Consider the Source

Should You Sue Your Offshore Outsourcing Provider?

By Cynthia Batty, Global Competency Lead, Governance Services Advisory, TPI

That’s the provocative and interesting question posed by a recent CIO magazine article.  If you listened to your business stakeholders, you’d sue them every time the smallest thing went wrong! In fact, while most companies never sue their outsourcer (whether onshore or offshore), many clients are unhappy, and that unhappiness is often caused as much by the lack of clear governance process as it by the provider’s service failures.

Contract language to address major breaches is important, but most problems result from the nagging little things – projects taking too long, people turning over too quickly, watermelon service levels (green on the outside, red on the inside), issues that don’t get resolved for months – that wear down the relationship and cause deep frustration and emotional distress.

After more than twelve years in the business as both a client and an advisor, I’ve come to believe that the single most important governance process a relationship can have is a defined Issue Resolution process that allows any stakeholder from either party to document issues and problems without engaging in emotion or conflict. Characterized by a crisp “resolve or escalate” mechanism that creates documents and artifacts along the way, Issue Resolution prevents problems from sitting around and festering for a year before a CIO hears about them – we have seen that happen more than we’d like to admit.

An issue resolution process is generally not spelled out in a contract, but is part of a Governance Manual that is identified at a high level in the Governance exhibit in the contract, and generally developed by the parties after the contract is signed. The Governance Manual defines the operational business processes that allow the two parties to work peacefully and effectively together. The Issue Resolution process motivates the service delivery and governance teams to solve problems before they get to the top, through structured escalation and visibility.

An Issue Resolution process is an insurance policy that protects the client from risk and exposure. We are aware of a case where a client had a significant dispute that was not documented in an Issue Resolution process; as a result, while they had a legitimate reason to sue, their own internal lawyer told them they couldn’t proceed.

A few years back I conducted a poll of my TPI colleagues showing that when a dispute resolution process  was started, the issues were typically raised directly to executives, who tended to do the executive thing and “make it go away” – often on terms that were highly dissatisfying to the team and in a manner that didn’t solve the problem. What we’ve learned since then is that by controlling the issue process at the service delivery and governance level, the people closest to the problem are best-suited to solve it properly, and also to create the documentation to drive the executive discussion to a correct solution if required.

Improved Issue Resolution is part of the emerging management science of managing third party service providers – the rules are entirely different in this new world. The goal is to get the services and value, on the happiest possible terms, with the least disruption and angst. A strong Issue Resolution governance process is key to this outcome.

What do you think? Can good governance be more effective than legal action?

Checklist for Multi-Provider, Multi-Country Sourcing Initiatives

By James Lofton, Director, TPI

Implementing a multi-provider sourcing strategy across multiple countries requires tight coordination between business units, finance, legal and internal contract management. Success depends on an appropriate commercial structure, well-managed multiple-provider service delivery, smooth invoicing and allocation processes, and optimal service levels.

Note these TPI Top 5 questions and their answers, which will be unique to your organization, when considering a multi-provider, multi-country sourcing strategy:

1. How do we create a suitable commercial structure? Cross-border taxes and cross-subsidization are key factors in determining a commercial structure that best serves your multi-provider initiative. Whether you use a central agreement that covers all countries or a Master Services Agreement (MSA) with local agreements for each country, your commercial structure should allow for service delivery and legal and finance implications that work in your favor.
   
   
2. Is the provider capable of delivering services in multiple countries? Service providers need to deliver services under a flexible commercial structure that can handle local, in-country invoicing and billing in local currencies. Be sure your providers have managerial and legal entities to assure appropriate and legally sound agreements with multiple countries.
   
   
3. What is the optimal multi-provider management approach? The provider management approach for any multi-provider initiative should be based on the culture of your organization, your internal capabilities and your availability of skilled staff. There is no “one size fits all” solution nor a formula that will provide this answer. Whether you manage providers internally, through an outsourced service integrator (SI), or using Governance-as-a-Service from a third party, be sure your management strategy contributes to your sourcing goals.
   
   
4. How do we invoice in multiple countries? The most favorable invoicing approach will depend on your commercial structure. Invoicing may be centralized, invoiced by country to a single legal entity, invoiced by country to multiple legal entities, or a combination. The main consideration in deciding the best approach is the cost of local invoicing and allocations versus the financial impact of cross- border taxes and cross subsidization. Depending on the amount of the invoice and the scope of services delivered within a country it may be more beneficial to invoice centrally and not by country.
   
