SAP & IT Outsourcing – Vendor Management Tactics & Strategies

In an outsourcing arrangement you have one of two approaches: work up front to reduce potential disputes or be prepared to deal with the fallout.

The less aggressive you are with your outsourcing management, the more profitable you are to the outsourcing company.

Does fallout mean you will be in court? Sometimes yes, but sometimes it means re-negotiating a contract, or worse still, skyrocketing costs which can exceed the original costs.

Outsourcing Relationship or Arrangement

The sales personnel for outsourcing will push the idea of “relationships” and try to appeal to an emotional connection. Outsourcing is not about relationships; you build relationships with friends, family, and co-workers. Outsourcing is an arrangement with specific objectives, expectations, goals, outcomes, and profit motives. Outsourcing is secured through contractual agreements with the upfront specter of penalties, litigation, or other punitive action for non-performance.

Real relationships don’t generally have a contract and profit motive.

Managing outsourcing arrangements are not about employee relationships, which are handled far differently from vendor arrangements. This is about bringing an outsider into your organization, who has a profit motive and goals that are far different from those of displaced employees. Their profits come from your company or organization. The less aggressive you are with your outsourcing management, the more profitable you are to the outsourcing company.

Just because outsourced service management is not a “relationship,” does not mean it has to be nasty or adversarial. Ideally, you have a positive working arrangement. Even contract provisions should promote fairness and equity.

1. Don’t buy the lie! Outsourcing is not about relationships. Rather, it is a contractual arrangement with specific performance and compensation.

Managing the Outsourcing Arrangement

If you are considering outsourcing, the first and foremost criteria for success is strong and aggressive management. When it comes to SAP and IT Outsourcing – Vendor Management Considerations, remember the outsourcing profit motive. There is nothing wrong with a profit motive, but their profit does come from you as their customer. Realizing “cost savings” from outsourcing requires aggressively managing the outsourcing vendor.

“Thomas Young is a partner and managing director with the CIO Services-Infrastructure at TPI, an IT consulting firm based in The Woodlands, Texas. Prior to joining TPI, Young was financial director at AT&T Labs, another TPI client…

“Young said a big mistake people make is that after doing a yeoman’s job on the initial contract, they neglect governance and contract ‘maintenance’ that will keep the contract fresh. Even CIOs with $200 million of external spend on 20 outsourcing contracts will put their ‘C’ students on invoice verification. A $12 million per year contract that the CIO agonized over will creep to $18 million because managing the invoice and the contract was the employees’ ‘night job,’ an afterthought, Young said. ‘Vendors love the afterthought mode,’ he said” (A dozen danger signs that your outsourcing contract is on the rocks).

A lack of post-award contract management clauses in your outsourcing agreement can create serious issues. If the contract does not allow sufficient management of the outsourcer and their activities, resources, processes, and other key parts of their functions within your organization, then you have little or no control over outcomes that affect your business.

Every contract (arrangement) must be designed for continuing oversight and management.

2. Outsourcing arrangements need strong, aggressive, clear, and direct management. Service provider contracts are different from product contracts– oversight and active management must continue throughout the life of the agreement.

Governance of Outsourcing Processes

If you give up the management of the outsourcing processes, you will face disappointment and trouble. This does not mean their processes should not be used. However, it does mean you must retain control over the service delivery processes, as they directly affect your organization. Many of these processes should be reviewed in advance, and agreements must allow for periodic reviews and adjustments to ensure they are sufficient to satisfy the service recipient’s requirements.

As part of outsourcing governance, an outsourcer should provide key templates or document examples, such as the following:

• Matrix of Decision Makers
  • Org chart
  • RACI lists where appropriate
• List of all service provider processes, including ownership, responsibility, and objectives or outcomes
  • Individual task assignments within processes
  • Methods for continuous improvement of the processes
  • How process objectives or outcomes will be measured
  • Recordkeeping requirements for monitoring the processes
• Process definition for prioritizing service work
• Evidence of changed service delivery processes requested by service recipient(s)
• Change management and change control
  • Sample change order
  • Change order triggers
  • Change order processes (how are change estimates determined, what level of analysis is done, etc.)
• Issue, Risk, Decision, and Change register processes [FN1]
• Scope Management Plan
• Communication plan
• Quality Management Plan
  • Periodic and ad hoc quality reviews
  • Use of ISO/IEC 20000 guidance for service management
  • Capture and incorporation of lessons learned (PDCA)
• Etc.

3. A successful outsourcing arrangement must include a service recipient’s ability to understand, monitor, and adjust any service provider process to meet their particular needs.

