"Strategic Outsourcing - Some Nuggets "

Introduction
The latest trend is towards strategic outsourcing as is something new. Since it requires a large investment and continues for long term, it should be handled with extreme care. More often we find that the failure to handle the partnership or wrong decision making creates a lot of issues. At times it has a potential of causing serious injury to the business if we do not deal with the situation.

Large outsourcing deals are more close to a marriage where you will have to live with the pleasure and pain. Since the opportunity of experimentation is close to nil, it is worth to listen to experts and take correct decisions.

Why Outsource?
Most often we see the decision for outsourcing is not understood by many. Though the business case might tell few things like cost reduction, faster time to market, leveraging expertise etc, the experience will tell that there is something else which drives the decision to outsource and not so spoken and discussed in public.Some of these could be Outsourcing as a catalyst of change for CIOs which they thought they cannot do in current setup, Similar decisions taken by competitors triggering fear that this may provide competitive advantage, personal relationship which between CEOs of the two organization, leveraging brand value of another, strategic reasons of shared value creation over a period of time, financial flexibility by converting from Capex to Opex model etc. Most often we find CEO or CFO showing more interest in making an outsourcing decision and this where it is important for CIO to understand the trigger as it will go a long way in managing the relationship.

What kind of contract?
Once a decision to go for outsourcing is in place, the question comes what kind of contract is good. Is a large contract is good or a small contract is good. In my humble opinion we should remove ambiguity. Both less and more will have its own issues and hence avoid extra English everywhere. Wherever there is a chance of interpretation in different ways, it is good to add something for avoidance of doubt. Also core spirit of contract should be drafted separately and understood as not everything can be documented. There will be a lot to be discussed and executed under the framework of relationship management and the spirit of contract provides the basis of such discussions for making right decisions.The contract should have well defined chapters and termination of the contract should be very well structured from both sides.

One of the things which you also need to take care is the duration. The duration of the contract is sometimes longer than your predictability of business plan and company strategy. This is a dichotomy which you need to handle and changes in business scenarios will have to be baked into it. One of the ways we can look into the contract is the alignment of the contract every two years with the current situations.

Contracts are generally not referred in day to day executions as it is the processes of working together plays dominant roles. Contract discussion should not happen between delivery teams and separate groups should discuss contracts in a smaller forum. In my view, if you are referring to the contract too often during its execution, your relationship is close to getting over.

What Kind of SLA?
SLAs are key to relationship and agreeing on right set of SLAs is key to manage this. Too relaxed SLAs will not help you benefit and too tight SLAs can be potential cause of heart burn. One has to be very careful in dealing with the same before it is baked as an agreement. In my view business performance should be part of part of the SLAs which are aggregate of IT performance as well. Over a period of time, we should explore whether business outcome can be linked to SLAs after the relationship reaches a certain maturity.

What Financial models?
Be very careful in structuring the financial part of the contract. On many occasions CFOs would push for full opex models but it depends on company objectives and means of maximizing shareholder value. You also need to understand that how the entire value is amortized under Opex agreement and what happens to the balance sheet towards the beginning of the contract and towards the end of the contract term should you not decide to extend it. A full scenario analysis of payouts depending on the various situations including when your future situations for example profits down and revenue up, revenue down and profits up, both profits and revenue up and both profits and revenue down etc needs to be simulated in case if you have chosen to take a revenue share model. Also involve good financial consultants to structure the deal so that it does not cause injury to you and your partner as well.

What kind of Contract Governance?
Contract Governance is important part to come out of the roadblocks which you will hit during the course of execution of the contract. It is essential to setup forums starting from lowest to highest levels. The expectation alignment should also be made during first 3 months as experience tells me that a lot of hyped expectations are there in every organization before outsourcing and these results in mismatch. If you have not done it well, do not expect it to be drastically different immediately when you outsource. Rather at times you will see first 3-4 months will be settling period where you may even see drop in service performance. Also mutual respect is essential for our co-existence and hence my strong suggestion is for informal channels alongside formal means. Personal and individual differences and conflicts of ego at times come on the way of execution but if we convert into healthy relationship, we can have positive impact as well. This is true for the leadership as well.

Practically at the beginning we see the senior executives do not participate in governance forums. Even if there is nothing to discuss, such meetings should happen to just to say thank you for the great job done before it is too late. In my view phone calls or face to face meetings work better than emails and should be used more frequently than emails. Emails should be used for circulating the final conclusions or the action items from such meetings.

Win-Win or Win-Lose?
Tendency of the supplier to extract as much from customer to make the profits and margins healthy or customer's expectation to extract as much as possible from supplier to justify cost saving targets can create issues. In strategic outsourcing, we have to think bigger and at whole lot of money lying on the table rather than getting into petty conflicts. This brings an opportunity situational leadership for collaboration and jointly target business to get more value out from the market and create shared vision. If we focus our bandwidth and energy in doing that, we will have more options to make our balance sheets look good. In my view, if we create win, we get wins which is far more beneficial and builds trust.

Joint Success or individual success?
In strategic outsourcing, we do not fail or succeed in isolation with our partner. Every success story should be shared by both sides and both sides should look good in the eyes of business. If things are going well, communicating joint success stories also help. It is not them or post outsourcing if it is strategic.

Outsource Innovation?
We find one of the dilemmas today is whether outsourcing helps innovation. If the strategic outsourcing is driven in a tactical manner, outsourcing itself can be threat to innovation. A truly strategic outsourcing will bring innovation and strategic depth to the business. Even in my view, innovation can be outsourced to a trusted partner if the customer does not have core competencies or bandwidth to do the same. But choosing a partner which itself has the core competency to innovate and be a part of value chain is also important. In practice we often find that contracts are written in a way where innovation is towards the last few pages and not well thought of how and what it actually will deliver.

Choosing the right partner?
Choice of right partner depends on what you intend to achieve. Big may not necessarily be best always. Also choosing a partner larger in size then yours comes with significant challenges of managing the partnership. We have to very careful on this part and should think beyond cost and capability. If you intend to reduce the cycle time from outsourcing and chosen a partner whose bureaucracy and inflexibility is larger than yours, you cannot achieve objectives.

Conclusion
Maturity in driving the relationship is essential and should be driven from long term perspective. Joint value creation by leveraging strengths outside the existing contract can redefine the relationship and take it to the next level. CIOs and leadership should drive the partnership with the perspective of trust building and create strengths to overcome wrinkles which they will face over a period of time. Ignoring individual KRAs of cost savings and P&L to generate larger value for both the organizations will pave the way for success.