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IT outsourcing Frameworks – Part 2

October 23rd, 2015
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This is Part 2 of my ITO framework series. In Part 1 I looked at drivers for back sourcing of services

 

Part 2 Considerations for Outsourcing

 

Jennex and Adelakum (2003 in MBAX9106 – ISM, 2015, pp.8:22-8:24) identify critical success factors to consider for ITO including People Factors; Technical Infrastructure; Client Interface; Business Infrastructure and Regulatory Interface. IT outsourcing failures are due to the lack of understanding of critical success factors (KRONAWITTER et al., 2013). Buxbaum (2002 in MBAX9106 – ISM, 2015) identifies a number of questions to minimise the risk of backsourcing services and in combination with the decision criteria provided by McKeen and Smith (2015), provide a framework to support identifying the risks and reasons for backsourcing from section 3.1. By using this framework to answer the questions that need to be addressed when initially outsourcing, it also prepares the client organisation for backsourcing should it be required.

This framework addresses organisational maturity level, service functionality maturity and appropriate sourcing models, sourcing profile based on function, potential contracting model and most importantly the governance framework needed to manage the relationship.

 

Organisational IT Maturity

Organisational Maturity plays a large part in the success of continued IT Outsourcing and as an organisation matures, the ability to easily switch suppliers in and our increases (KIEN et al., 2010).

Research firm Gartner created an operational maturity model (GARTNER, 2008) ranging from 0 (ad hoc IT operations and poor understanding of how IT supports the business) through to 5 (“IT operations are integrated with the enterprise & provide additional value to the organisation”), see Figure 1 below. This model can be used to determine at what level the entire IT operation, or subcomponents, operate at. Building a picture of where the business is and where it wants to be.

Gartner
Figure 1 Gartner IT Maturity Model

 

In addition to organisational IT maturity, the IT Service Maturity will dictate what can be outsourced (BANNISTER, F and Remenyi, D, 2005).

 

Service maturity and appropriate sourcing models

 

Smith and McKeen (2015, pp.122-127) provide a service function maturity model associated with IS/IT functions, ranging from unique to commodity and utility; this is analogous to Carr (2003; 2004) and Wardley (2014) models for the evolution of IT. This model provides a continuum, with guidance, for what should be delivered by a business versus what can be outsourced or procured externally.

This model is then overlaid on the Lacity and Willcocks classification model (2000) for outsourcing options to provide a multi-axis model for identifying the relationship between services, the maturity of the services and the potential sourcing options, depicted in Figure 2.

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Figure 2 – Sourcing strategies (MCKEEN, J D and Smith, H A, 2015, p.128)

This model, due to the overlapping of sourcing options, makes it difficult to decide on what is best (MCKEEN, J D and Smith, H A, 2015, p.128). Identifying your core functions (MCKEEN, J D and Smith, H A, 2015) and then, using the Gartner model above, identify the detail needed to determining the appropriate sourcing model.

 

Function sourcing profile

An additional technique to assist in identifying what sourcing model to use employing a value-chain mapping technique like the Wardley Map (WARDLEY, 2015), This will help not only identify how the various components are inter-connected, it supports grouping supportive services together, that can be used for the contracting construct (WARDLEY, 2015) discussed later in this report.

This creates the ability two developed a Framework for sourcing. Understanding what sourcing strategy to use (KAISER and Buxmann, 2012). Fee for service requires maturity, strategic partnerships require both parties to be equal on many levels; and Buy-in-contracts that requires body shopping (LACITY and Willcocks, 2000).

Contract Problems

 

Organisational IT maturity comprises of IT operational maturity and contracting experience. (LACITY et al., 2009). “Much of the fear of losing control comes from the feeling that IT departments are relinquishing control to IT third parties because they no longer own the IT and can’t see, touch or grab it” (KRIEGER, 2015). How much should be contracted out, how many contracts should exist (WARDLEY, 2015) and how much control is needed? When outsourcing services, there is an all or nothing approach taken by some organisations, though this is not necessarily the best, or most appropriate answer (CHOU and Chou, 2009). Contracting of ITO services should be designed to guide and protect all parties involved in the outsourcing arrangement (CHOU and Chou, 2009; LACITY and Willcocks, 2000).

