Management Update: How to Build a Co-management Contract

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1 IGG W. Maurer Article 20 November 2002 Management Update: How to Build a Co-management Contract Today s sourcing needs of enterprises require contracts that are designed to be flexible and manage change. Gartner describes ways for enterprises to accomplish that with a comanagement contract. The contract models historically used for outsourcing have been designed to accomplish a number of goals, but those goals are somewhat static in nature. By contrast, today s sourcing needs of enterprises require contracts that are designed to be flexible and manage change. Gartner describes ways for enterprises to accomplish that with a co-management contract. Contract Models Older sourcing contract models were designed to do the following: Bring the enterprise IT environment to a predefined steady state Define the cost elements and pricing structure that shows cost control to the enterprise Map a path to profitability for the external service provider (ESP) Ultimately, the structure typically will define the parameters of risk acceptance by the ESP, risk transfer from the enterprise and risk mitigation efforts by both parties. Those contracts, therefore, have defined what the ESP will deliver to the enterprise, how the services will be transferred to the ESP, how the enterprise will be charged for the service, and may define the key players or key organizations within the ESP responsible for service delivery. They come up short, however, in defining the overall model for governing the contract, governing the decision-making (especially how the ESP and enterprise will manage demand), and laying the foundation for managing change throughout the life of the contract. Governance Model The process into which enterprises and ESPs enter for making decisions concerning the provisioning of IT services by the ESP can best be described as contract governance. Governance is often overlooked in large outsourcing deals because the emphasis in the planning, negotiation, 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 and implementation of the outsourcing agreement is focused on getting the deal done, getting it done as quickly as possible, and minimizing to the extent possible the impacts to the enterprise s business cycle. Lessons learned from past outsourcing failures as well as those that have been able to achieve a measure of success and, therefore, have continued to remain relatively intact and somewhat responsive to change helps enterprises can to govern their contracts today. Governance requires more than a single enterprise resource, or enterprise organization working with its ESP, to manage the contract intent and its ultimate outcome. Governance requires a more complex set of organizational units, defined processes, committed leadership and a virtual, changing approach to contract governance. Governance can be broken into three essential elements: The sourcing office, which is responsible for service sourcing, coordination and evaluation The sourcing committees The sourcing communities Transferring those components of governance and transitioning enterprises and ESPs to adopt that joint approach to governing the contract will be a challenge for many organizations. The transition will be slow, as enterprises define the boundaries, costs and implications of outsourcing governance specifically as it relates to the dynamic needs of the enterprise, changing market and business conditions, and fluid landscape of ESPs and service solutions. Organizational Structure Enterprises often falsely assume that outsourcing means delegating the IT decision making to the ESP. Enterprises need to carefully examine the functions that the vendor will provide and determine what retained staff functions need to be handled internally. To do this effectively, roles such as contract manager and operations manager are required in addition to relationship manager. Best practices also dictate that enterprises engage personnel from business units who are directly affected by the ESP engagement to participate in the deal management. The entire deal management team should do the following: Take part in regularly scheduled meetings Review annual operating plans Provide a forum for discussion of major issues Guide the relationship manager Review performance results (i.e., particularly out-of-compliance results) Recommend changes to processes and procedures

3 Review and act on contract terms, conditions and change orders Act as arbitrator should problems arise No matter what size the deal is, each element listed above exists in all deals. In smaller deals, roles will most likely be consolidated; in larger deals, it is common to find multiple individuals in each of the above categories. No matter what an enterprise s deal type or size, it is critical that the enterprise and ESP manage all aspects of the deal. The use of a sourcing office can help in directing the most appropriate use of resources through its efforts in evaluating and selecting ESPs. The sourcing office, however, does not perform the work of managing projects, services and the resources that deliver day-to day-operations. It can provide the overall approach and framework within which the enterprise can build an organizational structure needed to manage the outcomes of the sourcing arrangement (see Figure 7). Figure 7 Managing Sourcing Arrangement Outcomes Illustrative Functional Alignment Business unit liaisons Decision authority Business unit liaisons Service recipient/ CIO Service provider regional executive Relationship manager(s) Relationship Relationship manager(s) Integration and standards Architecture design Business analysis Change management Financial management Performance management Application SMEs Network services SMEs Platform SMEs SME: Subject matter expert Source: Gartner Research Design Business Delivery Strategic planning Integration and standards Business analysis Change management Financial management Performance management Application Network services Desktop/distributed Contract and Governance Linkage

4 Gartner research shows that co-management contracts will focus on relationship management, handling change and delivering value. Gartner research has identified six primary processes that constitute the gear box in a complex, changing, long-term relationship. Those processes are: Strategy Membership Integration Equity Audit Feedback The contract structure and governance linkage is straightforward and seamless. The six comanagement processes reflect a logical link to the contract addenda (see Figure 8). Figure 8 The Contract and Governance Relationship Strategy Membership Integration Equity Audit Feedback Addenda Startup Relationship management Exit strategy Strategic objective Transition Transformation Ownership Statement of work Service level Pricing Measurement Communication Innovation Roles Responsibilities Risk Demand Exit plan Independent Contract change control and management Advisor Charter Source: Gartner Research

5 The key to success is a combination of relationship management (i.e., through the six comanagement processes) linked with effective, day-to-day service management through a flexible contract structure. Without the linkage, the deal will suffer. Cost of Management Enterprises often wonder what the optimal number of resources should be, and what the enterprise should spend on managing its ESPs. No single best-practice approach exists and, therefore, no single metric for proving its value. Gartner recommends that enterprises should expect to spend between 3 percent and 11 percent of the value of the deal on contract administrative management, contract delivery management and contract relationship management. That amount will vary depending on many factors, including: The scope of the deal and contract arrangement Internal relationship and the ESP management capabilities of the enterprise Maturity of processes for managing outsourced environments that exist within the ESP Relative size and complexity of the deal (i.e., number of resources, geographies and business units involved) Type of contract, whether utility, enhancement or transformation Business expectations of the enterprise Despite knowing that more is required by enterprises to manage their outsourcing deals, many do not spend an adequate amount of money on managing the deal, leading to suboptimal relationships and contracts that fail to deliver fully on their intended benefits. Bottom Line Now, more than ever, it is essential for enterprises to have a flexible sourcing contract structure that allows for continuous change and helps the enterprise manage the relationship and risk. Utilizing key contractual elements reduces the deal risk significantly. Enterprises should use best practices to develop a flexible outsourcing relationship, including independent performance assessment and benchmarking as the primary mechanisms for keeping the deal on track for both parties. Written by Thomas Berg, Research Products Analytical source: William Maurer, Gartner Research For related Inside Gartner articles, see:

6 Management Update: How to Build a Co-management Contract Team, 13 November 2002 Management Update: Developing and Managing ESP Relationships for Business Outcomes, 23 October 2002 Management Update: The Sourcing Life Cycle Can Be Key to Business Operations, 2 October 2002 Management Update: Application Service Provider Market Status and What s Ahead, 14 August 2002