Tuesday, May 21, 2013

Your Provider Hates Your Outsourcing Contract Too by guest blogger Ben Trowbridge

Outsourcing agreements are typically multi-year contracts ranging from three to five years in length. As the client environment changes over time, a client may determine that it is in the company's best interest to pursue an early renegotiation of the outsourcing contract in order to achieve different business results.

Are you too nervous to approach your provider about renegotiating your outsourcing contract? Are you afraid that the mere mention of the "R" word will lead to degradation of services and of the relationship? Don't worry – chances are, your provider hates your outsourcing contract too. It has been found that providers, once they have a chance to absorb the message, are willing partners in the outsourcing contract renegotiation process.

Four of the most prevalent reasons for renegotiating an outsourcing contract from the provider's point of view are described below.

  • 1. The Ability to Extend the Contract Term - You may be concerned about the impact of requesting price reductions as part of the renegotiation process. While the provider may not initially like this (why would they?), they understand that market forces are driving IT support costs down and will be open to lower run-rate pricing in return for extending the contract term by a couple of years so that they can maintain (or even improve) their overall total contract value (TCV). As long as the contract is structured to allow you to realize the benefit of future cost reductions and improvements, this is an acceptable trade-off that results in a win-win for everyone.
  • 2. The Ability to Realign Prices with Their Internal Costs - As technology, support structures, and the outsourcing market evolve, the pricing mechanisms currently included in your contract may no longer be relevant for either you or your provider. For example, perhaps you currently have an Additional Resource Charge (ARC) for adding a server to your environment, but the rate seems too high in the current market. For the sake of this example, assume you currently do not differentiate between server instances and physical servers - they are all treated the same. During the contact renegotiation process your provider will probably concur that the current rates are too high and come back with a different price structure that can be used in return for reducing the overall server support rate. So, perhaps you devise a pricing mechanism for "server instances" at a much lower rate, and you develop a higher rate for "physical servers." Net/net, your overall server support costs go down, but the provider is protected because their real cost driver (in this case the addition of a new physical server) is still covered. This is only one example - there could be many variations of this theme across each of your towers.
  • 3. The Ability to "Re-Transform" the Environment - When your original outsourcing agreement was implemented, there was probably an assumption of the "new" or "transformed" technical environment that would be implemented and supported by the provider. Chances are, things didn't go quite according to plan, and even if they did, the environment in place today probably doesn't represent the best-in-class environment that would provide the highest performance and availability at the lowest support cost. Through a renegotiation, the provider may be able to propose some one-time transformation activities that implement tools, technologies, and architectures which allow them to better support the environment at a lower cost to you. Typical transformation activities can include things like applications rationalization, server consolidation, remote infrastructure support, and service oriented architecture. By carefully considering these types of transformation options, it is possible for you to improve the performance and flexibility of your IT environment while also making it easier and less costly for the provider to support.
  • 4. The Ability to Restructure Service Delivery - In order to achieve your desired price reduction while also aligning their services to their standardized offerings, the provider may want to move more support offshore, standardize server platforms, and implement or increase the use of remote infrastructure support. Assuming they can address any concerns you may have regarding service delivery, your provider should be able to reduce their support costs by standardizing operations and using low cost labor, while maintaining (or possibly even improving) service delivery to you. Depending on your current contract, it is possible that the provider can technically do some of this work now, but the reality is that a certain amount of equilibrium usually sets in, and it usually takes a significant event such as a renegotiation to truly make these kinds of changes.
It is possible to have positive, productive discussions with your provider regarding outsourcing contract renegotiations. In addition to satisfying your requirements while maintaining overall revenue and/or profit, the provider can use contract renegotiation to improve their long-term ability to support you while realizing additional standardization and cost efficiencies. 
Ben Trowbridge, Founder & CEO, Alsbridge, Inc.

Thursday, May 09, 2013

BPO Governance- Are You Still Following The Pied Piper? by guest blogger Ben Trowbridge

In the past few years there's been a great deal written about governance; yet, it's still a misunderstood subject. In most cases, it's an afterthought only considered once the "transaction" is complete and the provider is selected. Unfortunately, this practice relegates governance to no more than a box to be checked off on the path to program implementation. In order for governance to have a chance to realize the business case for which it was created, it must be more than this. 

Considering the governance structures of providers, as well as most advisors, one sees that there is a blending together as though all are dancing to the same "sheet of music." Each has their organizational alignment charts, communication plans and list tasks that need to be accomplished. But, if this is the silver bullet to program success, then why is there such a high failure rate and common dissatisfaction among most buyers? Has the reliance on the "same sheet of music" turned everyone into following the Pied Piper? Or, perhaps it has led to the kind of pack mentality that caused the lemmings to run off of the proverbial cliff.

BPO Governance

The importance of having a good governance structure should never be underestimated and planning for it should begin the first day, i.e. the day you begin the feasibility study and not the day you sign the contract! As Stephen Covey noted, you must "begin with the end in mind." Don't just look at the numbers, but at the organization itself and ask:

Can the organization make the transition?
Is there sufficient process documentation and metrics?
Are the right people in the organization to make it happen?
Is there adequate executive commitment and oversight?

If the answer to any of these questions is 'no', then fix it immediately!

Planning for the retained organization and Program Management Organization (PMO), must be holistic in nature and take into account the larger imperative for change. It is crucial to understand the key drivers: people, process and performance. Each driver must be coordinated by the PMO to work together. The retained organization and the provider's staff (people) must understand the process and the KPI's (performance) by which they will be measured. The metrics must be realistic, measurable and repeatable. From this basis, continuous improvement can be imbedded throughout the delivery model.

Outsourcing is a long, multi-year journey and you must realize that you are picking a strategic partner and not a vendor. Yes, you want a fair price, but in the end you'll get what you pay for. Driving for rock bottom prices will deliver you a provider that looks for every excuse not to improve the process, thereby giving you sub-standard results. This too must be planned for up front; you have to define the financial targets that must be achieved to meet the business plan. Then, when reached, back off and focus on the relationship.

In Conclusion

What is the lesson here? Ask yourself the following:

Is my company just following the Outsourcing mantra to reduce cost without an overarching plan or strategic alignment?
Is there a central PMO set up to coordinate and standardize outsourcing efforts?
Are there effective change controls in place?
Does my company know how to measure performance and program success?
Is my program floundering and about to derail?"

If you don't have warm fuzzies after reviewing these questions, then you have a governance issue. And just like in the ERP days, it fundamentally comes down to effective program management, change management and performance measurement - all of which adds up to governance.
Ben Trowbridge, Founder & CEO, Alsbridge, Inc.