   
5. What is the best way to ensure service levels? Whether service levels are equivalent across varying countries or each country has independent service levels, the best strategy will define service levels as end-to-end across multiple providers. In-country service levels can be managed locally, while service levels that are comparable across multiple countries may be managed globally, keeping in mind the particulars of in-country service defaults and service credits. A combination of global and local service levels may provide the most flexibility.

For more information on multi-provider in multi-country sourcing initiatives, e-mail James Lofton or call +1 775 250 2933.

Part 2: Creating a Value Plan to Drive Positive Outsourcing Relationship Change

by Cynthia Batty, Global Competency Lead, Governance Services Advisory, TPI

Earlier I posted the first installment of a two-part blog on the importance of using a value plan in performing value assessments and acting on their results. Today I address several steps you should take in conjunction with creating the value plan to help bring about a positive outcome for your company and your service providers. If you haven’t already done so, please read part 1 of the discussion here.

Having a value plan is crucial for successfully absorbing a value assessment and using it to improve outsourcing relationships. In addition to preparing such a plan, you can get the most out of the assessment process by taking the following steps.

Prepare your executive management. Whenever TPI goes looking for value leakage, we find it. Note that this may not be evidence of poor management on your part; we have found that value is lost in various ways in outsourcing relationships. If you start from a premise that “we are going to improve and this is a step in a quality process to achieve that objective” and you prepare your management for the overall program, you will be less likely to face hard questions on the initial exploratory research and findings.

When the overall plan is directed toward governance, management improvement and monitoring, your executive can see a process aimed at continued improvement and may indeed become more committed to the process as a consequence.

Engage your service provider. Assessments are like audits—nobody likes to see the auditor coming. You don’t want to create an environment of defensiveness with your service provider, because you are going to be asking the service provider to work with you to improve services and costs. When you have your value plan developed, invite your service provider counterparts to a meeting and explain your goals and the way in which you plan to go about it. Ask for their advice and support, and ensure that they know they are a vital part of the solution. Then engage them in your plan periodically as you determine what to do and how to do it.

You may also discover in the process that your own team is doing things that are preventing the service provider from delivering all the potential value. Be open to this finding and to making the changes that will enable greater value realization.

Don’t take on too much in the beginning. Although you may not be clear on exactly what your situation is when you start, you can make a conscious decision that you will only initially tackle a manageable set of problems. It is likely that to find value improvements you will need to make organizational or goal changes on your side of the fence. Bear in mind that these efforts can feel like witch hunts to your own team and can cause them to be demoralized or resistant—or both. Give everyone room to work on the problems at a reasonable pace, but identify metrics that are to be reported monthly to measure your progress.

Be conscious about what you are looking at. Studies such as a value assessment, depending on how they are performed, can sometimes veer close to being enhanced customer satisfaction surveys. This may not necessarily be bad, but be sure that you understand the distinction and how to drive value from the results (as opposed to merely recording dissatisfaction).

Create a positive goal. Service provider bashing is not the way to ensure or sustain value attainment, and an approach that puts a negative focus on your service provider will create a negative attitude in your entire stakeholder environment from which it can be hard to recover. You need their cooperation to make positive changes. Make the goal a win for both parties. This approach will require you to think carefully about what your service provider executive and team stand to gain, and it will help ensure their engagement in the positive goals.

By looking closely at the value achievement in your outsourced services relationship, you can find ways to increase value and relationship quality across the board—by viewing a value assessment in context, making a plan, and being realistic about outcomes. You may be surprised at the positive results of having a well-considered value plan.

Part 1: Creating a Value Plan to Derive Positive Outsourcing Relationship Change

by Cynthia Batty, Global Competency Lead, Governance Services Advisory, TPI

“Be careful what you ask for” — it’s fortune cookie wisdom. We have many client situations where they want to know whether they are really getting the value out of their outsourcing relationships. They ask us to look at the situation from all kinds of angles: services, invoice and resource unit accuracy, risk, productivity and so forth. We do these types of assessments from time to time, and they almost always show that there is some value loss in the relationship.

