After the conclusion of an IT outsourcing contract and also in ongoing contractual relationships, the first priority is to ensure that operations are maintained and that the agreed service levels are met. From the very beginning, however, equal importance should be attached to the targeted cost goals in the continuous pursuit, so that these do not fall by the wayside in day-to-day business. Professional and efficient provider management with a mix of skills, tools and resources is the key to successful outsourcing. We report on our experience in optimizing provider management with savings of around 10 percent per annum.
In an outsourcing project and the associated selection process, the highest priority and all the effort go into selecting the right provider and drafting a watertight outsourcing agreement that takes all contingencies into account. Once this has been accomplished, the customer often follows the “outsourcing philosophy” of having placed his IT in competent hands and now himself puts his hands in his lap at the latest after the transition.
However, the challenge for provider management to consistently control IT costs and ensure compliance with the original objectives already begins with the first change (change in performance compared to the contract for which a charge is made), which usually takes place during the transition.
One of the original tasks of provider management is to prevent or control the proliferation of requirements in the form of changes. This applies both to the provider’s own organization and to change requests initiated by the provider, which exploit scope for interpretation and loopholes in contracts to generate additional revenue.
For a strong provider management, it is therefore essential to bundle the knowledge of the scope of services of the contract, the legal as well as the financial parameters and their billing and control in one hand or in a compact team on the customer side, if possible. Identifying and building up an appropriate team with the necessary skills and capabilities is therefore an urgently recommended measure for efficient collaboration with the future provider right from the start of sourcing projects. The goal must be to maintain transparency over the services received and thus cost control compared to market prices throughout the entire contract term.
In various audits and benchmarks, we repeatedly find that it is precisely at this point that potentials of 10% and more of the outsourcing costs p.a. lie dormant. In summary, the following reasons can be identified on the customer side:
- Only reactive provider management
It is not uncommon for a certain collegiality to have developed in dealing with the provider(s) at the operational level, which is certainly helpful and necessary on the one hand, but on the other hand must not lead to the roles of “customer” and “service provider” being reversed. Also, the sometimes tight resources on the customer side and the much better staffed provider side result in rather reactive management, which is usually associated with less than optimal cost structures. Here, flexible external support is sometimes helpful, if required, in order to “calibrate” the customer team again and relieve it.
- Weak position in contract interpretations
Often, after e.g. two contract years, the customer team is no longer aware of the originally negotiated construct, so that any interpretation gaps in the contracts can be used by the provider in its favor. There is also a lack of knowledge about the current market situation in other outsourcing situations in the event of changes or technological developments. Our perception is that a service provider offers the same services much more competitively and cost-effectively in new contracts than in existing outsourcing contracts as so-called change requests. This requires knowledge from other negotiation situations.
- Lack of knowledge of current market prices & developments
The majority of today’s outsourcing contracts include a provision for price benchmarking every two to three years. While this is not always done, it usually results in price reductions based on renegotiations. An alternative to this rather static benchmarking procedure is a continuous service that subjects the many small changes and anomalies in the day-to-day business of provider management to a market comparison and builds up corresponding negotiating positions.
- Lack of transparency, no effective controlling
Although a lot of reports are produced in almost all outsourcing projects and handed over to the customer, the value of the reporting is often not oriented to the financial variables and cost drivers. In contrast, reports on “superfluous” and no longer required capacities of desktops, storage or server capacities in the virtual environment or on billed but not ordered services have to be laboriously compiled. This takes time, but according to our findings provides significant leverage for better control and cost savings.
- No optimization and innovations
Probably the greatest lever lies in the optimization of requirements on the part of the departments and business units. On the one hand, the optimization of IT resources and service levels, which in some cases do not correspond to actual business requirements and the associated costs – i.e., are set significantly too high. On the other hand, the change of the agreed IT services for innovation in IT operations is probably the most difficult technically as well as organizationally, but also for both sides the biggest lever in cost reduction. Here, Navisco offers both relevant experience and technical tools such as “end-to-end monitoring”.
Increasingly, it can be observed that customers in this area of conflict seek external help in order to participate from the experience gained in other sourcing projects and to use current market developments not only in the form of price benchmarks, but also as coaching for their strategic and operational provider management.
When commissioning such external sourcing specialists, it is important to ensure that they are not contracted in the form of a classic body leasing arrangement. After all, the company’s own employees also have the necessary experience and intellectual skills; they may become “operationally blind” in the customer environment over time and lose current market know-how. Instead, it is advisable to agree on a strong profit-sharing component as part of the compensation arrangement so that the consultant works with maximum focus on goals and results. Last but not least, external consultants in provider management should have mature tools and best practices at their disposal, which can remain in the company as added value even after the end of the assignment.
For the support in the set-up as well as for the long-term support of the provider management on the customer side, Navisco brings in corresponding experiences and tools from many customer situations. These range from expertise on current market prices and enforceable contractual and non-contractual regulations to controllable service management processes and technical monitoring tools.
Successful collaboration to achieve the required quality in service delivery as well as the budgeted cost targets is the challenge in the implementation of an outsourcing contract. For this, a competent, interdisciplinary and powerful team on the customer’s side is essential, in which competencies such as knowledge of the service provision, technology developments, legal aspects of the contract, negotiation competence as well as current market knowledge and prices are bundled.
In this context, customers are increasingly integrating external capacities on a long-term and success-based basis in order to strengthen and enrich their own provider management team with specific experience, tools and know-how.