Today most companies do not do a good job of managing multiple service provider engagements. This can be troublesome as service providers have become more adept at providing multiple IT and BPO services to companies, which often include vendor-type relationships for hardware and software sales as well. When a company’s procurement organization, outsourcing governance office, vendor management organization, and enterprise outsourcing center of excellence each have contact with a service provider for different purchasing and services, there will always be a chance that one organization will not know what the other is experiencing from a services and cost perspective. The result is poor management that can mean fragmented contact with the provider and missed opportunities to leverage and coordinate these relationships.
Companies often have trouble managing vendor/provider engagements for the following reasons: internal politics, conflicting department and employee roles and incentives, lack of consistent governance process, or lack of awareness of the value of a common view. Another layer of complexity is added for global companies that must determine whether the operations (and contracts) are managed in a centralized or decentralized manner. To ensure that engagements with service providers are effectively managed to prevent value leakage, companies must have a strategy. This article outlines the steps for creating such a strategy and the internal organization required to ensure success.
There have been significant changes to the service provider landscape over the last few years, particularly as sourcing engagements and the process of outsourcing has matured. Prior to the M&A activity among service providers in recent years, IBM was the only provider that a company could source hardware, software, and services. The recent mergers of HP with EDS, Perot Systems with Dell, and Xerox with ACS, for example, have now made it possible to make vendor purchases of hardware and software from the same company that is providing managed services and consulting services. In this new world, we see even more potential interfaces with a single company, which involve significant expenditures. What if these provider relationships fall outside information technology? It is common to have managed services and staff augmentation in IT with a service provider that also offers services in the business process outsourcing (BPO) space for services such as finance and accounting or engineering (as is the case with India-heritage providers and those previously mentioned).
THE MANAGEMENT OF SERVICE PROVIDERS
How should enterprise service provider management work in today’s market and how can it be undertaken tomorrow?
It is generally more effective to integrate the contracts for managed services and staff augmentation when working with a single provider under one master services agreement (MSA). Staff augmentation as a working method, especially in application development and maintenance, never fully goes away in our experience. However, integrating the contracts for both types of support ensures common pricing for resources and a single set of terms for working with the provider. In an arrangement where consulting is anticipated, the consulting fees can be negotiated in the rate card. That way all services can be handled as work orders or statements of work, rather than separate engagements covered by different terms. Regardless of the common MSA, it will still likely fall to different entities within the enterprise to manage different elements of the relationship.
The organizational roles outlined in figure 1 are likely to continue to exist for a long time in the enterprise, and, as a result, the collection of data about the provider relationships will continue to occur in various places, which means valuable performance and costly insight could be lost. Staff augmentation and arranging for consulting services may be managed by procurement, vendor management in IT will continue to manage hardware and software purchases, the outsourcing governance office will manage the service governance, and the enterprise functions will advise. This leaves significant opportunity for lost information about the provider performance.
Each organization will have to determine where various types of sourcing will be managed between the four entities described above, and there is no single right answer. With that in mind, the various stakeholder groups at the enterprise and business level should collaborate as an information coalition to agree on an approach to a “Balanced Scorecard for Sourcing.” This would allow both a view into individual service provider enterprise performance and comparatively into the portfolios of various providers working within the enterprise. Each organization must determine the high-level values they want to measure; a good starting place is the example below, which is based on the Kaplan and Norton Harvard research on a balanced scorecard for enterprise. This aggregation of data is intended to be seen in several views, from the combined results of engagements with a single provider, to a comparative review across providers delivering related services, or an overall enterprise view of outsourcing management, capability, and results. The idea is to provide both reporting of past performance and predictive indicators of future performance. By thinking of the outsourcing relationship in this way, it is possible to have early warning of problems and clear ways to create improvement and value. (See figure 2.)
When the various stakeholding groups agree on the high-level key performance indicators (KPIs), they must then agree on a way to translate the data elements coming from the various engagements into the target Balanced Scorecard for Sourcing metrics and which group will own and share this final data. This agreement will lead to several accomplishments:
- Discipline and common practice at the engagement level to capture and manage data relevant to that project—service levels, satisfaction, risk, spend value, innovation, and so forth.
- Aggregation of key performance indicators that can be trusted, which gives an enterprise-view of a provider’s overall performance.
- Ability to view providers delivering common services in context with each other.
- Highlights of areas where leverage (for both positive and negative reasons) may be possible.
- Information for the company’s various governance teams about which providers rate the best (and worst), which ultimately influences future strategy development.
There are frequently some barriers to this solution that companies still must resolve for themselves:
- Where is the data aggregated?
- Can data be aggregated manually, or will a new system be required?
- Can all the stakeholders be relied upon to create timely and trustworthy data?
- Can all the stakeholders agree on who owns the data?
- Will the company take advantage of this knowledge and act on it?
- Who has the authority to take action?
- Can a third party help with the data management process?
There is plenty of room in the future for continued development of sourcing maturity. Companies must accept that this type of collaboration is a continuous improvement process that will take time to implement, but the resulting strategic information and budget management capability is worth the effort and investment.