Tapping the source


IT’s mandate: cut costs. Again.

If you’re in business, you can blame the economic downturn. If you work in government, you can blame the Gershon Report. Those who work for newspapers or the music industry can blame the Internet for crash-tackling their business model. But whatever the reason you’re feeling the squeeze, the pressure on CIOs to cut costs and improve efficiency in IT is a challenge that is not going away any time soon.

Getting the business and IT outcomes you expect from your outsourcing partnerships, is never easy, but the current economic situation has put additional pressures on CIOs to drive down the cost of outsourced services

For CIOs at many companies, the directive to trim costs will almost certainly prompt them to take a long, hard look at their IT outsourcing bills. Others are no doubt busy re-prioritising projects, virtualising servers by the score and scaling IT needs down to accommodate poor market conditions, altering their IT requirements in ways that were unforeseeable when their outsourcing partnerships were originally agreed upon.

In this day and age, when so much IT is outsourced to service providers, wringing every drop of savings from your vendor is critical. It can be a tough conversation to have and one that’s often difficult for CIOs to initiate. What’s more, how do you progress from that conversation to a well-crafted agreement, one that that lets you scale up your IT needs when business is good and roll them back when times are bad?

Trade-Offs

Getting the business and IT outcomes you expect from your outsourcing partnerships, is never easy, but the current economic situation has put additional pressures on organisations to drive down the total cost of outsourced services, while still achieving the expected benefits. In fact, Gartner has indicated that through 2012 “an excessive focus on cost reduction will cause inflexibility that will disrupt business in 30 percent of outsourcing deals”. According to the Gartner research, “a well-executed sourcing strategy is more important during tough times than ever before, because it can help to avoid some key outsourcing problems”.

Tony Henshaw, vice president and general manager global outsourcing and infrastructure services, for Unisys in the Asia Pacific, is very familiar with the disruption being caused because he’s been hearing about it from Unisys’ outsourcing customers since the global financial crisis arose a year ago.

Henshaw divides these customers into two camps: “The first I describe as the ‘knee jerk reaction’,” he says. “They say, ‘We need you to cut your costs by 20 percent. Next invoice you give us we’ll cut it to 80 percent of what you said and then we’ll move along’. Generally that’s a cry for help -- at least we interpret it that way.”

“The more mature reaction is one that says: lets talk about it, what we can do together to reduce costs for both us?,” Henshaw says. “The next level of maturity is where they’re looking for flexibility from us -- they’re looking for a dialogue and a conversation about what might be possible.”

Reluctant Partners

“You can benchmark to reset pricing, but at the end of the day, benchmarking is an adversarial process -- one party wants to do it and the other doesn’t,” says Arno Franz, partner and regional president at sourcing advisory firm TPI Asia Pacific. “Benchmarking is a way to open the door to reassessing the entire relationship, but you have to go into it with your eyes open, because one party is often a reluctant bride.”

Franz says too many outsourcing providers tend to look at each client situation on a transaction-by-transaction basis. “It’s natural they would do that,” Franz says, “but at the same time, you as a client want to see if there are efficiencies or utilities that can be created, because they’re not going to go into that willingly.”

Franz says CIOs and their boards must ask themselves: What type of relationship are we looking for with our provider? Is it a partnership arrangement? Or do we have an experienced team inhouse? “You need to understand what your trade-offs are going to be in terms of driving some of these efficiencies, and getting current market pricing is key,” Franz says.

“You’ve got to decide: am I going to restructure my existing arrangements, or am I going to go down the recompete path? Both of these have different implications in terms of timing and realisation of benefits.”

Restructure or Recompete?

CIOs who opt to follow the “restructure” path will either end up with a new contract with their current service provider or will modify the existing contract -- it’s a pretty straightforward proposition. “Theoretically, if you’ve had strong governance in place you should already have a good feel for what those levers are, and you should already know what things you’d like to change in your existing contract -- whether it be services, pricing, scope of services, etc -- in order to be able to restructure for your benefit,” Franz says.

Going down the recompete path, however, involves a lot more decision-making and a lot more re-alignment with the business. As a CIO, you’ll be faced with questions like: Single vendor or best-of-breed? Sole source or competitive bid?

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“There are a lot of decisions that have to be made in order to arrive at multiple scenarios,” Franz says. “You need to work through those, in terms of engaging the business about what’s involved, and also drive a very tight time-frame to achieve them”.

Franz says the decision tree CIOs need to think about should include:

  • Working with your service provider to restructure contracts that align with your IT and business environment with a forward-looking provision;

  • Contract renegotiation -- rethink what’s feasible and still meets the demands of the business;

  • Align service levels;

  • Identify opportunities for lower-cost outsourcing options in terms of Software-as-a-Service (SaaS) and utility or cloud-based infrastructure offerings;

  • Benchmark with the right to evaluate and negotiate based on current market prices.

“There is a great deal of immaturity in terms of governance,” Franz says. “A lot of folks think that as long as they’ve got ITIL in place then that’s good governance. That’s certainly part of the picture but there is a lot more.”

Franz says best practice has been slow to emerge in this area of outsourcing governance, but he says companies that are succeeding are the ones that have created strong service integration roles -- or a service integration layer -- within their organisations to manage the end-to-end service.