Contracts are often seen as one-sided either benefiting the Client or benefiting the vendor (ALEXANDROVA, 2015). Using the models supplied above, understanding of what services and capabilities could and should be outsourced along with what outsourcing arrangements make the most sense is possible. There are some common elements that need to be considered when looking at sourcing contracts. The elements include knowledge enhancement or management, cost management, HR aspects and sufficient flexibility to allow the business to adapt and change (MCKEEN, J D and Smith, H A, 2015).

Knowledge enhancement is one area of value when looking at IT outsourcing arrangements (LACITY and Willcocks, 2000). During the process of transitioning to outsourcing an ongoing management of the service processes policies in cool should become well documented. This raises the concern of IP ownership, who owns the resulting IP; and IP retention, what happens to the IP in a back sourcing situation (BENAROCH et al., 2007).

In the contracting framework it should be clear who owns what IP, this should includes access to IP (KAISER and Buxmann, 2012). To ensure that IP is also retained the contract should include a knowledge management component, which addresses the systematic update and refreshing of process and business knowledge during the lifetime of the contract. This is especially pertinent when process improvements clause have been included in the contract, providing reduce cost of service and increased business efficiencies overtime. Where the outsourcing partner brings their own IP or joint IP is created, there needs to be provision for access and use of this IP should the services be backsourced. This protects both the client’s business now relies on new process and the vendor you may have enhanced or improved their own outsourcing capability during this time (KIEN et al., 2010). This is assists in controlling costs where services maybe backsourced or outsourcing suppliers change. Understanding what information needs to be generated and created adds to the transition-in costs (KRONAWITTER et al., 2013). Understanding what information needs to be handed over at the end of the contract supports identifying and understanding the scale operation needed to take on the services, the transition out costs.

HR costs, those associated with downscaling an existing IT operation in an ITO or up scaling and IT operation during a backsource are also contract considerations (MCKEEN, J D and Smith, H A, 2015). In an outsource these costs include redundancies and pay-outs but also include potential loss of it. In a backsource these include recruiting costs and delay in service transition due to recruiting activities. Both of these can be addressed contractually with the transfer of key staff. This may not be possible in situations where offshore resource thing is use, as noted previously the intense pressures of globalisation requires Service providers to use global labour arbitrage.

Finally there are the internal and external opportunity considerations providing the flexibility that is the agility and speed which service functions can be delivered and business exigency to rapidly shift or pivot to meet the market demands. If the contract has been set up with the above provisions in mind you should be sufficient flexibility in the structure to allow this.

ITO contracting experience is gained through the act of contracting services. Those organisations without experience should seek external assistance in structuring and negotiating contracts (LACITY and Willcocks, 2000).

 

Governance

Governance brings together these principals, policies and frameworks with structures and resourcing (ISACA, 2012) , it is critical to the delivery and ongoing success of ITO services (MCKEEN, J D and Smith, H A, 2015). Governance is delivered through open and clear communication between the parties encompassing not only the contractual obligations but look too validate and manage ongoing risks (BAHLIA and Rivard, 2005), communicate changing needs, future visions (KAISER and Buxmann, 2012) and strategies (BENAROCH et al., 2007) and provider model for engagement an issue escalation (MCKEEN, J D and Smith, H A, 2015).

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Figure 3 COBIT Governance structure (ISACA, 2012)

Governance models put in place the measures by which services will be monitored, aligning to the service and business specific needs (Key Performance Indicators and Service Level Agreements). By structuring the interaction and governance of IT formally, it allows the aligning of IT solutions to business initiatives (MIYAGI et al., 2014), these all lead to the formation of a Governance strategy (CHOU and Chou, 2009). Figure 3 depicts the COBIT 5 (ISACA, 2012) model for governance. This incorporates the necessary functions for successful governance of IT (MIYAGI et al., 2014), by measuring and monitoring progress, that can be used to not only manage the outsource, but support backsourcing activities.

Complex Service Level Agreement (SLA), Key Performance Indicator (KPI) structures and penalty clauses put undue risk on the vendor, adding to the cost of service. SLAs and KPIs within the contract should aligning outsourcing goals with the vendor incentives. This last piece I cannot stress enough. Too many times have I seen arbitrary SLAs and deliverables applied across contracts that add risk that MUST be accounted for (people or money to partly or completely mitigate, depending on penalties). 

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In part 3 I make my recommendations for sourcing framework and governance model.

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