The Sourcing Agreement
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The Sourcing Agreement

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CHERUB has leveraged sourcing lessons learnt to date and have incorporated these into its existing sourcing arrangements. For the most part, CHERUB have noted that there are six main schedules that......

CHERUB has leveraged sourcing lessons learnt to date and have incorporated these into its existing sourcing arrangements. 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 that depict a successful sourcing agreement.

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  • 1. Sourcing and SelectionA quick analysis of outsourcing research from any number of sources over the years reveals thatthe 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 notvary in context, they do vary in priority or relevance according to the specifics of the organisation’sbusiness environment at the time. A recent survey (Figure 1) from Vantage Partners cites severalsuch drivers. Drivers for sourcing IT services Move fixed costs to variable costs 32% Avoid capital investment 17% Easier for management 17% Other 8% Get the job done quicker 18% Lack of in-house resources 34% Cut costs 74% Focus on core competencies internally 58% Better expertise than in-house 34% 0% 10% 20% 30% 40% 50% 60% 70% 80% PercentageFigure 1. From a 2010 study by US-based consultancy Vantage Partners Managing Outsourcing Relationships to Maximize Value. 2010The indicators are, therefore, that outsourcing is not a declining phenomena and that more andmore clients are using outsourcing as a management tool to deliver services to its internal andextended 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 fullysatisfied with the outcomes of their outsourced arrangements ... sometimes, with dramaticresults. 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 Page 1 of 9
  • 2. In order to reverse these results, it is essential that those considering outsourcing as amanagement tool should understand sourcing trends during the last two decades and leverage thesourcing lessons learnt to date.CHERUB‘s research indicates that the following characteristics must be addressed by any futuresourcing 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 value- add 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. Page 2 of 9
  • 3. Where do these characteristics sit in an agreementCHERUB has incorporated these characteristics into existing sourcing arrangements (usually at themid-term stage of the arrangement) and whilst these efforts have been successful, the degree ofsuccess is often limited by the degree to which the current contract can be modified. This is usefulas an interim solution to address an immediate business requirement (budget constraint,consolidation program, alignment of two or more contract expiry dates, broader sourcing strategyetc) 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 thesourcing arrangement its “teeth” and which, if designed together will incorporate all four of thecharacteristics described above. These schedules are depicted in the figure below: Contract Service descriptions Service Levels Agreement Pricing regime Risk / Reward Governance Reporting / monitoringFigure 2. The Contract’s primary scheduleService descriptions - What do you want?Service descriptions are contained within the Statement of Work (SOW). ContractThe SOW must clearly define the nature, quantity and quality of services to Service descriptionsbe sourced and comprises a definition of the services, description of the Service Levels Agreementservice environment, the roles and responsibilities of the individuals Pricing regimeassociated with the services and any associated links to other schedules, Risk / Rewardsuch as the service level and reporting schedules. Governance Reporting / monitoringService Level Agreements – When, where and to what “standard” do you want the services?A Service Level Agreement (SLA) identifies the key performance measures Contractthat will be used to evaluate a vendors delivery of the IT services. The Service descriptionsoverriding goal in developing SLAs is to focus the vendors attention on the Service Levels Agreemententerprises most-important business requirements. Where possible, Pricing regimethese SLAs should be aligned with business key performance indicators, Risk / Rewardalthough it is not always the case that this can be achieved and measured Governancein a Balanced Scorecard context to ensure the vendor is managing and Reporting / monitoringsupporting all aspects of the client’s business, not a single dimensionalaspects, such as availability of servers. Page 3 of 9
  • 4. Pricing regime – What are you prepared to pay for the services? ContractThe pricing schedule describes the basis for pricing in addition to providing Service descriptionsa resource usage model to forecast resources to be consumed over the Service Levels Agreementterm of the agreement. The schedule should provide a mechanism for Pricing regimeprojecting year-to-year pricing for associated resource volumes (e.g. Risk / Rewardsupport costs per server), by resource consumption units (e.g. Moves, GovernanceAdds, Changes, Deletes - MACDs), and by class of service (e.g. critical, Reporting / monitoringmoderate, 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 Contractvendor behaviours. It is tied to the SLA schedules and the Pricing Regime Service descriptionsto focus the vendor on “spot” failures. Service Levels Agreement Pricing regimeThe outcomes that should be achieved from a Risk / Reward model are: Risk / Reward  The vendor has strong incentive to ensure it meets performance Governance hurdles for Service Delivery. 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 Contractframework that the client and the vendor will follow to oversee and Service descriptionsmanage the vendor’s provision of the IT services. It describes how the Service Levels Agreementvendor will interact and support the client’s business, and documents how Pricing regime Risk / Rewardthe two organisations will jointly manage the relationship and make Governancedecisions and is a critical document to formally establish this working Reporting / monitoringrelationship.Reporting / monitoring - How will the services be tracked andmonitored? ContractThe content of all reports are developed and included in this schedule. Service descriptionsDepending on the time available and the vendor’s understanding of their Service Levels Agreementrequirements, report layouts may not be included, as these may be agreed Pricing regime Risk / Rewardto be developed during transition. GovernanceThe frequency of reports is also included in this schedule, along with the Reporting / monitoringintended recipients. Page 4 of 9
