Management Update: The Sourcing Life Cycle Can Be Key to Business Operations

Transcription

1 IGG L. Cohen Article 2 October 2002 Management Update: The Sourcing Life Cycle Can Be Key to Business Operations Many CIOs and other enterprise executives are evaluating strategies for using service providers. Many problems, however, can doom a sourcing project. To help executives achieve successful sourcing strategies, Gartner provides guidelines for understanding and using the sourcing life cycle. Many CIOs and other enterprise executives are evaluating strategies for using service providers. Many problems, however, can doom a sourcing project. To help executives achieve successful sourcing strategies, which can be critical to business operations, Gartner provides guidelines for understanding and using the sourcing life cycle. Strategic Sourcing: A Life-Cycle Activity Gartner has analyzed strategic sourcing as a life-cycle activity in which a sourcing strategy leads to an evaluation-and-selection process, then deal negotiation and relationship management. As enterprises make the transition to that way of working, each of the four phases of the Gartner Sourcing Life Cycle can pose a challenge (see Figure 1). Figure 1 The Gartner Sourcing Life Cycle Gartner Entire contents 2002 Gartner, Inc. All rights reserved. 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.

2 Strategic Tactical Sourcing Strategy Alignment Organization assessment Core co mpetencies Market scan Make-or-buy decisions Risk analysis Phase 1 Phase 2 Evaluation and Selection Identification Criteria development Organization fit Selection process Partnership opportunities Sourcing Management Relationship Performance assessment Goals: reach busin ess objectives, efficiency, quality and innovation, Transition Phase 4 Phase 3 Contract Development Governance model Metrics Payment models Terms and conditions Provision for changes Phase 1 Sourcing Strategy. Needs and strategy are defined. Phase 2 Evaluation and Selection. Needs and strategy are transformed into tactical requirements. Phase 3 Contract Development. Tactical requirements evolve into contract and relationship principles. Phase 4 Sourcing Management. Contract and relationship principles become management processes. Once the discipline of strategic sourcing has been engaged, however, generally little state transition occurs (such as from internal provision to outsourcing), and the cycle condenses to a continuing and fluid mapping of sourcing strategy to the governance principles needed for relationship management. When enterprises have a virtual structure and are highly dependent on their partner networks, the sourcing strategy will be fused into their business strategies, which become extremely relationshipbased. Consequently, the sourcing life cycle is the key to successful business operations, and the sourcing strategy is the enabler of the business strategy. Developing a Sourcing Strategy Sourcing is about defining who will fulfill various parts of certain objectives. Business strategy is clearly the first step, but then what is the next step IT strategy or sourcing strategy? The classical, prescriptive world has been based on the sourcing logic of do that for me, this way, and followed the sequence of business, IT and then sourcing strategy. In a less monolithic and more dynamic enterprise, the second step is strongly oriented to define who will ensure the result, with less emphasis on how to achieve it. That makes sourcing strategy the second step, to quickly select

3 the internal or external entities that will carry out a project, a service or a process that is part of the global objective. The IT strategy will be worked out later, involving the service providers selected. A sourcing strategy is the starting point for mapping disruptive business change into effective changes to the operational environment (see Figure 2). However, the strategy should be revisited frequently to ensure that no misalignment is allowed to develop. Figure 2 Overview of Developing a Sourcing Strategy Stage 1 Discovery and identification Baseline assessment (i.e., review of operational status and strategy) Assessment of competencies, capabilities and knowledge capital Assessment and alignment of business and IT needs Initial risk identification and review Assessment of change capability High-level market and pricing Stage 2 Analysis and strategy determination Establish sourcing alternatives Identify most viable alternatives Establish and determine strategic sourcing principles Select risk-optimal sourcing alternatives Embody strategic sourcing principles in business case Stage 3 Implementation planning Performance improvement and development plan for retained functions Outsourcing objective statement and action plan Change plan for sourcing governance model Organizational restructure and skills acquisition plan Strategic gap analysis High-level sourcing strategy Business case Detailed sourcing strategy Implementation plan Emergent strategy feedback loops In businesses that are far more virtual than today s typical organizations and are highly dependent on their partner networks, each single organization s value will be far more related to those of its partner network than to only its own. For this kind of organization, the sourcing strategy will be an integral part of or practically fused into the business strategy, which must be highly relationship-based. The Sourcing Value Proposition

4 Gartner research shows that three broad types of relationships exist between external service providers (ESPs) and buyers of their services (see Figure 3): Figure 3 Three Types of Relationships Between ESPs and Their Clients Competitive advantage Business Value Effectivenessfocused Efficiencyfocused Enhancement Transformation 3% 5% 15% 17% Utility 80% Where the service volumes are now Relationship Complexity Utility relationships focus primarily on cost reduction, with the goal of maintaining consistency in the delivery of services. Enhancement relationships have productivity as their goal. Transformation relationships are characterized by a partnership focused on innovation and new business, changing the very nature of the basis on which an enterprise competes. Although it may appear that the goal for an enterprise is always to establish a transformation deal, that may not be the correct approach for the particular circumstances. Understanding and choosing which relationship best fits an enterprise s business strategy, and the value it wants from the deal, lays the groundwork for all subsequent decisions on how the deal is managed. Strategic Imperative: Enhancement and transformation deals require greater flexibility for the service recipient and the service provider to keep pace with ever-changing business requirements. Renewing the Value Long-term arrangements with ESPs must be built for change, rather than built to last. Flexibility is the key to successful long-term service supplier and buyer relationships. Over time, changes in the

