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Solid governance model key to IT outsourcing contract success

A solid governance model and a relationship-minded manager are crucial to the success of an IT outsourcing contract. Here's what to look for.

Governance models are increasingly placing responsibility for IT outsourcing contracts under the sphere of the IT department rather than procurement, experts agree, as companies look to improve results and put the right person or team at the helm of the outsourcer relationship.

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Positioning IT outsourcing contracts in procurement's sphere might lead to lower-cost arrangements, but they're more likely to be lower quality as well.

"With procurement, it becomes an issue of squeezing the life out of the service providers and not really focusing on anything strategic," said Phil Fersht, a research director at Boston-based consulting firm AMR Research Inc..

"Procurement tends to focus on contracts that are punitive -- 'if you don't meet these service levels, we'll penalize you,'" he said. "At least when you have a CIO sitting over the contract, there's a little more focus on not just the cost, but on the outcomes and service levels."

In either case, employing a proper governance model for managing IT outsourcing contracts -- both domestic and offshore -- is as crucial to long-term success as any specific terms dictated by a contract.

"Your satisfaction with an outsourcing contract is almost always directly correlated to the governance of that contract, as opposed to how well you picked the right vendor in the first place," said Christine Ferrusi Ross, a vice president and research director at Forrester Research Inc., a Cambridge, Mass.-based research firm.

Clients who are unhappy with their outsourcing arrangements, even when service-level agreements are being met, feel that their outsourcers aren't business partners who are truly concerned about their companies' needs.

"They didn't have enough focus on the day-to-day relationship," Ross said of companies in such predicaments. "What governance does, first and foremost, is make sure you're satisfied with your contract."

Michael Lebiedzinski knows about that firsthand. Now an independent consultant, he previously served as the assistant vice president of IT at a large financial services firm, where it was the individuals charged with overseeing his firm's IT infrastructure outsourcing contract -- rather than the outsourcing company itself -- who probably led to the firm's decision to end the contract when it expired.

The former IT managers and directors who managed the contract, referred to as an enterprise technology services group, weren't well qualified, he said. "They had no formal training or background or competency in IT governance, and didn't have a good understanding of metrics or transparency," Lebiedzinski said.

What they lacked, Lebiedzinski said, was a broad understanding of the diverse needs of the company's many business units, and the kind of impartiality and trustworthiness required to oversee such a large part of the business. "They were out of touch with the needs of the business, and in some cases partial and subjective to the outsourcer's needs and not necessarily the company's needs," he said.

"Outsourcing works when you have a good governance model in place, and an understanding of what you want to get out of the outsourcing agreement," he continued.

VMOs another option for IT outsourcing governance model

Ross touted the effectiveness of a well-run vendor management office (VMO), rather than a single individual, to oversee IT outsourcing contracts. Most VMOs have between two and 10 people, she said, depending on the size of the company.

Managing IT outsourcing requires qualities of a leader
Our experts listed the following skills as needed in those who manage IT outsourcing contracts:

  • Responsiveness to both the business and the outsourcer.
  • Commitment to cost transparency.
  • Broad understanding of the business units and their needs.
  • Contract management skills, including an understanding of metrics.
  • Project management skills, particularly financial oversight and team building.
  • Commitment to relationship enhancement within the team and outsourcer.
  • Appreciation for different cultures, including the outsourcer's
  • The individual or individuals should also know more about the business than the outsourcer does, Ross said. "It sounds a little silly, but CIOs and project managers come and go, and a lot of the time the biggest struggle is knowing more about your business than the outsourcer does," she said.

    Companies must be proactive in identifying talent and retraining IT and business professionals in managing IT outsourcing relationships, which requires a skill set beyond basic technology or business (see box).

    "What we've seen more recently are people from more of a business background being put in charge," said Dana Stiffler, a research director at AMR. "While it's important to have IT skills and know-how, it's almost more important to have people skills, contract management skills and project management skills."

    "Just because you might have an IT manager who is excellent at managing 200 developers, it doesn't mean he will be good at managing a relationship with IBM," Fersht agreed.

    Moreover, it's important to recognize that IT outsourcing is a two-way partnership.

    "They're now part of your team," Fersht said. "You need to make sure they're adding value to your team and that you're working effectively with them."

    Let us know what you think about the story; email: Rachel Lebeaux, Associate Editor

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