Trust and Control: The Key to Optimal Outsourcing Relationships

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1 Roger Cox, Ian Marriott Strategic Analysis Report 9 April 2003 Trust and Control: The Key to Optimal Outsourcing Relationships Gartner's Confidence Index model enables enterprises to measure and track the confidence both parties have in a relationship. Start by assessing the components of trust and control, which underpin confidence. Management Summary In January 2002, Gartner Research set itself the challenge of measuring trust in IT outsourcing relationships. However, the findings went much further than that. The research discovered recognizable and predictable patterns of behavior that determine how the business-to-business relationships work. The research continues, and this report highlights the key findings from the project so far. In summary: Trust is one aspect of the confidence that each party has in the relationship. The other is the controls that govern the relationship. Optimal relationships require the right mix of trust and control. Gartner has devised the Confidence Index model (CI), which indicates the level of trust, or distrust, at three levels: organizational, group and individual. Determining the CI starts by assessing the importance and effectiveness of the 10 components of trust and of control. Deals with high CIs tend to operate more effectively than those with low CIs. Quality will likely be higher and operational savings could be as much as 15 percent. Board-level CI can quickly "flip" from positive to negative. When it does, termination of the deal seems to be inevitable. Many established deals have in-built "confidence disrupters" that can trigger a rapid decline in CI, resulting in wasted management time and loss of value. Gartner's CI model forms the basis for establishing and managing trust-based relationships, which are essential for the long-term success of strategically important outsourcing deals. Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

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3 CONTENTS 1.0 Trust Is Hard to Define Confidence: A Balance Between Trust and Control Components of Trust Components of Control The Confidence Index Organizational Trust (CI of +3 or Higher) Group Trust (CI of +1 to +3) Individual Trust (CI of 0 or +1) Individual Distrust (CI of 0 or -1) Group Distrust (CI of -1 to -3) Organizational Distrust (CI of -3 to -5) The Dynamics of Confidence in Long-Term Outsourcing Deals Avoiding the Confidence Disrupters How to Improve the CI and Knowing When Not to Using Trust and Control in a New Deal Co-management The Growing Importance of Relationship Management The Six Co-management Processes Co-management Shapes Relationships That Work Case Studies International European-Based Company Nationally Based Company Conclusion April

4 FIGURES Figure 1. The 10 Key Components of Trust in an Outsourcing Deal...6 Figure 2. The 10 Controls Commonly Used in Outsourcing Deals...7 Figure 3. Confidence Requires Both Trust and Control...8 Figure 4. The Confidence Index...9 Figure 5. Poor Capability and Congruency Are the Top Two Factors in Deal Termination...11 Figure 6. Co-management Processes: Managing Relationships in the Face of Change...16 Figure 7. Outsourcing Relationship in an International European-Based Company...17 Figure 8. Outsourcing Relationship in a Nationally Based Company April

5 1.0 Trust Is Hard to Define In 2001, a Gartner study on trust and business relationships asked IT services customers to rate the relative importance of trust in their business decision making. Attesting to the criticality of trust, 93 percent of participants rated trust as highly important, with a mean rating of 9.1 out of 10. Participants revealed that individual interactions between a company and its stakeholders were the main drivers of perceptions as to whether a partner was trustworthy or not. Even prepurchase, when interactions with a company's representatives are typically limited and formalized e.g., in a sales call 94 percent of participants in the study indicated they would rely on the interactions in forming judgments about a service provider's trustworthiness. The ability to assess trustworthiness is increasingly honed as the parties progress through an outsourcing engagement. It may form part of the bid-qualification process within the service provider, and is frequently a major factor even if not formally stated in the customer s process for selecting a long-term service provider. However, there were no definitive views on what constitutes trust. It is clearly very important, but most enterprises find it extremely difficult to define trust. Put simply, people know trust when they see it, but are unable to define it. Early in 2002, Gartner Research, working with Dr. Andreas Hoecht of Portsmouth Business School, set itself the challenge of defining trust and making it measurable. However, the findings went much further than this. The research discovered recognizable and predictable patterns of behavior that determine how business-to-business relationships work. 2.0 Confidence: A Balance Between Trust and Control The confidence both parties have in a business relationship is determined by the level of trust and the perceptions of how good or poor are the controls that govern a deal. Not surprisingly, the research found that long-term outsourcing deals are usually constructed to rely on control," which organizations understand, rather than on trust, which is often perceived to be a less objective, and therefore more difficult, concept. In reality, a combination of both trust and control is always in play. Optimal relationships rely on the right balance between trust and control, and it is this combination that results in the perceived level of confidence each party has in the relationship. To be able to understand, measure and track confidence requires an understanding of the components of both trust and control that underpin it. 3.0 Components of Trust The study revealed that, for business-to-business relationships, trust involves more than is implied by a typical dictionary definition. The research identified 10 key components of trust that enterprises considered essential in a long-term deal between a service provider and service recipient (see Figure 1). 9 April