What executives who ask for this assessment discover, however, is that simply finding out about value loss is not a road to a solution — far from it. Now that the value loss is documented, whose job is it to figure out how to “get it back?” Corporations being what they are, there will doubtless also be questions like, “Whose fault is it that we are not getting our value?” Taking an approach that has answering this question as its principal aim can put the client contract executive as well as her team at a significant disadvantage to rationally working on the problem — and has caused some of our analyses to be buried and forgotten. To effectively conduct a value assessment and act on its findings, there has to be some level of corporate awareness and planning up front.

Although the stated purpose of a client-service provider relationship is to increase value, it is inherent in the relationship that there will be value leakage. Service providers are always looking to maximize their margins and often will do so without informing the governance team of their actions or motivations. Part of developing greater maturity in your governance team is to ensure that your team is trained on what to look for and on how to respond in a structured way. But sometimes it makes sense to “stop, look, and listen” to the relationship to determine in an empirical way where you stand from a value perspective.

So do consider performing a value leakage assessment, but do your homework first to be sure that it is received and acted on in a way that is best for your governance team, your provider relationship, and your company.

The fundamental step that you can take in preparation is to do the value assessment as part of a “value plan.” If you perform an assessment without an apparent goal, the information you receive will blindside everyone. Create your value plan with several elements that are intended to improve your service quality and bottom line, and keep in mind that this is just one of several actions you will be taking. Your plan could include governance process improvement, skills improvements for your team (or the provider’s), and invoice validation improvements. It could also include more relationship-building actions such as creating conditions for innovation.

These kinds of overall relationship improvement need monitoring and management over time. Often you will discover that the elements you decide to measure look a great deal like a Balanced Scorecard for Sourcing. This approach can feed the overall governance process and bring the relationship up to a higher level of objectives and achievements. Include them in your monthly and quarterly governance meetings to ensure that all team members (of both your internal team and the provider’s team) keep focused on these goals.

In my next installment, I'll discuss several steps you can take in conjunction with creating the value plan to help ensure that both your company and your service providers can gain from these value assessments. Should you have questions in the meantime, please feel free to e-mail me.

Walking the Talk of Telecom Negotiations

By John Lytle, Consulting Director, Compass

Because telecom costs represent a significant investment for a global organization, effective negotiation of telco/service/product contracts is imperative.

But it’s not enough to “play hardball” and threaten to terminate a contract and find new partners if your terms aren’t met.  You need to use knowledge of mature and emerging technologies, market-based price and service standards, and contract terms and conditions to define goals and manage vendor performance.

Some do’s and don’ts:

• Do include contractual provision for annual benchmarks to ensure that rates stay aligned with rapidly evolving market conditions, as well as your changing business requirements.
• Do enhance flexibility by demanding a low, or no annual commitment.
• Do be aware of market standards regarding pricing structures for basic product and service elements, as well as for those less obvious “administrative” charges that seem to appear on invoices.
• Don’t allow published tariffs to be used as the basis of negotiations. They are misleading, since they don’t include the credits, bonuses, and forbearance that typically characterize any large telecom agreement.
• Don’t allow the contract to include prices for services that you don’t use.  Since you have no incentive to negotiate prices for such services, you’ll be at a disadvantage if you need them in the future.

If you follow these and other guidelines and still don’t get what you need, then you have to be prepared to pull the trigger and issue an RFP for new services.

But how do you know when you've crossed the line from a salvageable relationship to a lost cause? "Make the Call," a Compass white paper on telecom negotiation strategies, outlines the basics of renegotiating an agreement with an incumbent service provider, and, if that renegotiation fails, how to go about finding new providers and implementing a smooth transition.

Rules of Thumb for Selecting and Managing ERP Service Providers

By Bob Krohn, Director, TPI; and Kirk Teal, Senior Partner, STA Consulting

Editors note: In February the parent company of TPI, Information Services Group Inc., acquired STA Consulting, a premier independent information technology advisor serving the public sector. This TPI Top 5 is co-authored by one of our STA Consulting colleagues.