Franz says this trend for more service integration roles has been growing for the past decade, but it has accelerated in the last five years thanks to the rise of multisourced environments. “What we’re seeing now is a focus on getting the right people into the right positions and spending more time around the change management aspects of good governance,” Franz says.

“What you see in these governance roles are individuals who can balance the demands of the business, the demands of the particular group they are working with and the demands and needs of the service provider community at the same time,” Franz says.

TOURISM AUSTRALIA: Recompete Re-examine

The restructure vs recompete debate is one that’s very familiar to Shane O’Neill, network and infrastructure administrator for corporate technology at Tourism Australia. Established in July 2004, Tourism Australia is a statutory authority of the Australian Government, charged with promoting Australia as a tourism destination both locally and overseas. The agency reports to the Cabinet Minister responsible for tourism and also delivers official research and forecasts for the sector.

O’Neill has been running a centralisation project at Tourism Australia for the last two and a half years, and outsourcing efficiencies are an important component of the project. “We’ve been tasked by the business to come up with innovative solutions in order to improve our end user experience while maintaining service levels -- but not increasing costs,” he says.

O’Neill achieved much of those savings through virtualisation, identifying underutilised servers in Tourism Australia’s data centre and eventually coming up with close 60 servers that could be virtualised.

Tourism Australia is dispersed throughout the globe, with offices in Australia, New Zealand, Europe and North America, which added another layer of complexity to O’Neill’s challenges. “Obviously we don’t have IT staff all over the world,” he says, “so to make all this stuff possible we have to engage our external outsourcing partners in places like Asia, Europe and North America.”

Like many government organisations Tourism Australia had little choice but to follow a recompete path with its outsourcing arrangements, as a result of procurement guidelines that exist, both at state or federal level. O’Neill says the upside of this process is that it forces him to maintain good governance and re-examine the IT organisation regularly. “The benefit in that process is that you end up re-evaluating your entire organisation before you go back out to the market,” he says.

“As an exercise it’s quite good, but the downside is the amount of time that process takes -- to go to tender, to do your official response to tenders, to do your evaluation -- it’s a lot longer than it would take to just continue with the incumbent, so you’ve got to plan for that.”

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CAPE: Vendor Pillars

Cape Australia, which provides support services to customers in energy, natural resources and other industries both here and in the UK, maintains a very small IT team internally and selectively outsources all of its core IT components and major projects. This means it is vital that executive manager of business services Jason Cowie keep a watchful eye on the company’s relationships with its service providers. To that end, Cowie developed a partnering model which he applies to all outsourcing commitments, a management framework Cape refers to as “Vendor Pillars”.

We don't have client-supplier relationships. You either want to partner 100 percent using our model, or we don't want to work with you.Jason Cowie, executive manager for business services, Cape

“We apply this to all vendors,” Cowie says. “Vendor Pillars is a very detailed partnering roadmap which explains everything based on a ‘win-win’ scenario. We outline the vision, we outline the business objectives and then we bring the vendors in to sit down around a table and work out a 50-50 breakdown of the service.”

Vendor Pillars is Cape’s governance model. It takes the form of a very detailed document that includes Cowie’s responsibilities, what the vendors are responsible for and what two have to do together. Cowie also provides a roadmap that spells out the benefits over the duration of the project: “We divide it up: what Cape gets, what the vendor gets, what I get and so on,” Cowie says. “That way there’s no questions, no contractual issues and no arguments.”

“We don’t have client-supplier relationships,” Cowie says.” You either want to partner 100 percent using our model, or we don’t want to work with you.”

Central to Cowie’s approach is the importance of engaging service providers as early in the process as possible. “We bring them in at stage one, not at the end,” he explains “Right at the start we say: here are the business objectives, this is where we want to head from an IT strategy point of view, and we let the vendor work with us collaboratively, pointing out where they can fit in and what we can do together.

“We still go along the decision-making process, but by getting them involved at the start you ensure complete transparency. Our aim is that by the end of the process they’re so excited about getting involved in our partnering model that the cost is relatively low -- because they’re excited about it, instead of it being a traditional client-supplier-relationship.”

Cowie even goes so far as to assemble all of Cape’s various vendors in a room together to iron out the details. “We’ve found that works quite well,” he says. “When there’s trouble they become more like a partner to Cape. They feel like they have a vested interest in the success of the project and they want it to succeed as much as we want it to succeed.”

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Cape has now managed to hone these outsourcing partnerships to such a degree that the only IT staff the company keeps internally are a handful of key strategists in auditing roles. Almost every other IT function is selectively outsourced to a group of partners; for example, the company’s desktops environment is a collaboration between HP and Datacom.

But that’s not to say Cowie has no staff to manage. “We find that a lot of the vendors who work for Cape don’t tend to feel like they work for the vendor, they feel like they work for us,” he says. “When they’re inside of our building they feel like they’re part of the Cape team.”

Cowie developed the Vendor Pillars model in a previous senior IT role, at a time when he was involved in a multi-million dollar virtual desktop project. During this project, he learned that not every vendor warmed to the approach and its emphasis on partnering -- on Cape’s terms.

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