6 Trust Component Trust Indicators 1. Capability The technical, management and financial skills and resources to do the job. 2. Congruency Perception and reality are the same. 3. Predictability The ability to set and meet expectations such as financial certainty, financial stability and delivering to targets. 4. Dependability Both parties can anticipate how each other will perform and behave, particularly in changing and unpredictable circumstances. They are confident in each other s capabilities to get the job done. 5. Mutuality As shared committed to a common goal. 6. Communications Giving and receiving the correct information in a meaningful way and time. 7. Consistency Standards, processes and protocols are understood and consistently applied. 8. Responsiveness The ability and willingness to understand and react to new circumstances and to harness skills and resources to meet those needs. 9. Compatibility Often called cultural fit, this must include an understanding of the differences between the service provider s and customer s delivery models e.g., some banks have found it difficult to find an IT outsourcer with a standard delivery model that matches their trading floor environments. 10. Reputation Built up by consistent, independent validation from a variety of sources including personal experience, word of mouth, press coverage, case studies and references. Source: Gartner Research (April 2003) Figure 1. The 10 Key Components of Trust in an Outsourcing Deal At any point in time, the level of trust is based on the perceived importance and effectiveness of each of these components. By assessing both importance and effectiveness on a five-point scale (1 = low, 5 = high), organizations can measure and track trust in their business-to-business relationships. Using this model in major outsourcing deals reveals that trust operates at three primary levels in a relationship: Organizational trust, which is characterized by perceptions of a company name or a brand. Group trust, which is characterized by the perceptions of the groups of people affected by, or delivering the outsourcing deal. Individual trust, which is characterized by the perceptions of the key individuals managing the deal for the service recipient, and the key individuals managing the deal for the service provider. Trust at each of the three levels is typically high when an outsourcing deal is first signed. As the relationship progresses, however, the perceptions of trust at each level can differ significantly at any given point in time. At board level, for instance, organizational trust can remain high even when trust at the group or individual level has declined significantly. 4.0 Components of Control In any long-term deal, trust and control work hand in hand. However, to understand the controls that are in play means looking beyond the contract and into the workings of both the service provider and service recipient. The details of the controls can vary significantly from organization to organization, but tend to 9 April

7 fall into recognizable groups e.g., decision mechanisms and change mechanisms. The research project used 10 common groups of controls (see Figure 2). Control Component Examples 1. Feedback Ability to: Mechanisms Do predictive reporting of changes, risks or issues that could impact a service or project. Monitor key performance indicators. Test the health of the operation. 2. Decision Ability to rapidly evaluate and prioritize options. Mechanisms There is a simple and reliable approvals process. There are clear delegation limits. 3. Mechanisms For Ability to: Setting Goal and Set key performance indicators and working practices. Standards Impose, or accept, technical standards. 4. Mechanisms For Ability to define an integrated set of activities that constitute end-to-end service, Setting Roles and who will do each activity, and who will be accountable. Responsibilities 5. Mechanisms For Ability to predict, plan, evaluate and prioritize potential changes, and assess Managing Change associated benefits and risks. 6. Mechanisms For Ability to make use of service credits, gain-sharing incentives and sanctions. Managing Behavior 7. Mechanisms For Ability to: Financial Identify all costs and manage to budget. Management Set and control contingencies. 8. Mechanisms For Ability to: Ensuring Continuous Continuously identify opportunities for improvement in costs, service levels and Improvement management. Implement and measure selected improvements. 9. Mechanisms For Ability to benchmark price and service levels, and use the results to continuously Ensuring Peer-Group improve the service. Parity 10. Mechanisms For Ability to: Managing Demand Balance requirements with costs. Prioritize. Source: Gartner Research (April 2003) Figure 2. The 10 Controls Commonly Used in Outsourcing Deals 5.0 The Confidence Index Confidence cannot be established through trust or control alone. Confidence depends on achieving the right mix of trust and control, and the research suggests it is the key to optimizing business-to-business relationships. The combination of trust and control drives the level of confidence the parties have in the relationship (see Figure 3). 9 April