Sourcing considerations in ERP environments are not that dissimilar from those of traditional Application Development & Maintenance (ADM) environments in many ways. Yet there are also unique challenges and nuances that are especially applicable when sourcing ERP service providers. Note these TPI Top 5 rules of thumb for selecting and managing best-fit ERP service providers: 

1. Determining the sourcing strategy: The business drivers for multimillion dollar investments in ERP systems vary by organization but generally include the need to: 1) reduce cost; 2) mitigate risk of aging, often poorly documented, legacy systems; 3) increase efficiency in business processes; 4) introduce new functionality to obtain a strategic advantage; or 5) any combination of the preceding factors. The blend of these drivers will ultimately drive the IT sourcing strategy that an organization pursues.

2. Selecting service providers: When deciding to implement an ERP package organizations will inevitably bring in external parties at some stage of the process. Selection of the appropriate service providers is a key decision that should be supported by a qualified sourcing advisor. Organizations should weigh their evaluations based on the relative importance of price and quality. Key components of the quality attributes of service providers that should be evaluated include: 1) their experience with newer modules and relevant industry solutions; 2) the account team; and 3) the implementation methodology. Subcategories of the implementation methodology that should be considered include their approach to: 1) data migration; 2) training; 3) stakeholder communication; 4) change management; and 5) benefits realization.

3. Defining pricing methodology for ERP sourcing agreements: The most common mechanisms that ERP service providers use for projects are: 1) fixed fee; 2) time and materials; or 3) a creative combination of the two. Although at first glance these mechanisms appear to be very different, experience shows that service providers use similar methodologies in their pricing. ERP providers tend to build their price quotes from the "bottom up" and include a risk premium. In a fixed fee proposal, the premium is included in the base quote. In a time and materials proposal, it is either included in the base hours or as a contingency line item. A useful technique in negotiating ERP projects is to isolate this risk premium and attempt to minimize it. In most instances, application maintenance and support for ERPs should be contracted as a managed service. There are a variety of methods for pricing ERP support contracts, but much like other managed service transactions, pricing should be based on applicable resource units.

4. Managing the quality of implementation deliverables: Managing the key quality aspects that were indentified in selecting the service provider is instrumental in determining whether or not an organization achieves the goals of its ERP projects. In general, the established ERP service providers all possess the necessary technical competency and capacity to meet customer needs for ERP implementation maintenance and support. The differentiator is often management of the other less technical aspects of the delivery model described in bullet 2.

5. Evaluating the incumbent maintenance and support ERP service providers: Not surprisingly, proper sourcing management is a critical success factor in effective relationships with ERP service providers. The relationship between an ERP provider and its customer is often termed a "partnership" and is sometimes even compared to a marriage. Although the marriage analogy has some merit, it is often over-used. ERP customers need to recognize that the effectiveness of their service providers should be routinely and formally evaluated and that contractual agreements should be structured that reference these evaluations. Service providers should also understand that if they fail to meet predetermined expectations, the customer has a formal evaluation process that could lead to a change.

For more information on selecting and managing ERP service providers, or on any aspect of ERP-related decision making, contact Bob Krohn, Director, TPI, or Kirk Teal, Senior Partner, STA Consulting.

Please share your thoughts about this post in the comments section. Do you feel that you got the best value possible from your ERP contract negotiation? Have you had an ERP project go off the rails? What would you do differently if you could do it over again?

Value of Sourcing Advisors, Advised Deals Discussed at SSON “G6 Panel”

by Bill Huber, Partner & Director - CPO Services, TPI

Do sourcing advisors add value? This was a question posed to a panel of service provider executives at the IQPC Shared Services Outsourcing Week (SSOW) conference in Orlando this week.

The panelists from Accenture, Genpact, Infosys, CSC and TCS offered their candid and sometime pointed perspectives on whether advisors enhanced or stifled innovation and accelerated or delayed reaching a deal. Several of the providers expressed their preference for unadvised deals.

Granted that there are some advisors who fit all of these descriptions; but the fact is that service providers have always been motivated to prefer unadvised deals to advised deals. This is rational self-interest on the part of the providers, as unadvised deals often can tip the scales in favor of the providers. Service providers are in the market doing deals all the time and thus better understand the economics and risks of a transaction than a client who has much more limited knowledge of the market.  Additionally, the involvement of an advisor increases the probability that an outsourcing relationship will be sourced competitively. 

All service providers prefer a single source transaction. Sometimes this is okay, and an unadvised deal can turn out well. However, the majority of failed deals are either unadvised or have been negotiated with advisors who are willing to short-cut appropriate deal discipline to get a “strategic” deal signed in an unrealistically short timeframe. Regular industry watchers can all rattle off a list of deals that fit these characteristics.

