Governance makes or breaks outsourcing deal

The Running Room is focused on running human beings, not technology. But it was spending more time putting out fires in its IT department than using technology to advance its business.

“We’re a sporting goods company,” said Mike O’Dell, vice-president of Running Room Canada Inc. in Edmonton. “And we know our limitations.”

Up until 2003, the Running Room maintained its own IT infrastructure.

“We were continually fighting issues with our servers, maintaining data, staying online, and being able to serve our needs as we grew,” he said. “We started outsourcing because as technology changed, we just did not have enough in-house experience and expertise to be able to move with technology.”

Running to Q9
The company hired a consultant and, after six months of research and interviews, chose Q9 Networks, an outsourcer of Internet infrastructure and related managed services, and Graycon Group Ltd., which helps businesses optimize their IT investments. Since 2003, the Running Room has doubled the size of its IT infrastructure with Q9, and Graycon makes sure this outsourcing arrangement is working. “We have that triangle, and it allows for those checks and balances,” said O’Dell.

More businesses are turning to outsourcing as a means of controlling IT costs and keeping up with the latest technology trends. Some achieve these goals, while others end up in battles with their service providers over unmet expectations.

Having a governance model in place can go a long way to making that relationship work and resolving conflicts when they arise. And with government regulations, audit requirements and professional best practices, this is now an essential part of any contract.

If you go into an outsourcing arrangement without a game plan, the roles and responsibilities get blurred, said O’Dell. To ensure it works well, these roles and responsibilities should be clearly defined – for every service.

Platform Outsourcing
“In our case, because (we do) platform outsourcing, there’s a clear demarcation between what we do for the customer and what we don’t do for the customer,” said Osama Arafat, chief executive of Q9 Networks Inc. in Toronto. While Q9 manages data centre services, it doesn’t manage customers’ applications.

The Running Room measures the effectiveness of its IT infrastructure in terms of speed of services, outages and downtime. “If we don’t measure the effectiveness of this relationship – if we don’t consistently do that all the time – we’re dead,” said O’Dell.

Never Down
Its ultimate return, however, is measured in dollars and cents. “We have more than 80 stores now,” he said. “If our retail environment is not up, we’ve got a problem.” Since the company started outsourcing, its retail environment has never been down. “That’s our measure,” he said. “That’s where the money comes in to pay for this.”

Choosing the right provider requires diligence, said Jason Bremner, director of Canadian outsourcing services with IDC Canada in Toronto. It often makes sense to turn to a specialized consultant, he said, not just for legal assistance, but to determine price points and service levels. Your objectives will shape the selection of the provider, as well as the construction of the agreement.

“You need to figure out what you will concede to the provider (and) what you want to keep control over,” he said. “If you’re going to handcuff the provider in terms of letting them bring their best practices to bear, you’re either going to get a potentially dysfunctional relationship or the provider is going to say it will be X much more money for you to have that.”

Relationship Management
Managing the relationship and monitoring activities are crucial to avoiding conflicts or dealing with them before they become critical, he said. A performance management framework, dashboard or balanced scorecard approach should underpin whatever outsourcing arrangement companies opt for.

“The No. 1 thing you have to do in any kind of outsourcing relationship is manage the relationship,” said Hugh MacDonald, vice-president of strategic alliance management with CIBC’s HR division in Toronto. “That doesn’t happen because a couple of people like each other and go play golf.”

Structured meetings and a governance model allow people to communicate on a regular basis. “The contract can’t cover everything,” he said. “If what you’re trying to do is look at a contract like it was some supernatural text, it won’t work and you end up arguing about the position of commas.”

Research from MIT’s Sloan School of Management in Cambridge, Mass. suggests businesses that outsource need to spend four to seven per cent of their costs on managing the deal.

Banking on better HR service
CIBC turned to outsourcing to keep up with technology and, in 2001, signed one of the country’s first outsourcing deals with EDS Canada. About 40 per cent of its human resources function – anything that isn’t considered strategic – is outsourced.

“We were able to replace a lot of old technology with brand new technology that EDS had, and that was tremendously important for us to do from a strategic perspective,” said MacDonald. “If we had done it ourselves, it would have cost us upwards of $40 million to $50 million. We weren’t necessarily looking to save money, but we were looking to avoid a significant capital cost.” Because it’s a fixed-price deal over seven years, it allows CIBC to manage IT costs, while reducing risk and boosting productivity.

Both CIBC and EDS jointly operate various committees, and these committees ensure that people at various levels meet regularly to solve problems. If that doesn’t work, it has an alternative dispute resolution process. “In five years we’ve never had to do that,” he said. “We’ve always been able to make our governance model work.”

All hands on deck
A common problem in an outsourcing relationship is the buyer doesn’t have enough people charged with making the relationship work. And it won’t work if you leave it alone or deal with it on a part-time basis, said MacDonald. “These things don’t work if you have some executive whose job is to provide some passive oversight,” he said. “I have a full-time team of 12 people who do nothing but work with EDS on making the governance structure work.”

What you actually do in practice is more important than what you set down in the contract, said Greg Gulyas, vice-president of business development and outsourcing sales with IBM Canada in Toronto. For a relationship to work, you require an effective governance model, a way of measuring the success of that model and a process to deal with change management.

“These three things are like three legs of a stool,” he said. “A three-legged stool will sit firmly on uneven ground, and an outsourcing relationship can have some uneven ground and the ground can shift over time.”

Clarify goals first
While businesses might turn to outsourcing to save money, increase predictability or reduce risk, they need to be clear about why they want to outsource in the first place.

“For a company that has not outsourced much before, they may underestimate the cultural change in their organization,” said Gulyas. Outsourcing exposes hidden costs and service level issues in an organization, he said, and buyers doing this for the first time should think through the process so they get what they want in the long-run.

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