CIO conversation summary Max IT out: New thinking on how to maximise the value from IT outsourcing Facilitator: Kevin Nevrous Summary of the discussions from the CIO lunch on 4 August 2011 Questions: Q1. In your experience, what are the most pressing concerns regarding your outsourcing arrangements? Q2. What do you see as the cause of this concern, and where do you feel the responsibility for fixing the issues rests? ‘IT adopts a very process centric view in responding to the business requirements and also planning for the future. To enable the organisation the ability to respond to various situations, CIOs need to be able to manage suppliers just like managing a personal investment portfolio.’ Quote from Stephen Tame CIO, General Manager IT/Jetstar Airways Imagine two organisations that have outsourced substantial IT operations to a highly experienced and reputable provider. They have similar operational requirements and desired outcomes and both have provided similar upfront scopes. The first organisation is extremely happy with their provider. The provider always meets their KPIs and consistently delivers value. Their responsiveness to any issue is always positive. The provider works with them and toward their future. The provider is considered a reliable business partner. The second organisation has had the opposite experience. The relationship has tension and key measurements are not always met. The CIO is constantly criticised by peers and colleagues regarding the provider’s performance and there is constant stress and confusion in trying to complete tasks with what seems like little or no consideration for the future. What makes each of these experiences so different when the basics are virtually the same? 1 Peter Barta, Principal at Deloitte Consulting, shared his extensive experience on ‘both sides of the table’ as service provider and as an advisor to buyers of services from vendors. He illustrated a three dimension model in maximising value capture from IT outsourcing. • Control performance – these are the measures to check that you receive what you have been promised. Sometimes referred to as ‘vendor management’, this function is variously performed by functions such as Legal, Procurement, Finance or even IT management themselves. The activities tend to be a ‘look in the rear-view mirror’ with a compliance and problem resolution focus. The skills and capabilities for doing this are readily available in today’s marketplace with ‘plug and play’ toolsets, which make it easy for organisations to rapidly gain capability maturity. However, due to its dominant focus on yesterday, ongoing delivery assurance is generally not able to be driven from this domain. • Manage performance – these are activities closely related to the day to day management of operations, and they leverage the required skills and processes that would address the challenge of delivering quality services consistently. CIO conversation summary: Max IT out: New thinking on how to maximise the value from IT outsourcing The focus is on the immediate road ahead. It’s based on a good understanding of what the job at hand is, and the business reasons for the activity. Standards such as Information Technology Infrastructure Library (ITIL) simplify these challenges somewhat due to the embedded process consistency and behavioural predictability. However, maintaining accountability and continuity is a challenge when multiple service providers are involved. Because of the dominant focus on today, the imperative to prepare for the future and plan related change initiatives is not able to be effectively discharged in this domain. • Plan for the future – these are activities which are probably the most difficult but exciting to maintain in the outsourcing context as they are driven not just by internal business requirements but also by external market forces. The efforts are outward-focussed and forwardlooking and require the ability to understand the emerging needs of the business and a deep understanding of what outsourcing levers to pull to achieve future objectives; as well as the requisite authority to drive the plan’s execution across the delivery organisation and to directly integrate that with the business. This combination of skills is difficult to assemble and, unlike the other two domains, there are no generally accepted standards for achieving this. Complications such as unique circumstances and future uncertainty create an additional imperative to maintain balance between the finite resources allocated to IT and the growing demands of the business. While this function is certainly difficult to implement and maintain, leading practitioners show us that effective investment in these capabilities and structures is the key to unlocking sustainable value capture from outsourcing. A recent Deloitte report entitled ‘The Outsourcing Vendor Management Program Office (VMPO): Art, science, and the power of perseverance’, considered this issue. This publication reports the results of a survey on vendor management practices that polled business and IT executives at global enterprises that outsourced IT and/ or telecommunications services. The survey results, as well as our interactions with clients across industries, indicate that companies still continue to struggle with operating effective vendor management program offices (VMPOs), – even though they understand the need for VMPOs and invest in them. Among the key findings: 2 • Sixty-seven percent of respondents reported that they had established dedicated VMPOs, suggesting a growing awareness of the importance of actively managing service provider relationships • Many companies are showing an increased interest in adopting a broad approach to vendor management, as evidenced by the fact