems initially resulted in to innovate in ways that could grow thevery high levels of dissatisfaction and efficiency and effectiveness payback to thedisappointment with the outcomes of recipient enterprise if they could deliver theoutsourcing. contracted levels of service without doing so.In response to the problems and lessonslearnt, a second generation of deals evolved. 3|P ag e
Sourcing Management: What’s the Problem?In many instances problems emerged or were As a consequence of the second and thirdacerbated as a result of service level generation approaches, plus more mature andrequirements having been specified from an realistic expectations and objectives on theIT-centric perspective. For example, service part of enterprises, satisfaction with serviceperformance targets in relation to performance and deal outcomes has lifted.requirements for overall application server Another contributor to this lift has beenavailability or first-call resolution of incidents improved service delivery and clientby the service desk could be met but the management processes on the part of servicebusiness impacted adversely through an providers.individual application server incurringexcessive downtime or the root cause ofincidents remaining unaddressed. Despite this liftThird Generation however, enterprisesSourcing Deals According to a study completed in 2006 by often believe they could achieve better resultsThese and other US-based consultancy Vantage Partners than they have to date,lessons learnt have working in conjunction with Cutter and we at CHERUBgiven rise to the Consortium, BT’s Vital Vision Program and agree.current, third EquaTerra, almost all of the nearly 200generation of deals. study participants comprising outsourcingThird generation buyers, providers and influencers agreed One contributing factordeals remain that at least 15% of the total outsourcing we see is that in a multi-outcomes focussed contract value is at risk if the deal is not vendor environmentbut provide there is greater well managed. The majority of participantsmechanisms for the complexity in managing – 80% of buyers and 60% of providersenterprise IS the relationship believed that 80% or more of the contractorganisation to between the variousinfluence the way in value is at risk. external providers aswhich providers well as between thedeliver services. providers and the internal service customers.Outcomes are often expressed as a balance Service management is more complex andbetween the business and IT perspectives. difficult by several orders of magnitude.Business-centric service levels are supported Enterprises have also realised that regardlessby the more traditional IT-centric of whether operating with a single servicerequirements. provider or multiple providers, the contractThird generation deals are a hybrid of the alone is insufficient to ensure delivery of allpreceding generations of deals and continue desired outcomes and objectives. Thethe unbundling of service portfolios and contract must be supported through effectiveembracing multi-vendor scenarios that management of the sourcing arrangement oncommenced with the second generation. a holistic basis. 4|P ag e
Sourcing Management: What’s the Problem?Ongoing Problem As Figure 1 illustrates, effective sourcing management interacts with and influencesHowever, our observations and experience both the service recipient and the servicetell us that to this day the scope of the provider.sourcing management function is often notwell understood by many enterprises. Figure 1 Five Capabilities of Sourcing ManagementAll too often sourcing management is thoughtto be little more than some form of enhanced Servicecontract or management. Perhaps with a Performance Managementmeasure of vendor relationship managementbolted on. ChampioningIf enterprises do not fully appreciate the Relationship Service Management Provider(s) Recipientsscope of the sourcing management function Innovation Service Servicechances are that they will do less than isrequired to fully manage their outsourcingdeals.At best, service users may be left dissatisfied Contract Service Administration Financialwith the services they receive. Worse still, & Management Managementdeal-specific and sourcing strategic objectivesmay be put at risk and ultimately businessstrategic objectives compromised. We believe each of the five capabilities to be important and all must be present if enterprises are to succeed in realising maximum potential from outsourcingWhat do we mean by ‘Sourcing arrangements.Management’? Unfortunately, a thorough discussion of eachAt CHERUB we define sourcing management of the five capability domains is beyond theto be comprised of five primary capabilities: scope of this white paper. As is detailing the Relationship Management; full set of competencies, skills and levels of Service Performance Management; proficiency required for excellence in sourcing Service Financial Management; management. Nevertheless we do offer the Contract Administration & Management; following overviews of what we consider to be and most important in each capability and some of Championing Service Innovation. the key competencies required. Please note that the lists of competencies are notWe believe the key to achieving excellent intended to be exhaustive.results from outsourcing deals and realisingthe enterprises sourcing strategy objectives isexcellence in the discipline of sourcingmanagement. 5|P ag e
Sourcing Management: What’s the Problem?Relationship Management Service Performance ManagementThe goal of excellent Relationship Performance Management is the process ofManagement is to foster and maintain a actively monitoring, measuring, reporting andharmonious, collaborative and cooperative providing feedback on the quality, timelinessworking culture between the enterprise’s and levels of the contracted services.people and the service provider’s people. The Excellence in performance managementtwo sides, service provider and recipient, requires a continuous and proactivemust be encouraged to come together and approach. The goal is to promote servicework as a single team. excellence from the provider.An adversarial relationship is to be proactively It is not enough to rely solely on formal,guarded against and actively discouraged. periodic measurement and reporting ofHistory tells us that in the absence of highly service levels in accordance with the metricscompetent relationship management