The fact is that good advisors create value by ensuring that the deal economics are sound to both the client and the service provider and are priced competitively with the market; that service levels are aligned with client outcomes; and that financial structures and incentives are designed to achieve the client’s objectives for the relationship. The best deals also are structured to foster innovation and transformation, but such structures must ensure measurable outcomes — not merely reflect promises or good intentions.
Lastly, the best advisors also serve to educate and guide their clients on the art of the possible in terms of strategy and transformation; the real (vs. advertised) capabilities of the service providers; and the risks and pitfalls that are present even in good deals and how best to mitigate them through effective change management, transition and governance.

One panelist, a high-level executive of a multinational service provider, affirmed this, pointing out that good advisory services are not merely about tools and templates but about the softer elements that need to be considered when guiding a customer through the complex dynamics of outsourcing, all of which help clients to achieve more predictable outcomes. Another executive of a well-known provider pointed out that, similar to any industry, sourcing advisors need to continually innovate, and as the best advisors help their clients to build their internal sourcing capabilities, they are able to build on this internal expertise to help take their clients to the next level of strategy. A third panelist underscored this, pointing out that with a strong advisor, the probability of a deal coming to fruition was greatly increased.

The bottom line is that a smart client should select its sourcing advisor not only by the reputation of the advisory firm, but by the proven ability of the individual advisors who will be guiding them on the path to transformation.

New AskTPI and DynamicRFI Services Put the Power of Information in Clients’ Hands

by Debora Card, Partner, TPI; and Kimberly Fey, Director, Sourcing Industry Relations, TPI

A busy February at TPI saw the welcoming of our new sister companies Compass and STA Consulting followed by the announcements of two new services to help clients and service providers make smart, strategically powerful sourcing decisions.

We’re excited to bring to market the new AskTPI information service, which offers clients fact-based answers to all types of sourcing questions with one click of the mouse. This subscription-based inquiry service combines the expertise of TPI advisors with our market-leading research capabilities to offer a wealth of TPI knowledge, including data from the TPI Index, Contract KnowledgeBase, Mark-to-Market® and Prevalence Database®.

AskTPI members can submit questions anytime — from on-the-fly general inquiries to detailed queries requiring our experts to mine TPI databases — or choose direct access to TPI industry and service line experts. Got a sourcing question, or want more information on this new service? Put us to the test — AskTPI today.

We recently announced our second new service, DynamicRFI, in response to the growing need for speed, cost efficiency and accuracy in researching best-fit service providers. On-demand access to the DynamicRFI data repository will help clients make more informed provider qualification decisions without the labor-intensive process of distributing and analyzing their own request-for-information (“RFI”). Service providers benefit, too, by being able to present their company information in real time through a secure and auditable Web portal, which is an equitable and effective way to communicate their capabilities and reduce the costs that are often incurred fulfilling multiple data requests.

We plan to pilot DynamicRFI in the Business Process Services (BPS) market and expand across all our service lines throughout 2011, so watch for further information on this new tool shortly.

For more information about AskTPI, contact Debora Card, Partner. To learn more about DynamicRFI, e-mail Kimberly Fey, Director, Sourcing Industry Relations.

TPI is committed to the success of our clients and to the global sourcing industry as a whole. Whether you’re a client, service provider or industry observer, let us know what you think about AskTPI and DynamicRFI. Also, what other services you could use to enhance your sourcing initiatives?

Make the End of Your Current Contract the Beginning of a Better One

By Roger Sparks, Partner & Managing Director, TPI EMEA;
and Bob Mathers, Principal Consultant, Compass

Editors note: On Jan. 4, the parent company of TPI, Information Services Group Inc., acquired Compass, the premier independent global provider of business and information technology benchmarking, performance improvement, data and analytics services. This TPI Top 5 was co-authored by one of our new Compass colleagues. 

The end of an outsourcing contract term is considered an ideal time to drive improvements in rates and services. But many clients go into a renegotiation under-prepared and overly confident, believing they have more leverage than they actually do. The result is a missed opportunity to address problems and strengthen the relationship.

