Moving Beyond Ad-hoc Outsourcing to Service Level Based
Moving Beyond Ad-hoc Outsourcing to Service Level Based
By: Ian S. Hayes
Hot Issue: How can
IT organizations expand the value of their outsourcing efforts?
Adversarial buyer/supplier relationships breed discontent,
result in short-term relationships, add significant overhead to the negotiation
process, and limit outsourcing engagements to ad-hoc projects with constrained
benefits and cost savings.
Establishing mutually beneficial, long-term
relationships gives providers incentive to build company-specific skills, eases
knowledge transfer between both sides, increases the odds that deliverables
will meet expectations, and lets the parties exploit growing synergies.
For long-term arrangements, Service Level
Agreements supported by automated tools are an ideal way to objectively manage
performance, resolve issues proactively, and continuously improve performance.
Initial approaches to outsourcing are typically
project-focused. When a need arises, an
IT organization sends an individual project to a chosen service provider for
completion. Although this approach
offers value, it does not take full advantage of partner capabilities, leverage
the experience gained from previous projects, or foster the creation of a pool
of company-knowledgeable external resources to tackle future work assignments. Forging a longer, mutually beneficial
partnership between buyer and vendor enables the parties to develop a deeper understanding
of each other’s needs and capabilities, capitalize on the synergies that
develop between them, and extract greater efficiencies than are possible in the
Moving from adversarial relationships to business
In the business world, it is fairly common for buyers, especially
large ones, to act adversarial in their relationships with suppliers, using
their size and financial wherewithal to browbeat suppliers into acceding to
their terms. This “us versus them”
mentality creates a hostile environment from the outset, one in which
outsourcers are treated as fungible components to be hammered on price and
replaced at will if they fail to satisfy the buyer’s every demand. Rapidly rifling through suppliers in pursuit
of the best possible deal, buyers are limited to outsourcing discrete
projects. From the service provider’s
perspective, after devoting substantial time, money and resources to winning
the deal and executing the project, there is no incentive to invest in building
company-specific skills without assurances of obtaining some follow-on
work. This type of adversarial
relationship discourages optimal performance and results in short-sighted
By switching from adversarial to business-partner mode, and
developing close relationships with one or several service providers, a company
can reap much greater, durable benefits.
Long-term relationships offer security and opportunities for future
business to motivate providers to build and retain company-specific
expertise. As these skills strengthen,
knowledge transfer between buyer and provider becomes more efficient and
effective, increasing the odds that the provider’s deliverables will map to the
buyer’s needs with little handholding.
Enduring relationships also foster communication and information sharing. Knowledge of the buyer’s strategic objectives
and expected development needs permits the service provider to plan, create and
staff services proactively to meet those needs.
Insight into the service provider’s capabilities enables the company to
apply those strengths in unforeseen and creative ways. Lastly, by eliminating the adversarial aspect
of negotiating and executing contracts, the parties can greatly reduce their
respective overhead. Writing and
reviewing RFPs is a costly proposition for a buyer, and responding to RFPs is
an even more expensive undertaking for suppliers. Much of the sales costs associated with
short-term, ad hoc projects can be avoided in longer term engagements. In sum, all of these benefits provide
sustainable savings and efficiencies that far outweigh the short-term cost
savings gained from more traditional approaches.
The role of the service level agreement
If a long-term relationship is the way to go, the most popular
tool for managing performance is the Service Level Agreement (SLA). An SLA
specifies service expectations and commitments, identifies the metrics that will
measure performance to those commitments, and sets incentives and penalties for
exceeding or failing to reach commitments.
The foremost advantage of a well-written SLA
is its ability to identify objective, mutually ascertainable performance
standards. Using SLA
metrics to monitor performance allows quick, proactive resolution of problems,
and generates data to drive continuous improvement programs – an effort which
the parties are more inclined to undertake within the context of a long-term
relationship. SLAs are dynamic documents,
and modifications are inevitable to accommodate changes in the buyer’s needs or
the provider’s delivery capabilities.
Drafting strong SLAs is a thoughtful and time-consuming
process. Effectively using them to
manage performance is daunting without tools to automate the otherwise manual
metric data collection, analysis and reporting.
Implementing tools may be financially prohibitive for short-term
projects that lack economies of scale, but are a smart investment for long-term
relationships, where costs are more apt to be recouped and expected benefits to
be much higher. The efficiencies that
SLAs enable, combined with their superior ability to objectively evaluate
performance, generate substantial benefits over the life of a long-term relationship.
Long-term relationships foster information sharing to help
shape more responsive services and capabilities. SLAs contribute to alignment by offering an
objective means of assessing and adjusting levels of service, and detecting
mismatches between expectations and actual performance for early resolution.
Longer-term engagements, where suppliers have the possibility
of capturing future work, motivate them to invest in services advantageous to
their clients, build a resource pool familiar with client specifics, and
introduce efficiencies whose benefits accrue over time.
Creating and managing strong SLAs is a critical talent not
routinely found in IT organizations.
Establishing a Program Management Office, to build the skill sets
needed to choose and instantiate metrics, and to provide ongoing management
of SLAs, is often advisable.
For relationships that will last several years, it is easier to
justify investing in processes and tools to ease interaction between the
parties. In particular, tools to
support SLAs are increasingly available and powerful, helping to automate
metrics collection, analysis and reporting.
To expand the scope and benefits of outsourcing
arrangements, view suppliers as potential business partners rather than
adversaries, and move beyond price as the exclusive focus of every arrangement.
Strike mutually beneficial deals that encourage
service providers to invest for the future by acquiring company-specific
knowledge and developing synergistic services and capabilities.
For outsourcing agreements with terms exceeding
two years, use SLAs to define expectations and commitments, and to proactively
manage supplier performance over the life of the engagement. Support the SLA
with automated tools to assist in collecting, analyzing and reporting on metric
Ready or Not, Global Sourcing is in Your IT Future
Metrics for IT Outsourcing Service Level Agreements
About the Author
Ian Hayes, TAC Thought Leader, has extensive experience
in improving the business returns generated by IT investments. He is the author
of three IT books and hundreds of articles, a popular speaker at conferences,
and his clients include many of the world’s top corporations. He helps
companies focus on value-creating projects and services by better targeting IT
investments, improving the effectiveness of IT execution, optimizing the
sourcing of IT activities and establishing measurement programs that tie IT
performance to business value delivered.