5 business and evolutions in technology will create a need for contract renewal. Recognizing those inflection points will be critical to the long-term success of an enterprise s sourcing strategy. Contracts with suppliers must be assessed continually at the change or inflection points to determine how the terms and conditions and service metrics must be adjusted to create the next level of value. Once things stabilize, it is necessary to go back again and review the contract structures to adjust to the stabilized operation and bring the relationship back to the utility range until the next renewal is called for. Measuring Sourcing Value Four factors define a good sourcing deal pricing and service levels, customer satisfaction, contracts and relationships, and alignment and vision (see Figure 4). They vary in importance from deal to deal and as the relationship develops. Figure 4 Sourcing Value: Four Factors Define a Good Sourcing Deal Utility Enhancement Transformation Hard metrics (e.g., benchmarks and service-level review) 1. Pricing and service levels 2. Customer satisfaction 3. Contracts and relationships 4. Alignment and vision Soft metrics often failed to be measured In a utility deal, pricing and service levels will be the dominant factors and will typically carry a weighting of more than 50 percent in the evaluation process. Customer satisfaction will typically focus on the end user. An enhancement deal will place more emphasis on contract flexibility and the relationship (value will depend more on success in these areas than in a utility relationship). Customer satisfaction will focus on business managers and end users. Pricing and service levels will continue to be important, but they will carry a lower overall weighting than for a utility deal. In a transformation deal, alignment and vision will be critical to success. The deal will focus on business benefit or the development of new business, with the direct price of the services

6 delivered less critical to the meaning of value. Customer satisfaction will include business executives. The combination of the four factors, and the relative importance assigned to each, represents a set of common goals for the enterprise as well as the ESP. The Role of the Contract In the outsourcing market, as in most business arrangements, enterprises rely on a legal contract to define terms and conditions. However, the dynamic nature of business and technology makes it imperative that flexibility exists in any outsourcing engagement. Therefore, the combination of contractual management and relationship management defines how the partnership works (see Figure 5). Specifically: Figure 5 Importance of The Contract vs. The Relationship in Partnering Business Value Enhancement Transformation The contract Relationship management dominates Utility The contract The contract Contractual management dominates Relationship Impact = Contractual management = Relationship management = The partnership In utility deals, the contract is dominant. It prescribes technical performance levels. The relationship management aspect is also critical to act as a buffer to accommodate change and adjust performance. The criticality of a good contract serves both parties well to ensure clarity of understanding in expected outcomes, service-level agreements and other aspects of the deal. In enhancement deals, the contract remains an important guide to specifying outcomes, and process teams will rely on it to set and monitor performance. However, equal importance is given to the relationship management component, largely to accommodate flux in business cycles. In transformation deals, relationship management dominates. The contract provides basic structure. The partnership becomes the tool for ensuring the value of the relationship.

7 Preparing for Strategic Sourcing From time to time, it is beneficial to assess how well the enterprise is progressing in tackling the four main challenges of strategic sourcing (see Figure 6): Figure 6 An Aid for Assessing an Enterprise s Readiness for Strategic Sourcing Diagnosing sourcing needs 1. We generate our IT sourcing needs directly from the business strategy. 2. We differentiate our sourcing needs on the basis of different kinds of IT service. Done poorly or not at all 0 Done somewhat poorly 1 Done somewhat well 2 Done well or completely 3 Evaluating and selecting best sources Managing contract changes Providing sourcing management competencies 3. We identify our IT service sources on the basis of objective criteria. 4. We routinely evaluate potential sources inside and outside the business, using the same criteria. 5. We complement built-to-last contract items with built-to-change items. 6. We co-manage contract arrangements on a formal basis. 7. We have joint procedures in place for resolving conflicts in contract management. 8. We evaluate the staff competencies needed to manage IT sourcing. 9. We record and monitor the competencies we require of sourcing managers. 10. We recruit, develop and promote staff showing the appropriate competencies. Total score: Diagnosing sourcing needs Evaluating and selecting the best sources Managing contract changes Providing sourcing management competencies

8 The chart in Figure 6 is designed to help with the assessment. First, work through the chart and add up the total score. Then, check the total score against the following rating table: 24 or more: Strategic sourcing is a critical competency. 17 to 23: Need work in developing specific sourcing competencies. 9 to 16: A start, but need improvement. Sourcing is tactical and reactive rather than strategic. 8 or less: Sourcing is a function of procurement, not a competency of the IS organization. Finally, take the necessary action. Ultimately, building a sourcing strategy is about looking beyond today s tactical internal delivery problems to map out how business objectives will be fulfilled among an array of internal and external service-delivery options. Bottom Line More enterprise executives are looking at service providers as a way to obtain proven expertise to solve complex issues. Certain things, however, can cause significant problems, such as: Business objectives not being clearly communicated Unanticipated changes in the business environment Unrealistic user expectations Metrics not being based on business objectives The failure of senior management to sponsor the relationship and political influences within the enterprise Those problems can doom any outsourcing project. Enterprises and providers must work together to clearly understand objectives, set expectations, and sponsor and manage the project. That can be accomplished through the use of best practices, including properly selecting service levels for the outsourcing function, and knowing what to pay and how the charges are built. Successful enterprises will embrace the idea of a multisourced environment to support their business needs and will re-skill IT to effectively manage and optimize external provider relationships. Ultimately, the IT services market offers everything but maturity. Risk management is fundamental to every IT sourcing evaluation. The sourcing life cycle is the key to successful business operations, and the sourcing strategy is the enabler of the business strategy. Therefore, mastering sourcing governance and management is critical to seamless business operations

9 Written by Thomas Berg, Research Products Analytical source: Linda Cohen, Gartner Research For related Inside Gartner articles, see Management Update: Application Service Provider Market Status and What s Ahead, 14 August 2002 Management Alert: Mitigate Outsourcing Risk or Pay the Price, 10 July 2002 CIO Update: Benchmarking Helps Outsourcing Deals Stay Competitive, 3 July 2002