Outsourcing Innovation - Launching Outsourcing Management as a Service

The dependence on service providers for delivery of services is on the rise. More and more IT and BPO leaders are realising that timely execution of strategic programs to meet business needs is an uphill task and requires matured sourcing practices. Over the last decade several organisations embarked on an outsourcing-led transformation; several of these initiatives failed to deliver the expected value as many underestimated the complexity and skills required in executing the outsourcing strategy. The leading cause was they failed to take a long-term view and answer critical questions:

• How do you maximise value and bring forward sustainable enterprise improvements from outsourcing initiatives?
• How do you integrate outsourcing with the usual business of the organisation?
• How do you calibrate the pace of outsourcing-led transformation while balancing your company culture, operating model and business objectives?
• How do you assess the level of complexity and take a structured approach to achieving the outsourcing goals?
• How do you maximise success and balance that with the myth of excellence?

The companies that succeeded had invested in building a business-led strategy, strong governance, investments in mature outsourcing competencies, and dedicated outsourcing management organisation (Program Management Office, PMO). Most importantly, they recognised outsourcing management as a key differentiator and core competence.

What is outsourcing management as a service?

In practice, outsourcing management can be successfully done as a service supported by blend of strategic and operational competencies. Outsourcing competencies are a cluster of related abilities, commitments, knowledge, and the skills that enable an organisation to act effectively in a job or situation. They signify the measure of the ability of an entity (department, organisation, person, and system), especially in relation to the overall outsourcing objectives.

Creating a meaningful, sustainable and high-value outsourcing impact will require enterprises to evolve matured outsourcing competencies. These would need to be extended to clients as well as providers. In the absence of mature outsourcing competencies, outsourcing experience can be frustrating for internal clients as well as vendors. Some of these processes may exist in buyer environments but they may not have been structured as competencies and positioned for continuous improvements.

Building and nurturing external and internal relationships requires that organisations evolve services and processes as subset of competencies to provide a positive outsourcing experience to customers and service providers. Implementing a “competency-based service catalogue” will be critical to providing a structured view to clients and vendors. Clients need to service providers also in addition to internal outsourcing users otherwise vendors won’t be able to deliver the expected value. “Outsourcing management as a service” will build mutual trust, keep vendors and outsourcing users strategically aligned and make it a win-win for both clients and providers.

Skills required for “outsourcing management as a service”

Outsourcing management as a service would require strong blend of skills in areas of program management, service management and relationship management. PMOs must own “outsourcing management as a service” and evolve these skills to implement and mature the competencies, and to derive maximum value from outsourcing initiatives.

Figure 1: Outsourcing Management as a Service
Source: Transformational Outsourcing, Page 48, (Copyright 2013)

In my book Transformational Outsourcing, I have introduced the Outsourcing Services Framework to manage IT outsourcing. The framework covers the depth and breadth of 30 key competencies, specialised outsourcing topics associated with each competency, associated processes and best practices that organisations need to implement as part of a defined service catalogue to generate greater value from outsourcing initiatives. The choice of which competencies to invest into will be unique to every company and will depend on the maturity of their needs and processes. The outsourcing objectives, nature of work, desired maturity of relationships, risk management needs and the size and scale of the outsourcing initiative may influence the level of investment in competency framework.

Figure 2: Outsourcing Services Framework
Source: Transformational Outsourcing, Page 302 (Copyright 2013)

Implementing competencies will provide a strong foundation for continuous improvements

Managing complex relationships is more art than science. “Outsourcing management as a service” provides guidance to improve service focus for outsourcing management and lays out a strong foundation to enhance value by improving productivity, reliability, responsiveness, and maturity of outsourcing initiatives. The outsourcing service framework of competencies is practical, flexible, and self-sustaining. Competencies and underlying services and processes can be designed to build on continuous improvements using industry practices (e.g.: Six Sigma, TQM, Lean etc)

Thinking in terms of the outsourcing cycle – strategy, design, transition, steady state and optimisation – can be a good foundation to start with “outsourcing management as a service”. The competencies required at each stage of outsourcing cycle need to be envisioned as part of a flexible framework that will be uniquely adapted to each company. Each competency can be designed to have underlying services, processes, benchmarks and metrics associated with them. Reviewing these in an integrated fashion at the program level and evolving dashboards would be critical to mature and identify areas of improvements. Thinking in terms of services and competencies will mature the already existing processes in alignment with outsourcing objectives.