8 Appropriate Increasing Confidence Control Inappropriate Low Trust Source: Gartner Research (April 2003) Figure 3. Confidence Requires Both Trust and Control High Everyday, hundreds of thousands of small, seemingly innocuous failures of confidence occur in business relationships. These failures often go undetected and uncorrected, but are the cause of wasted management time and missed opportunities. Although, corporate policies and codes of conduct are seen as critical aspects of managing relationships, they do not specifically address confidence. However, without a reliable means of inspecting and tracking confidence, enterprises have no means of managing it. To track the level of confidence at all three levels of an outsourcing relationship, and throughout the life cycle of a deal, Gartner has devised the Confidence Index (CI), which is depicted on a scale from +5 to -5 (see Figure 4). At the highest level, there is complete organizational trust; at the lowest level, complete organizational distrust. In between, there are varying degrees of group and individual trust and distrust. The figure also shows how the state of the relationship varies across the CI scale, ranging from "Comanagement established" to "Exit being planned." (Co-management is described in Section 10.) Enterprises can use Figure 4 to position themselves on the CI scale, and to track the state of their outsourcing relationships over time. 9 April

9 Co-management Established Co-management Initiated Seek Best Practices Ad Hoc and Random Group Activities Organizational Trust Individual Relationships Group Trust Confidence Index Group Distrust Individual Distrust Individual Trust Confidence Index Organizational Distrust Conflict at an Individual level Conflict Spreading to Group Level Both Parties Actively Score Points off Each Other Blame Culture Emerges Exit Being Planned Source: Gartner Research (April 2003) Figure 4. The Confidence Index CIs can be assessed at different levels in a relationship e.g., at board/senior executive level, at the operational level (for individuals and groups) and at the end-user level. The rest of this document concentrates on board-level and operational CIs since, at any given time, there can be significant differences between them. The different levels of trust and distrust shown in Figure 4 are described in more detail below. 5.1 Organizational Trust (CI of +3 or Higher) Organizational trust is typically characterized by a high level of trust in a company name or brand, coupled with a belief that good controls have been established in the deal. At a CI of +4 or +5, the parties are much more likely to forgive each other even for relatively serious mistakes. A can do attitude pervades the deal. Although it is common to find a CI of +3 at the start of an outsourcing deal, there is often little in place to maintain it at this level. A CI of +3 or higher will likely not be sustained over the long term without formal "co-management" practices being established. (The six co-management processes for an outsourcing deal, and the activities within them, are described in Section 10.) When the CI reaches +5, the parties in the relationship proactively, but formally, seek opportunities to improve efficiency or enhance business value. 9 April

