Nearly half of all IT outsourcing (ITO) deals fail to satisfy the customer?s service improvement and cost reduction expectations. Why? The reason can often be traced to poor vendor management and governance. On the flip side, when governance is implemented correctly, it can help foster the vendor accountability that is critical to any ITO program?s success and forge mutually beneficial relationships.
Customers frequently enter ITO arrangements without understanding the structure required for effective vendor management, and they assume that tactical activities will yield the expected financial benefits. But these activities are only a subset of effective vendor governance, as a comprehensive framework includes contract and financial issues, vendor performance management, customer-vendor relationship quality, and ongoing value from technology innovation and service/cost improvements.
Without a robust ITO governance framework, customer and vendor objectives can easily become misaligned. Each party may focus exclusively on what?s best for them, and that can lead to service quality deterioration. Effective governance keeps both parties focused on value and performance, while providing predictable and transparent program oversight.
?My best outsourcing relationships had a significant vendor governance component that continuously engaged me,? says Joseph Tahan, a former director of IT at a major wireless provider. ?Over time, we trusted one another enough that we would both ?take one for the team? occasionally. The relationship evolved into a collaborative partnership that served both our needs.?
Choosing a Partnership Approach
What are the key elements of a sound vendor governance program? We offer these best practices as a starting point:
Start early. The proposed governance framework should be communicated to the vendors in the RFP. During the evaluation process, the customer should invite vendors to comment on this framework, stating what they believe does and doesn?t work and why.
Define success together. The customer often has the upper hand if success is defined prior to vendor selection. However, for mutual success, both parties need to agree on a definition. Despite competing agendas (vendors aiming to maximize profits versus customers seeking to maximize savings), common ground needs to be defined, quantified and agreed upon.
Maintain a high profile. Govern-ance programs with high visibility in both parties? organizations keep attention focused on the overall quality of the relationship. Maintain this profile by requiring the customer?s governance program manager to report to the CIO on a monthly basis. Require vendor senior management to address issues or ensure that customer and vendor staff compensation be tied in part to governance-managed performance outcomes.
Move beyond static service-level agreements. Successful ITO governance structures are typically highly scalable to address SLAs and other evolving contract management elements. They also establish protocols for aligning business objectives, measuring end-customer satisfaction, managing technical risk and leveraging service innovations to bring the customer?s products or services to market more rapidly. Companies should implement an ITO governance structure that supports this complexity and is flexible enough to handle changing SLAs and facilitate a broad range of performance management activities.
Pick your battles. It is often tempting to fall back on the contract when issues arise. While this may solve an immediate need, it can also indicate limited flexibility in managing problems and lead to diminished mutual trust between the parties. Be discriminating but fair in enforcing ITO agreements.
Understand the power of give-and-take over a long-term relationship. ITO vendors recognize that a good customer?one who engages in active communication and collaboration, exercises good judgment when dealing with issues, and offers avenues for growth and up-sell?is hard to find but definitely worth keeping. A valued vendor will reciprocate accordingly with its strategic customers. For example, the vendor may keep its ?A team? in place, recommending service improvements to enhance performance and reduce costs, and strengthening the customer?s overall IT capabilities to help achieve business goals.
Rewarding long-term ITO partnerships are achieved when parties understand each other?s business objectives and determine together how those goals can be achieved. Companies with successful ITO initiatives leverage their vendor governance to expand the enterprise focus from cost savings to include improved vendor service delivery and superior customer performance resulting from stronger IT capabilities.
Rajesh Bhat and Jesse Decker are senior associates at Pace Harmon, an outsourcing advisory firm based in Vienna, Va.