the two and reporting frequency laid out in thesides are likely to become increasingly contract statement of works and service leveladversarial over the life of the contract. A agreements.soured relationship will have unfavourable It is essential to remain balanced in theimpacts on all aspects of the deal with direct appraisal and to maintain awareness of thecost to the enterprise. As found in a study by division of responsibilities between theVantage Partners et al2, at least 15% of the enterprise and the service provider.total outsourcing contract value is at risk if thedeal is not well managed. Key CompetenciesKey Competencies Investigative, analytical and interpretive competencies Emotional intelligence Numerical and statistical abilities Self awareness Information and record keeping abilities Self management Social awareness Capacity for thoroughness and attention to detail Leadership Service domain knowledge – especially of Negotiation, mediation and conflict IT service support and delivery process Resolution standards such as ITIL3 and also of the IT Communication – especially aural and systems deployed. verbal Negotiation, mediation & conflict Persuasion, influence and advocacy resolution Facilitation Communication – aural, verbal and Constructive criticism – both giving and written taking Auditing abilities Constructive criticism – both giving and taking 6|P ag e
Sourcing Management: What’s the Problem?Service Financial Management Communication – aural, verbal and writtenService Financial Management is concerned Adherence to policies and procedureswith the ensuring the smooth and timely flowof quotations, statements, invoices, payments Auditing abilitiesand remittance advices for services renderedby the provider.In enterprises with a policy of recharging the Contract Administration &business units for services they consume, the Managementfinancial management function of sourcing This capability deals with controlling andmanagement may also be responsible for supervising the maintenance and execution ofsupervision of that recharge process. the agreement in accordance with theAwareness of, communication about and contract terms and conditions; includingadherence to relevant policies and procedures compliance monitoring and reporting.is essential. So too is awareness, The function also embraces negotiating,communication and adherence to the documenting and communicating any changescontracted requirements in respect of to contract sections such as statements ofcontrolling the financial aspects of the works, agreed service levels, financialagreement and of the respective parties arrangements, contract party responsibilitiesresponsibilities. and general contract terms and conditionsExcellence in service financial management that may be required during the life of therequires proactive monitoring of the agreement.processes concerned to ensure that queries or Excellence in contract administration andprocedural delays emanating from either the management is to avoid over-reliance on theenterprise or from the service provider are codified content of the contract document.communicated immediately and resolvedquickly. An appropriate balance needs be found between reliance on and strict enforcement of the letter of contract on the one hand, andKey Competencies interpreting the spirit of the agreement on the other. It is more likely that allowing both Knowledge of financial accounting and parties sufficient but managed flexibility in accounting processes and procedures keeping with the spirit of the agreement will Numerical abilities result in the best possible outcomes than not Information and record keeping abilities doing so. Capacity for thoroughness and attention to detail Excellence in the other four sourcing management capability domains is essential Negotiation, mediation and conflict to achieving excellence in contract resolution administration and management. Investigative, analytical and interpretive competencies 7|P ag e
Sourcing Management: What’s the Problem?Key Competencies continually on the lookout for such opportunities and to bring ideas to the table. Emotional intelligence Self awareness Key Competencies Self management Social awareness Emotional intelligence Self awareness Legal literacy and comprehension Self management Knowledge of business and commercial Social awareness practices Leadership Knowledge of applicable regulatory Lateral thinking requirements and contract law Change catalyst - the ability to initiate, Information and record keeping abilities manage, and lead in a new direction Capacity for thoroughness and attention Communication – aural, verbal and to detail written Negotiation, Mediation and Conflict Persuasion, influence and advocacy Resolution Facilitation Communication – written, aural and Investigative, analytical and interpretive verbal competencies Adherence to policies and procedures Service domain knowledge Ability to identify risks and consider Enterprise business value chain and impact, likelihood and mitigation tactics process knowledge Auditing abilities Negotiation, mediation & conflictChampioning Service Innovation Resolution Constructive criticism – both giving andNothing remains static. During the life of the takingoutsource service agreement the business ofthe enterprise will change leading to changedservice needs. Likewise, the service providerwill change; new or more sophisticated toolsand process will become available andcomponent costs of systems and labour usedto support and deliver the contracted serviceswill change.Championing service innovation is aboutrecognising and seizing opportunities forenhancing the efficiency and effectiveness ofcontracted services that changingcircumstances may throw forth. It is evenmore about encouraging and facilitatingothers, be they persons in the enterprise orpersons from the service provider, to be 8|P ag e