10 5.2 Group Trust (CI of +1 to +3) Group trust is characterized by the groups of people managing or affected by the relationship, in both the service provider and service recipient, having a medium to high level of trust in each other, and believing the controls are adequate or effective. Group trust often starts with small groups of good people trying to do the right thing, but in an ad hoc and random way. As the group extends, or members change, it becomes necessary to formalize best practices to maintain the level of confidence achieved. This is the first step toward formal co-management. 5.3 Individual Trust (CI of 0 or +1) Individual trust is characterized by the key individuals managing the relationship in the service recipient and in the service provider having a medium to high level of trust in each other, and believing the controls are adequate or effective. These individuals will likely work well together, respect each other's capabilities and understand how others are positioned and motivated inside their own organizations. Gartner refers to this being the "You and me" stage of the relationship. 5.4 Individual Distrust (CI of 0 or -1) Individual distrust is characterized by the key individuals managing the relationship in the service recipient and service provider having a low level of trust in each other, and believing the controls are ineffective. Communication between them will likely be strained, or even avoided. Gartner refers to the state of the relationship as being "You vs. me." 5.5 Group Distrust (CI of -1 to -3) Group distrust is characterized by the groups of people managing or affected by the relationship in both the service provider and service recipient having a low level of trust in each other, and believing the controls are inadequate the "Us vs. them" stage of the relationship. When the CI falls to -3, Red team/blue team behavior develops. This is when the service provider and service recipient actively try to "score points" off each other at every opportunity. With group distrust, significant amounts of management time are wasted on activities that add little or no value to the relationship. 5.6 Organizational Distrust (CI of -3 to -5) Organizational distrust is often characterized by an institutionalized lack of confidence in the other party. This lack of confidence can spread well beyond those who are affected by the deal or even know what the deal is about and what the issues are. It is often coupled with a strong belief that controls are totally inadequate and too soft." When the CI falls to -4, the parties will seek to blame each other over almost every issue. Management time, and maybe legal costs, are now being consumed at a growing rate. The next, and often the most costly, step is exit terminating the deal, either in part or in whole. Gartner's research has shown that the two trust components most likely to cause the termination of a relationship are Capability and Congruency. Low scores for these two trust components would respectively cause 75 percent and 72 percent of organizations to terminate a relationship (see Figure 5). 9 April

11 Organizations were asked if a poor score for each trust component would cause them to terminate the relationship, reconsider it or would make no difference Capability Congruency Predictability Dependability Mutuality Communications Consistency Responsiveness Compatibility Reputation 75% 25% 72% 28% 55% 45% 45% 55% 40% 60% 39% 58% 3% 35% 60% 5% 31% 69% 21% 55% 24% 68% 28% Key 4% Terminate Reconsider No Impact Source: Gartner Survey and Case Studies (2002 and 1Q03) Figure 5. Poor Capability and Congruency Are the Top Two Factors in Deal Termination 6.0 The Dynamics of Confidence in Long-Term Outsourcing Deals By using the CI model, Gartner has started to identify common patterns in the life cycle of long-term IT outsourcing and systems-integration deals. The research continues, but the key findings so far can be summarized as: Relationships with a high CI tend to operate more efficiently than those with a low CI. Evidence from outside the IT industry over the last 15 years points to improved quality and to potential operational savings in the region of 15 percent. Gartner has not yet precisely quantified the efficiency difference between IT and business process outsourcing deals with high and low CIs, but early indicators suggest that 15 percent is a realistic, even low, target. When an outsourcing deal is first signed, CI at both board and operational levels is often around +2 to +3 equating to group trust and that the control mechanisms established to manage the deal are generally considered to be both effective and important. CI at the operational level can drop quickly within a few months, if not weeks to 0 or lower, while holding up at board level. If the difference in board and operational CIs persists, some service providers exploit this situation by rapidly escalating day-to-day operational issues to the customer's senior executives. When operational CI falls to 0 or lower, wide differences start to appear in the perceived effectiveness and importance of the control mechanisms with some controls being seen as less important than before and others as not working. There appear to be several common triggers (see below) that can initiate a further decline in operational CI. However, the fall in operational CI seems to be reversible provided it stays above -3 and board-level CI is maintained. 9 April