  • 5. How to incorporate these characteristics into the agreementThese characteristics should not be considered mutually exclusive, meaning that the contract as awhole should be considered when implementing these characteristics into a future sourcingarrangement. 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 asourcing initiative by interpreting the high-level stages of the sourcing life cycle as presenting astrict chronology of activity, that is Sourcing Strategy (1) through to Ongoing Management (5). 1 Sourcing Strategy 5 Ongoing 2 Go To Management Market 4 Negotiation 3 Evaluation & Selection ProcessFigure 3. Sourcing life cycle modelIt is important to recognise dependencies between the major stages and to appreciate thatexcellence in stage 5, Ongoing Management, the longest duration stage of the cycle, will only bepossible if the prerequisite capabilities are planned, prepared and established during the earlierstages.Figure 4 models our recommended order of activity as it might be represented in a high-levelproject network or flow chart. We highly recommend our clients consider the five stages in the order 1  5  2  3  4 whenplanning the work activities for an outsourcing initiative. We have found that doing so compels ourclients to give appropriate early attention to the task of building the sourcing managementcapability. Sourcing 1 Strategy Activities 2 3 Negotiation & 4 Go To Market Evaluation Selection Activities Activities Activities Establish Sourcing Management Capability 5 Transition Activities Ongoing Management ActivitiesFigure 4. Activities through the sourcing life cycle Page 5 of 9
  • 6. The diagram highlights the need to establish the sourcing management capability at the same timeas progressing the Go To Market through Negotiation & Selection activities.Following the 1  5  2  3  4 mantra guards against the immediacy (and often, urgency) ofactivity for the other four stages causing deferment of action to build the sourcing managementcapabilities 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 initiativeThe 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 evaluateand 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 effortson a number of critical areas.Rigorous and relevant Go To Market documentAn incomplete or impractical Go To Market document (whether an Expression of Interest, Requestfor Proposal, or Request for Tender) can be a very costly component of the sourcing procurementprocess.More often than not, its not the drafting and writing of the Go To Market document by a sourcingadvisor that saves an organisation money. Generally it will cost a client considerably less to draftthese documents themselves, however its the reduction in cycle time that comes from issuing anaccurate document to the market that is aligned to valid evaluation criteria that will ensure thegreatest benefits to clients.Pricing intelligenceAccess 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 tobenchmark 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 beingrequested, usually as a result of a misunderstanding of the requirements, or assumptions beingmade that aren’t valid.Access to innovationThe sourcing life cycle is indicative of a “traditional approach” to sourcing services. HoweverCHERUB has also been involved in innovative methods and techniques designed to meet a client’s“less traditional” needs. These techniques often accomplish the same results with less investmentin time or money, but require greater client involvement or the use of new methods or tools, likecollaborative vendor selection, dual negotiation, online RFP builders, evaluation tools, reversebidding tools and business case templates.FocusFor many clients, establishing an outsourcing deal is one of a long list of tasks and activities to becompleted. 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 theability to dedicate sufficient subject matter expertise to the project. A client’s internal team maybe insufficient in number, may be inexperienced, may lack process methodologies, templates and Page 6 of 9
  • 7. tools or be unable to devote adequate time to the overall process. In this case, when theycommence they find themselves at an immediate disadvantage and set their organisation on acollision course with any one of a range of sourcing problems later on that add unforeseen costs tothe process.NegotiationsIf vendors enter into a deal that is very marginally profitable for them (or even worse, they aretaking 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 inan attempt to recover their margins.A key element of successful negotiations is in developing a sound negotiation strategy prior toentering into formal negotiations. The negotiation strategy must:  Identify the disputed parts of the contract and define the organisation’s 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 negotiationof the business terms are best performed by the client, an experienced advisor or a combination ofthe two to balance the internal knowledge of the organisation, against the external knowledge ofthe tricks and traps a vendor can use to structure the contract—SLAs, metrics, clauses—to itsadvantage.TransitionWhen the dust has settled from the negotiation process, and the vendor and client negotiationteams turn their heads to home or their business unit, that’s when the hard work begins.Transition covers the move to the selected sourcing arrangement, whether the move is from onevendor to another, from the vendor to in house, or from the vendor’s current arrangement to anew 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, establishingmechanisms to monitor service delivery, transfer of assets where applicable and phase-in of thenew 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. Page 7 of 9
  • 8.  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 handovermay take some time to phase-in from the time of contract signing, particularly if the sourcedservice:  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 ofthe transition and implementation to ensure all aspects of the new arrangement are in place andoperating as agreed.ConclusionCHERUB 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 risksassociated with this type of rapid advancement and business transformation.Whether implementing new systems, sourcing business process or IT services to augment aninternal capability or to simply deliver bottom-line improvements, CHERUB is in a position toprovide 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 client’s 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. Page 8 of 9
  • 9. CHERUB is a specialist advisory and consulting firm that brings togethera rich heritage of experience and expertise in business and ICTmanagement. 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 it’s our people you will remember For further information please contact us on enquiries@cherubconsulting.com.au For further information www.cherubconsulting.com.au Page 9 of 9