Sourcing Management: What’s the Problem?Who‘s to be Managed? Figure 2 depicts the communication paths between the four groups and the sourcingWe identify four stakeholder groups that the management function. Sourcing managementsourcing management function needs to acts to foster, facilitate and channel openactively consider and work with; two on the communication between the groups.service recipient side and two on the providerside. On the surface, each stakeholder group wants the same thing: “...the service deal to work toThe four groups are: the satisfaction of all”. Below the surface Enterprise senior management – the however things get complicated. persons sponsoring and responsible for The four groups’ requirements and aims can the sourcing strategy; and often do conflict. Particularly, and to no End user community – the persons within one’s surprise, between the stakeholders on the enterprise who actually use the the recipient side versus those on the contracted services on a day-to-day basis; provider side. More subtle conflicts can and Senior management of the service do exist between the stakeholder groups on provider – the persons responsible for each side of the recipient/provider divide. profitability of the deal at the vendor enterprise; and There-in of course lays the challenge. It is the role of sourcing management to understand Service delivery and support agents of the the competing requirements and aims, provider – the persons responsible for the manage them, and drive the service provider day-to-day operational supply of the to maximise their performance. contracted services. Figure 2 Four Stakeholder Groups to Manage Service Recipient Service Provider Enterprise Vendor Senior Senior Management Service Management Performance Management Championing Relationship Service Management Innovation Contract Service Administration Financial & Management Management Vendor Service Service End-Users Delivery Agents 9|P ag e
Sourcing Management: What’s the Problem?Critical Success Factors 3. Recognise that no one person is likely to possess all of the competencies and skillsWe offer the following critical success factors required for excellence in sourcingas key takeaways in summation of the above management. Be prepared to provide thematerial. five capabilities through several persons.1. Understand the five capabilities that 4. Recognise the existence of the four comprise the sourcing management stakeholder groups and be aware of their discipline. competing requirements and aims.2. Recognise the importance of excellent 5. Proactively work with the members of all sourcing management to realising four groups in order to drive the desired expected service outcomes and enterprise outcomes from your specific outsourcing objectives. deals and realise your enterprise’s sourcing strategy objectives.ConclusionAs the use of outsourcing grows and broadens into business processes and other non-IT functions itwill become increasingly important that the dollars invested contribute maximum economic benefitto the enterprise. That is, that the sourcing deals work and fully deliver to objectives.Enterprises will not be able to concentrate fully on core, value-adding activities if they are beingunnecessarily distracted, or worse still, hobbled by poor service performance and inadequateoutcomes from those services they have chosen to source externally.Our experience tells us that many enterprises fail to fully appreciate what is required to effectivelymanage sourced services. Too often sourcing management is thought of as little more than simplymanaging the vendor to the contract terms and conditions.We define sourcing management to be comprised of five primary capabilities: Relationship Management; Service Performance Management; Service Financial Management; Contract Administration & Management; and Championing Service Innovation.Effective sourcing management requires all five capabilities to be present and for the sourcingmanagement team to understand and proactively work with each of the four stakeholder groups wehave identified: Enterprise senior management – the persons sponsoring and responsible for the sourcing strategy; End user community – the persons within your enterprise who actually use the contracted services on a day-to-day basis; Senior management of the service provider – the persons responsible for profitability of the deal at the vendor enterprise; and 10 | P a g e
Sourcing Management: What’s the Problem? Service delivery and support agents of the provider – the persons responsible for the day-to-day operational supply of the contracted services.In the second white paper of this tri-part series on the subject of Sourcing Management we willexplore the drivers and behaviours of the four stakeholder groups and provide our insights into howto influence and motivate all four groups, especially those on the service provider side to deliverexcellent service outcomes.Whilst business satisfaction with the outcomes from outsourcing non-core services has increased inrecent years, greater satisfaction and better outcomes is sought and can be achieved.The key is excellence in the discipline of sourcing management. 11 | P a g e
CHERUB is a specialist advisory and consulting firm that brings together a rich heritage of experienceand expertise in business and ICT sourcing and vendor management. Our clients rely on us to deliversolutions that address their complex and challenging sourcing and vendor management issues.We are about practical solutions – combining specialist skills in governance, strategy, performancemanagement, with our know-how in IT sourcing, vendor and contract management and programassessment and benefits realisation to provide our clients with a comprehensive and powerfulbusiness advisory asset.We provide the thought leadership, guidance, proven methodologies, templates and tools to helpour clients navigate through complex sourcing initiatives, and actively work with them to mentorand coach their procurement leaders and key staff to maximise the benefit from established vendorand supplier relationships.Our core services include: Strategic Planning services Sourcing and Selection services Vendor and Service Management services Benchmarking services Program and Portfolio Management services Contact details Mark Probyn John Liburti email@example.com firstname.lastname@example.org +61 419 376 411 +61 403 484 948 email@example.com www.cherubconsulting.com.au1 Gartner Research, 20082 Study completed in 2006 by US-based consultancy Vantage Partners working in conjunction with CutterConsortium, BT’s Vital Vision Program and EquaTerra of approximately 200 participants comprisingoutsourcing buyers, providers and influencers3 IT Infrastructure Library - ITIL is best practice in IT Service Management, developed by the UK Office ofGovernment Commerce and supported by publications, qualifications and an international user group. ITIL isthe most widely accepted approach to IT service management in the world.