12 As operational CI declines it is not uncommon for control mechanisms to start to be perceived as both highly important yet totally ineffective. In this situation, the service recipient's attention can shift from achieving the primary goals of the deal to day-to-day micromanagement of the service provider. Board-level CI appears to be remarkably resilient, but when it changes it can flip from positive to negative very quickly. A deal may last for some time with low, and declining, board-level CI. However, if board-level CI does not improve, it appears to be very difficult to eventually avoid partial or total exit from the deal see the first case study in Section 11. Termination seems to be inevitable even if operational CI has improved. CI scores seem to correlate with the three types of outsourcing relationships defined by Gartner: Utility delivering good quality day-to-day services for a good price; Enhancement focused on effecting a significant change; Frontier enhancing the business and delivering new revenue. Enhancement and Frontier deals tend to have higher CIs than Utility deals. 7.0 Avoiding the Confidence Disrupters Analysis of the trust and control components shown in Figures 1 and 2 reveals that some long-term outsourcing deals have management or contractual structures with in-built confidence disrupters." These can trigger a rapid decline in CI, resulting in wasted management time and loss of value. Some common examples are: Technology-refresh costs that are hidden in the price for ongoing services in a long-term IT outsourcing deal, when future technology needs are clearly unknown. Long-term outsourcing deals that are built on the assumption of achieving a steady-state condition, when the business environment is one of change and uncertainty. Deals that are based on a service provider's delivery model that is not suited to the specifics of the customer s business e.g., the ability to comply with external regulatory requirements. More generally, the triggers tend to fall into six primary areas: Lack of compatibility. Many service providers can provide experienced engagement executives and consultants with strong industry credibility, but this does not mean that a provider's delivery model is necessarily compatible with the specifics of the customer s business. For instance, not many IT outsourcing providers would have a standard delivery model compatible with a trading floor in a major bank. Lack of leadership. Senior managers who were closely involved up to the signing of the contract move their attention to other matters, assuming their job is done. In reality, it has only just started. Low scores for Compatibility or Mutuality (see Figure 1) often indicate a lack of leadership. Lack of skilled resources to manage the deal. Specialist skills and a professional approach are needed to structure and manage complex long-term outsourcing relationships. Few organizations, let alone IT departments, can flex to accommodate today s changeable business environment. Processes put in place to manage long-term agreements often monitor the wrong things and add little value. Low scores for Compatibility or Communications can often indicate a lack of skilled resources in the customer's internal team. Expectations not aligned with real needs. The details of a long-term agreement, spelt out at the beginning of the deal, may not be what each business unit involved thinks it will actually be receiving, 9 April

13 or needs in the long term. Managers then complain about the service they receive. The in-house team left in place to manage the deal is naturally unwilling to shoulder the blame. The service provider is then used as a convenient scapegoat, even though it may be fully meeting its contractual obligations. The outcome is often a reduction in trust. Low scores for Congruency, Mutuality and Communications are indicators of misaligned expectations. Poor deal structures. Short-term pressures can lead companies to sign unsuitable long-term agreements sometimes in the full knowledge that they are not doing the right thing. Many long-term outsourcing relationships are negotiated on the assumption that the company and its business won t change significantly, when the reality is an environment of continuous change and uncertainty. A low score for Congruency indicates a poor deal structure. Poor communication. A low score for Communications will likely indicate that the stakeholders in the relationship e.g., business unit heads, CFOs and other senior executives receive little effective communication about the progress of the deal. At best, they see deal-performance reports that, from their point of view, track irrelevant or inappropriate "hygiene" factors. As a result, they fail to appreciate the value of the deal. 8.0 How to Improve the CI and Knowing When Not to Higher CIs appear to be associated with improved efficiency, increased opportunity and improved satisfaction. But how can high CIs be achieved? There is no magic answer, but knowing where the boardand operational-level CIs are (see Figure 4 again), where they are heading, and where they need to be is a good starting point. If board-level CI is still high, and there is a clear need and desire to make the relationship work, then there is a good chance that a project to improve the relationship will be worthwhile and successful. Without these conditions, the chance of an improvement project achieving anything will likely be low. If both CIs are at -3 or less, establishing an exit strategy may be a better use of management time. Assuming that a clear commitment for improvement is available from board, or senior executive, level, the next step is to identify the specific issues that need to be addressed. One organization with several outsourcing deals and CIs in the range +2 to -1 used the CI model to improve its relationship with a major service provider by: Determining the relationship type. Business units had different perceptions about the deal a symptom of poor Mutuality, resulting in low Congruency scores and this was a major relationship disrupter. Thus, the starting point was to gain consensus across the business units on whether a Utility, Enhancement or Frontier relationship was needed. The business units expected an Enhancement relationship, whereas the contract was for a Utility relationship. Highlighting the lack of Congruency was a simple way of demonstrating the need for change in the relationship. Reviewing the trust and control status. The next stage was to measure the importance and effectiveness of each of the 10 trust and control components. This exercise identified key improvement areas. Using the CIs to track progress. The need to improve the CIs was then used to prioritize and track relationship-improvement initiatives. The CI model proved to be a simple mechanism for reporting progress back to the stakeholders. Joint customer/service provider workshops were used to drill down into each of the issues identified, and to build consensus for improvement. Running such workshops requires a good deal of cooperation 9 April

