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Two ways to improve your outsourcing strategy in 2012

In crafting an outsourcing strategy, metrics matter -- but not the kind that many CIOs are using to manage their IT suppliers, according to experts.

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"Generally speaking, outsourcing contracts have way, way too many metrics to measure vendors effectively, and many are meaningless," said Linda Cohen, chief of research and sourcing expert at Stamford, Conn.-based Gartner Inc.

IT departments still tend to evaluate their vendors by the service-level metrics used to assess the reliability and performance of internal IT systems, Cohen said. These deep technology metrics don't mean much to the business if they can't be correlated to the value the company is getting from IT services, especially ones that are outsourced.

As CIOs plot their outsourcing strategy for 2012, experts recommend two ways to connect vendor services more effectively with business outcomes: tie IT metrics to business key performance indicators (KPIs) and go vertical.

Using business KPIs in an outsourcing strategy

Cohen argues strongly for a solution that translates IT service-level metrics to business goals. "You have to link those service metrics to key performance business indicators," she said. "Take a couple of the business's big objectives, turn them into KPIs and map which vendors are necessary to achieve those KPIs. It changes everything."

Tying IT service levels to business goals potentially could change everything, according to Thomas Young, partner and managing director for CIO Services-Infrastructure at Stamford, Conn.-based sourcing advisory firm TPI Inc. CIOs would find this outsourcing strategy useful for selling IT services to the business, he said. Business users want the IT organization to have "skin in the game" and are looking for metrics relevant to them. "This is the holy grail of outsourcing agreements. Everybody wants to do that," he added. "The problem is it is very difficult in today's market to achieve that in any meaningful way."

There are many moving parts that contribute to a KPI, even such relatively straightforward ones as customer satisfaction. The past few years' trend of smaller deals has in reality increased the number of vendors typically involved in enabling a business outcome. Young uses the analogy of serving up a Big Mac: "If I am responsible for making sure the onions are there, I can't be held accountable for whether the Big Mac was served on time or was good," he said. "It becomes harder and harder to hold the onion person responsible for the Big Mac."

When a KPI is not met, CIOs will need a good adjudication process to assign vendor responsibility. "If you don't have a good process for adjudicating what we call root cause analysis, suppliers just don't want to sign up for it," Young said. Most suppliers don't want to be responsible for the performance of other suppliers. "It becomes a socialist kind of thing."

'Going vertical' with IT outsourcing

One way around the problem of supplier reluctance is to set up an outsourcing arrangement so lucrative that the various providers can't resist the contract. The trick might involve getting outsourcing partners to work together. For instance, Linda Jojo, CIO at Energy Future Holdings Corp. in Dallas, managed to get five outsourcing partners to play nice. She used a strict governance process that included formal monthly reviews, whether or not there was a problem. Her staff "never blamed" an outsourcing provider in a business meeting. "We hired them; we're responsible," she said. She also oversees the KPIs to make sure they stay aligned with the business goals.

Midmarket CIOs could have another path that will take them to an outsourcing strategy's holy grail, however. It involves moving away from horizontal deals (where CIOs outsource a single function, such as server management) and toward what Young calls verticalized solutions. In this type of deal, the vendor is responsible for an entire process, such as loan application processing.

"I can now have a process that is end to end, and can start to develop KPIs because I own the process, from the credit scoring to the IT infrastructure that supports it," Young said. "To the extent that verticalized solutions become the norm, then I think it is possible to develop KPIs."

Let us know what you think about the story; email Linda Tucci, Senior News Writer.

This was first published in November 2011

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