Here are the TPI Top Five keys to optimizing your end-of-contract review:

1.  Baseline existing operations. Conduct a quantifiable, fact-based analysis of the existing environment. Include all IT services – outsourced as well as internally delivered. Understand existing costs, prices, and service levels in the context of market standards. Identify where costs are competitive and where gaps exist, and use this knowledge to inform decisions on how services might be expanded, consolidated, repatriated, or re-sourced to multiple service providers. If prices are competitive, shift the focus to governance issues, facilitating innovation, or improving process efficiency.

2.  Be specific. Following the baseline, define your objectives and expectations for improvement. While kicking out the incumbent may be too expensive and risky and is often a last resort, identifying one service tower to rebid or repatriate could be feasible. Don’t be vague and expect the service provider to be “creative,” but don’t dictate how the service provider delivers. Rather, outline a framework within which the provider team can work. 

3.  Get boardroom support. You need the backing and support of senior management to be successful. This won’t happen on its own. Show that the sourcing strategy addresses constantly evolving business requirements and is delivering on strategic requirements. Define the potential risks and benefits of various operational scenarios, and outline options that best align with business needs.

4.  Walk the talk. Evaluate sourcing alternatives in the context of business strategy, and be willing to pursue those alternatives if necessary to support that strategy. Don’t go to RFP simply to drive down service provider prices. When evaluating the value propositions of prospective vendors, ensure a level playing field. This enables a more effective review and demonstrates your commitment to change, motivating the incumbent to improve the status quo.

5.  Look inward. Don’t put the onus of improvement solely on the service provider. Assess your internal operations and processes to identify how you can help leverage efficiencies and economies of scale.  Are custom requirements necessary across different business units? Do you really need 20 flavors? You will likely discover that vanilla will suffice in most cases. This helps enable the “commoditization” of standardized services, which, combined with appropriately tensioned pricing mechanisms, can drive significantly lower unit costs and more effective demand management.

To negotiate your most advantageous contract you have to come into the process knowing where you stand and where you ultimately need to go. The experts at TPI and Compass can help you meet your outsourcing objectives through industry experience, our extensive contract databases, and specialized knowledge of your industry and the associated service provider landscape.

Contact Roger Sparks, TPI, or Bob Mathers, Compass, for more information.

Mid-Tier Service Providers Continue Consolidation

By Kimberly Fey, Director, Sourcing Industry Relations

Earlier this week, iGATE Corporation (NASDAQ:IGTE) announced that it has entered into definitive agreements to acquire 63% of the outstanding shares of Patni Computer Systems Ltd. (NSE: PATNI). The transaction is valued at US$1.22 billion. The combined entity will have close to $1 billion in annual revenue and more than 24,000 employees. Patni will remain an Indian public company and a subsidiary of iGATE.

According to iGATE, the combination will:

• Create a compelling new go-to-market strategy, with iGATE’s differentiated outcomes-based pricing model augmented by Patni’s delivery expertise and focus on micro-verticals;
• Position iGATE-Patni as a top-tier player in the highly-fragmented global IT Services industry; and,
• Provide a strong presence across several verticals, including Banking & Financial Services, Insurance, Manufacturing & Retail, Communication & Media, and Utilities.

Patni’s destiny has been on the line for a while, making customers and prospects a bit cagey. The acquisition reduces this uncertainty, which should help Patni with early-stage sales discussions and existing account growth. Likewise, the enhanced size of iGATE is likely to create growth opportunities for its existing accounts. Given this, morale in the ranks of both companies is likely to improve.

In addition, at least on paper, the two companies have several complementary verticals, such as Banking & Financial Services for iGATE and Insurance for Patni. This combination should create a broader cross-section of clients they can both pursue, and we can expect enhancements in the sales teams in the combined entity.

Still, although the combined entity will be close to the psychological barrier of US$1 billion (the “Tier 1” threshold five years ago), the other Tier 1 players are well ahead of that number today. The portfolio of services still has significant gaps in both ITO and BPO capabilities that will need to be addressed to fully compete with the big players. And it is questionable if we will see any significant difference in delivery scale and cost in the immediate future.

In sum, the combination of iGATE and Patni has promise, but the challenges of formulating a detailed strategy and integrating the two companies are significant and will have to be overcome before the promise of the scale can be realized.

The year has started off with a bang. Will we average a merger or acquisition a week? The industry surely could sustain it!