“Outsourcing management as a service” provides a compelling critique of conventional thinking on managing outsourcing. It keeps the focus on quality of outsourcing experience and matures the outsourcing initiative in alignment with business objectives. Transformational Outsourcing captures a practical and hands-on perspective on deriving and sustaining enhanced value from “outsourcing as a service”; it lays out how various competencies collaborate with each other and how various organisational units support their implementation.

Managing the Managed Services - Part 2

In Part 1 of this series, I defined a managed service, shared potential benefits and a brief overview of the key components of a successful managed service. In this article, I will share some practical considerations of implementing managed services.

Complexity of implementing a managed service

Implementing a managed service can be extremely complex – managing by outcomes can be difficult for teams and may require a lot of education and change management. Companies that have co-sourced extensively can consider this model to look beyond labour arbitrage and determine new areas of value generation and outsourced portfolio optimisation.

Instituting change is always a complex phenomenon especially when teams that are used to managing people are asked to manage vendors by deliverables and review work by outcomes. The occasional escalations about the skill and experience level of resources may get raised no matter what is the nature of engagement. Since the complexity is very high, the transition to managed outcomes is recommended to be gradual and done in a phased manner to reduce risk.

Design the transition into managed services to be gradual

Service providers will not typically agree to share risks and to SLAs unless they have better visibility into historical volumes, peaks, and lows, and understand the scope from ownership perspective. That is the core reason that most annuity efforts start as Time and Material (T&M) nature contracts. As the vendor gains experience and has better visibility into the effort, they are more willing to accept the financial and delivery risk.

Both sides (client and vendors) need time to understand the implications and ensure readiness to operate in a managed service model. As a best practice, organisations should not sign outcome-based contracts unless there is sufficient incentive and benefits are clearly evident. As a practice, it is advisable to introduce a pre-managed service phase that formalises the readiness required to move into managed services. A gradual transition approach will help clients with developing better trust and confidence on vendor delivery. The pre-managed services phase can be run like a project with specific deliverables:

• mutual understanding of drivers, value and benefits
• establishing scope boundary – size, scale, stability and volumes
• establishing data capture, SLA and performance mechanisms
• instituting formal governance and reporting
• establishing demand and capacity/charging models
• demand assignment and prioritisation mechanisms
• defining future state and continuous improvements roadmap
• ensuring vendor accountability, leadership and commitment
• negotiating incentives including productivity improvements
• establishing employee training and transition plans

The value levers in managed services

Outcome- and service-based contracts require structuring around outcomes and service delivery instead of resources. The focus should shift to optimising processes rather than being on the quality of resources assigned to projects. Managed services can essentially be your first team towards portfolio optimisation as it can open up lot more value-generation possibilities.

Labour arbitrage is only a small percentage of savings that firms can generate from outsourcing. More savings can accrue from process improvements, automation, consolidation, resource and technology pooling and freeing up of day-to-day oversight when efforts can be managed by outcomes.

Best practices

Implementing managed outcome models without proper readiness can lead to several issues; establishing balance between provider delivery competency and stakeholder expectations would be essential.