14 between all parties, which would be difficult if the CIs were too low e.g., -2 or -3. If the CIs are low, a good strategy is to focus initially on raising CIs through relatively simple quick wins, combined with simple and clear communication. Once the CIs have increased, a more detailed investigation of the issues should be easier to carry out. Following on from the workshops, a series of improvement projects was drawn up. Each project had an owner one in the service provider and one in the customer and the whole program had executive sponsorship. The compensation of key staff in both the customer and service provider was linked to achieving the improvement projects' milestones. Whatever approach to improving CIs is adopted, it is important to consider if the metrics driving individual and group behaviors should be changed. Improvements may not be possible until these metrics have been changed. 9.0 Using Trust and Control in a New Deal When negotiating a new deal, Gartner recommends that organizations include co-management in the contract. This will improve communication, reduce management time over the long term and make the whole process of optimizing trust and control easier. Gartner recommends that a trust and control review i.e., rating each of the 10 trust and control components from both a service provider and service recipient point of view is carried out with the preferred service provider before contract development. The findings from the review can then be used to identify and avoid the confidence disrupters from the very beginning of the relationship. Gartner also suggests that organizations experiment with using CIs as part of the deal-reporting mechanism Co-management 10.1 The Growing Importance of Relationship Management Gartner's research has identified three key elements that are particularly important for long-term outsourcing deals in fast-changing or uncertain business environments: Most major deal failures are due to a breakdown in the overall relationship between a business and its outsourcing provider. Successful outsourcing relies on a range of contacts and interfaces between the service recipient and service provider that go beyond the day-to-day delivery of services specified in contract schedules. Six "co-management" processes are especially critical. They are usually informal and involve individuals from both parties interfacing with each other. These crucial interfaces often collapse when these individuals change jobs or the scope of their jobs change. In an environment where the service provider and service recipient are both likely to experience change, relationship management is emerging as the key mechanism for reconciling shifting objectives, capabilities, resources and services. There is an increasing need for organizations to move from outsourcing deals based on buying specified services to deals based on buying a relationship, through which changing services and capabilities can be accessed. Success requires clear commitment and defined co-management processes. 9 April

15 10.2 The Six Co-management Processes A good deal today will not always be a good deal in years to come. As the objectives and capabilities of both the customer and outsourcing supplier change, smart relationship management will be needed to keep the interests of both parties aligned with each other. In addition to day-to-day service delivery, there are six key co-management processes that are needed for the successful maintenance of a complex, changing, long-term relationship: The strategy process develops the overall objectives, priorities, policies and procedures, and makes the broad decisions that define how the agreement will work. The strategy process sets expectations and maintains high-level integration and commitment across all stakeholders. The membership process identifies the capabilities the company needs for its business. It involves selecting appropriate service providers internal and external to provide the required capabilities. Specialist subcontractors may have critical roles to play, and this process must enable companies and their prime contractors to work together to assess and select key suppliers. The integration process builds and maintains disciplined cooperation between all the service providers and the company. It includes defining and, where necessary, updating the roles, responsibilities, priorities and performance targets of each stakeholder. The equity process controls the commercial arrangements e.g., funding, pricing, billing, asset ownership and intellectual property ownership. It ensures the continued alignment of stakeholders commercial objectives, and assigns responsibility for day-to-day administration. The audit process monitors the performance of all the stakeholders not just service providers against their agreed targets. It assesses four critical components: price and level of service; the state of the contract and relationships; stakeholder satisfaction; and vision and alignment. Most importantly, the audit process uses monitoring of specific targets to focus on improving performance and resolving problems. The feedback process deals with regular reporting, captures lessons learned, and supplies the flow of information needed for short-term corrections and long-term enhancements. In a changing and uncertain environment, the feedback process provides the information that makes it possible to look ahead e.g., three to six months identify potential problems and anticipate required changes. The activities that naturally fall under these process headings can be brought together in checklist form (see Figure 6) to provide managers with a practical tool for taming the complexities of outsourcing relationships. The checklist can be applied, with only slight modifications, to any industry or project, as it focuses on higher-level success factors than those concerned with day-to-day performance and delivery. 9 April