that most respondents have adopted practices that incorporate, in some fashion, Deloitte’s approach to leadingpractice vendor management functions • Despite adopting dedicated VMPOs that focus on broad vendor management functions, only fiftyseven percent of the respondents rated their VMPOs as very effective to effective – a significantly lower percentage than our experience working with clients would suggest. During the forum, we tabled the two questions and the participants feedback was discussed and debated, with the participants sharing their own experiences and opinions. Q1. In your experience, what are the most pressing concerns regarding your outsourcing arrangements? There was a general consensus from the participants that having a contract that is fit for purpose is essential to most outsourcing arrangements. However, the contract will not in and of itself solve the day-to-day issues and demands on the outsourcing arrangements. Some of the key concerns presented include: • Difficulty in implementing comprehensive arrangements that assure access to both base services and also to any new, ad-hoc, or value added functions as may be required. Performance management becomes difficult for both parties if this flexibility is not baked in from the start. • Unstable relationship between the business stakeholders and service providers could lead to gaps in the service delivery and misaligned expectations. The participants highlighted that trust and confidence are also important aspects of the outsourcing arrangements which would require both parties to invest time understanding each others’ business model, operations and also their future aspirations for the relationship. Further discussion centred on the suitability of incentivising suppliers to contribute to the growth and progress of the business. CIO conversation summary: Max IT out: New thinking on how to maximise the value from IT outsourcing • Flexibility or scalability of the outsourcing arrangement can become an issue to both the provider and the business if not managed appropriately. While some argued that at times, a ‘gentleman’s agreement’ is more flexible as it is built on relationship and past experiences, many felt that this was not appropriate business practice. However, the view was that at the other extreme, an iron-clad contract could become cumbersome to manage and will not provide room for flexibility or scalability when needed Overall, the participants concur that because it is an important supply source for limited resources in the face of significant demand, especially in IT, outsourcing will continue to be relevant to CIO’s; and that outsourcing will continue to evolve to support the ever changing needs of organisations. There are certainly risks and concerns in dealing with outsourced providers, however with careful planning and management, as well solid investment in the capability to maintain good foresight, the relationship can become a solid foundation of growth and progress for both parties’ benefit. • There were competing views regarding whether innovation should be an obligation under the contract or implicit in the service delivery’s continuous improvement obligations. The difference being whether additional innovation funds should be allocated in the contract. It was generally recognised that whatever the approach, obtaining access to new methods that promote efficiency and cost savings were also important sources of outsourcing value. CIO’s can learn from the key success factors identified in high-performing outsourcing deals; and how those buyers’ create the levers to ensure ongoing value capture from their outsource arrangements: • Maintain sufficient ongoing investment in tools, information and skills to fully empower each corner of outsourcing’s Iron Triangle, namely: Q2. What do you see as the cause of this concern, and where do you feel the responsibility for fixing the issues rests? The participants highlighted various causes of the concerns raised in the first question. Of most significance was the lack of clear articulation of the business case and/or translation of that into the requirements for the outsourcing arrangement. This was sometimes due to management embarking on the journey without a detailed understanding of their needs, the metrics to measure the performance of providers and incomplete financial modelling. Some participants highlighted that the situation becomes aggravated over time when missed expectations become severe and the ‘blame game’ starts. It was generally held that the responsibility to fix the issues and concerns remains primarily with management; however, the service providers need to demonstrate that they have the capability and capacity to respond to the issues in order for the outsourcing arrangement to succeed. This often can be a key driver of service provider preferences. 3 –Measure and control contract outcomes received – Manage service delivery for today – Plan for the future • Ensure requisite skills are deployed and sustained • Clearly identify, and invest in collaboration and transparency with, those suppliers that are important to future strategic success • Ensure the organisation is empowered to act and connect supply with the business’ needs for today, tomorrow, and beyond. CIO conversation summary: Max IT out: New thinking on how to maximise the value from IT outsourcing Contact us Kevin Nevrous Partner – Melbourne Tel: +61 (0) 3 9671 7745 [email protected] Kurt Proctor-Parker Partner – Melbourne Tel: +61 (0) 3 9671 6423 [email protected] This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively the “Deloitte Network”) is, by means of this publication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication. 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