• Establish management support. Top-down support is important to drive conversions. Effort owners may resist the level of effort and change required to move into managed services and ignore the value they may be able to generate and sustain in the long term. The other need for top-down support is to transition displaced employees for exit or into more strategic initiatives.
• Keep the focus on value, maturity and readiness. Focus on clearly articulating the value from managed outcome engagements and make sure agreed outcomes drive towards win-win and are not one-sided. Establish mechanisms to: (1) establish business case that book value up-front; (2) review provider estimates to validate assigned capacity; and (3) track value generated to determine improvement areas in execution. Managed services direction will ask for increasing execution maturity and will establish a common understanding of estimation techniques and processes.
• Manage expectations. Even though vendors may be engaged for some time, their efforts may have been just directed to understand and run the operations (more likely what they agreed contractually) and not necessarily to optimise and generate value.
• Establish a consistent process. Work with your providers to evolve a process to transition efforts into managed services. Providers need the time and ownership to baseline various aspects of engagements before they can accept accountability.
• Evolve performance mechanisms. Evolve the SLA framework and other performance mechanisms that reduce delivery risk, enhance value and change behaviours.
• Implement informal workshops. Conduct educational sessions and trainings for effort teams to understand managed outcomes so that they can understand and apply what it means for them. Be prepared to address typical questions and evolve a FAQ and best practices documents. Typical concerns related to control, demand predictability, process and change management can be captured as part of these artifacts. Once you have some success, make sure those are showcase to broader teams.

Gaining maturity in managed services is a journey and can contribute towards deriving greater value from outsourcing initiatives.

Managing the Managed Services - Part I

It was interesting to hear several buyers at the recent SIG Global Sourcing Summit wanting to sign more and more managed services contracts. The trend was clearly evident and seems to be maturing gradually and catching pace in several areas including IT, BPO, cloud, real estate etc

Managed services are generally defined as the practice of outsourcing day-to-day management responsibilities as a strategic method for improving operations. The person or organisation who has direct oversight of the organisation or system being managed is the client and the organisation that accepts and provides the managed service is the managed service provider (MSP). While the day-to-day operation is outsourced to the service provider, the client still remains accountable to deliver the functionality, performance and experience to its business.

Managed services models can be difficult to implement; however, the benefits can be enormous and long-term once successfully implemented. Some of the key benefits come from:

• Outsourcing day-to-day work to free up the client teams to focus on more strategic business needs.
• Better cost-predictability and putting discipline on demand management.
• Implementing formal mechanisms to measure demand, assigned capacity, vendor performance and continuous improvements.
• Shifting the delivery risk from client to provider.
• Cost savings and specialisation depending on specific situations.

What mechanisms and practices build successful managed services?

Implementing managed services is hard work. Clients and buyers must collaboratively work together in the initial phases of managed service engagements to clearly establish the service. Understanding the nuances of managed services can easily get confusing for starters and therefore buyers must ensure that differences with contingent and SOW-based professional services engagements are well socialised during change management sessions.

A successful managed services would keep a long-term perspective and implement the following mechanisms and practices:

• Clear specification of the scope of services that the service provider will deliver.
• Clearly defined deliverables and expected outcomes.
• Performance measures to provide an objective measure of how agreed outcomes are being delivered. Performance measures can be in form of Service Level Agreements (SLA) built on well-defined metrics and data sources.
• Mutually agreed Unit of Work (UOW), estimation and pricing models.
• The service provider manages the service day-to-day with minimal (to eventually none) client involvement by establishing teams, processes, controls and reporting mechanisms.
• Strong governance and reporting mechanisms.
• Experienced client and vendor oversight that keeps a strong relationship and delivery focus to ensure that conflicting situations are properly resolved in time and outcomes are aligned to business needs.
• Change management and communication focus – especially during the transition phase of the service when client teams may resist a move into managed services.
• Agreed rewards for exceeding service levels and penalties for missing service levels.
• Service improvement plan that improves the service and matures it over time for greater benefits.
• Optimisation focus to derive greater benefits and consolidate similar services to build larger scale for better efficiencies. The benefits can be in the form of productivity gains, process improvements, better demand management, new ideas, innovation and other situational factors.
• Value tracking mechanisms to ensure that managed services are delivering the intended value.

Managed services implementation requires service providers to bring forward matured processes, strong leadership and experience of delivering similar services. Providers therefore today need to mature their service offerings to provide more comfort and trust to their clients to demonstrate their readiness to take engagements in the managed services model.

At the same time providers need to keep a rigorous focus on service improvements, reporting and value tracking to generate the desired benefits from the managed services. The increased efforts to take an end-to-end view of managed services will be rewarded by the clients who count on you to keep their business running at high efficiency.