Scope and Goals (Your Service Requirements)

The most persistent pain point with outsourcing contracts, whether they are for maintenance or for implementation work, is related to scope and goals. This really shouldn’t surprise anyone. Scope and goals have been a long-standing sore spot for IT projects for many years. So, why would anyone believe that scope problems are going to suddenly be resolved by outsourcing IT functions or operations?

For commodity-oriented services such as email, cloud-based storage, backup, telephony, and similar items, the scope and the functions are well known, and you have a healthy amount of market competition. These are true commodity services. Help Desk processing, such as addressing tickets and other items, is slightly more involved, but the methods to measure progress are known and manageable. Enterprise applications can be a little more challenging and must be carefully addressed if you want real results in a timely fashion.

Post award, after the outsourcing arrangement has begun, you must aggressively manage the vendor change order process. Outsourcing vendors frequently offer change order estimates that are heavily padded and skewed in their favor. After all, this is where they make up their revenue for any low ball initial bids to gain your business. To combat this, you must have clear processes to arrive at the scope and affects which determined the estimates.

4. Ensure you spend sufficient time addressing, creating, and reviewing the scope of what will be outsourced, as well as the scope of the outsourcing delivery. Scope that all parties understand will reduce surprises, including the surprises of “death by a thousand change order cuts.” When the scope needs changes, you need to have the internal resources do “mini blueprints” for every change requested. These “mini blueprints” form the basis of the scope and work estimates. Do not accept a vendor’s “thumbnail sketch” of the work estimate. More often than not, this estimate will be padded in their favor.

What Types of Services Are Being Outsourced?

Consistent with ITIL processes, you should create a “Service Catalog.” Normally, you would have two key separations: support/commodity and value/strategic.

By maintaining clear distinctions between the two types of services, you can make better decisions. Commodity services can be shopped around and consolidated, whereas value or strategic services should be evaluated separately and on a case-by-case basis. Services that require special or higher-level knowledge are assigned to the value/strategic category.

Broadly, generic service delivery (commodity) would be almost exclusively focused on cost, whereas strategic items would have some measurable value creation. Generic service delivery tends to be the most price sensitive. After all, cost is the primary driver. SAP Service Delivery versus Value Delivery provides some considerations for defining the two goal posts for a service catalog.

5. However you define your service catalog, the service choices should be binary between commodity options or strategic.

Handling Different Types of Service

After the binary division of your services, the focus moves to managing the procurement processes and engagement functions for those services. You must never mix these two service types in the same agreements, scope of work, or work orders. The outsourcing provider can still provide these services, but they should be treated differently.

For commodity services, you can often get a fixed price and have some stability and knowledge of what is expected. As mentioned above, scope can be well defined, and the outcomes are generally known by all parties.

When it comes to the value added or strategic services, the fixed fee arrangement may not be the best option. Fixed fee can work if you are a mature organization and know the application well. This is because you can reasonably clearly define the scope, processes, and requirements. If you are capable of creating an application specific “mini-blueprint” for your strategic services, then a fixed fee bid might work. Otherwise, you will experience the “death by a thousand change order cuts.”

Always remember who bears the scope management responsibility. In a fixed fee arrangement, the service provider bears responsibility, and they have a strong incentive to “game” the scope and kill you with change orders to make up for a low bid. On a time and materials basis, you as the client have the incentive to maintain scope to ensure the focus is on the right areas, but with enough latitude to deliver real business requirements.

6. Do not mix commodity services and value-added or strategic type services. Whether you outsource one type or both, mixing services makes tracking, monitoring, invoicing, and other activities very difficult for the client of those services.

Before You Engage in (Support) Outsourcing

I assume you will use an RFI-RFP process to determine candidates for your outsourced IT functions. The contents of that RFP cannot be more important. While SLAs and KPIs have mountains of possibilities (Top Ten Service Level Agreement Considerations), the key considerations lie in outcome measures.

We have all heard the old saying “what gets measured gets done.” When it comes to contract specifics, this is an absolute. Since these measurements are so critical to your RFP and your ultimate vendor contract, you should spend a lot of time and effort on them. Those contract schedules are the key to a successful outsourced vendor program:

“In IT, outsourcers often bid low initially in the belief that they will later be able to improve margins by exploiting the contract’s or customer’s deficiencies. The obvious point to make is that once the contract is signed, it’s set in stone unless both parties agree [to] its variation. So, if contract development or negotiation is rushed, it’s guaranteed that many unpleasant and costly issues will arise after the paperwork has been signed” (see Contracting Ownership Remains A Core Problem).