16 Strategy Membership Integration Equity Audit Feedback Goals Directions Policies Procedures Arbitration Set up change and exit management Standards Roles Responsibilities Service levels Demand Skills Resources Supplier selection Funding Assets Cost control Estimating Pricing Continuous improvement Performance assessment Deal evaluation Risk analysis Reports Meetings Forecasts Lessons Analysis Source: Gartner Research (October 2002) Figure 6. Co-management Processes: Managing Relationships in the Face of Change 10.3 Co-management Shapes Relationships That Work Gartner has defined the six co-management processes based on research carried out in many different industries. They are therefore generic, equally applicable to manufacturing, purchasing, construction, collaborative design work and most other types of business activity. However, most of the early testing and application of these processes has been within the IT field, where Gartner's consulting activities have already provided feedback on their value. Though IS organizations provide some of today s most complex examples of outsourcing relationships, understanding and applying the six co-management processes promises to deliver measurable performance improvements across the whole spectrum of business process outsourcing Case Studies 11.1 International European-Based Company This European-based company has outsourced its international IT operations. The deal covers data centers, midrange servers, desktops, and local- and wide-area networks, and includes help desk, remote operations and on-site support, for six European countries and some sites in North America. Some application development is included, along with some transformation projects. At the time Gartner reviewed the deal, it was two years old and had five years left to run. The main findings of the review are set out in tabular form (see Figure 7). 9 April

17 Relationship Profile Current: 80% Utility; 20% Enhancement Needed: 80% Utility; 20% Enhancement Board-Level CI -2 to -3 Operational CI 0 to -2 Contract Perception of Whether the Goals Can be Met Perception of Operational Control Mechanisms Key issues to be Resolved Perceived as an inhibitor Now: No Future: No Importance: High Effectiveness: Low * Lack of shared goals (poor Mutuality) * Service provider s lack of understanding of the customer s business (poor Congruency) * Deal structure based on transition to a steady state (poor Congruency) * Lack of clear, timely and reliable decision making (poor Dependability) Source: Gartner Research (2002) Figure 7. Outsourcing Relationship in an International European-Based Company With board-level CI as low as -3, a decision by the board to stay with the service provider and improve the deal was the first step in starting to turn the deal round. The second step was to recruit a senior executive, experienced in outsourcing deals, to take over and restructure the company's internal team and the deal itself. At the time of the review, this work had just begun. Although the company has pulled back from terminating the deal, this could still be the eventual outcome Nationally Based Company This deal is about the same size and scope as that of the European-based company, but does not have such wide geographic coverage. At the time of the review, the deal was about four years old and had another three years to run. The scope has been extended to include systems management services and call-center operations. This deal has a greater emphasis on Enhancement and Frontier relationships and, as with all such deals, the company is focused on making it work. Like the European-based company, this company has a desire to fix the problems, and few doubts that it will eventually succeed. A can do rather than can't do attitude pervades. The main findings of the review are set out in tabular form (see Figure 8). 9 April

18 Relationship Profile Current: 30% Utility; 30% Enhancement; 40% Frontier Needed: 20% Utility; 30% Enhancement; 50% Frontier Board-Level CI +2 to +3 Operational CI +3 Contract Perception of Whether the Goals Can be Met Perception of Operational Control Mechanisms Key issues to be Resolved Perceived as an enabler Now: No Future: Yes Importance: High Effectiveness: Medium * Price, pricing structure, flexibility and transparency (poor Predictability and Congruency) * Lack of ownership of problem resolution (poor Dependability) * Lack of integration across services (poor Capability) Source: Gartner Research (2002) Figure 8. Outsourcing Relationship in a Nationally Based Company Although there are some significant issues e.g., goals are not currently being met high CIs have been maintained and there is a clear desire to find solutions. This is primarily due to the strong focus on relationship management from the start of the deal Conclusion Organizational agility, and the ability to create value, require flexible thinking and creativity that go beyond process excellence. These factors are often "negotiated out" of outsourcing deals because traditional approaches are based on control rather than trust. Building a framework for a trust-based relationship is the most powerful way of ensuring the long-term success of a strategically important outsourcing deal. Gartner's Confidence Index model provides the foundation stone for establishing and managing trustbased business-to-business relationships. 9 April