Multiple Choice Answers
Managing multiple outsourcing vendors is costly and complex, and in order to control contracts and providers, smart CIOs are using vendor dashboards and training their staff in finance.
BY SUSANNAH PATTON May 1, 2005 , CIO Magazine
For Filippo Passerini, Procter & Gamble's CIO and global services officer, managing outsourcing deals is a tall order. Literally. In December 2002, Passerini received proposals from three IT companies to take over much of P&G's IT services. Binders filled with documents from IBM, EDS and Hewlett-Packard weighed a total of 147 pounds and stood 6 feet tall when piled on his office floor.
Within five months, Passerini would sign a contract with HP that was so voluminous (10,000 pages) he had to sign it standing up. The $3 billion, 10-year deal with HP, it turns out, was just the beginning. Over the next four months, Passerini would sign three more large outsourcing deals, covering HR systems, payroll, facilities management and CRM—all with different vendors.
The rows of proposals that still line the shelves of Passerini's Cincinnati office reflect the complexity of what Procter & Gamble took on when it made a major shift toward outsourcing with multiple vendors. When P&G started planning to outsource IT and shared services functions, top executives considered a "big bang" approach with one provider.
But a year into the project they decided to award the jobs to a select group of vendors in order to take advantage of technical specialization. "We were looking for the best suppliers in different areas, so we decided that the big bang outsourcing deal wasn't for us," says Passerini.
By choosing to work with multiple outsourcers, CIOs can cut costs and foster competition between vendors, while taking advantage of vendor specialization and technical expertise. They can also reduce the risk associated with depending on a single vendor.
But as Passerini will attest, managing a stable of outsourcing partners can also be time-consuming, complex and expensive. "I would call it extremely demanding," he says. In P&G's case, Passerini has spent the past two years shaping a new governance structure to oversee the outsourcing vendors, an area in which the company had little previous experience.
Others with similar experiences would no doubt agree that managing multiple outsourcing vendors can be a strain. Through 2007, according to research group Gartner, multisourcing will remain the dominant sourcing model, but fewer than 30 percent of enterprises will have formal sourcing strategies and appropriate governance in place.
In a 2004 survey of 130 CIOs, 42 percent said they were dissatisfied with their outsourcing relationships, according to outsourcing advisory company EquaTerra. And the primary reason cited, according to EquaTerra, was a poorly developed, underbudgeted, underresourced governance model.
To make sure they are getting the most from their multiple outsourcers, CIOs need to dedicate staff to oversee each vendor relationship and establish regular reviews of vendor performance with measurement applications such as dashboards or vendor scorecards.
In contract negotiations, CIOs need to spell out that vendors should cooperate and refrain from blaming, or else risk losing the job. They need to find qualified staff with financial as well as technical skills to help run a project management office or some other body that can track all outsourcing agreements.
"Managing the outsourcing relationships requires a whole new set of skills," says Passerini. "You have to plan carefully, train your staff and set up a new management structure. None of this can be done overnight."
Going Multiple
In October 1989, Kodak outsourced the bulk of its data center operations to IBM in a 10-year, $250 million deal. It was a momentous occasion for Kodak and the dozens of other large companies that would soon follow the film giant's lead.
Kodak's deal set the stage for massive outsourcing negotiations with vendors such as IBM and EDS and helped to change the way corporate America thought about IT. Suddenly, CIOs were talking about core competencies, cost savings and strategic partnerships with their IT vendors.
Since then, as outsourcing has taken off, so has the complexity of managing the contracts. As opposed to the early days when several large providers ruled the territory, CIOs can now survey a varied landscape of small and large outsourcers.
And by carefully choosing providers that specialize in ERP, HR and desktop support (among other areas), they can get better overall service. "It's becoming a lot more rare to see one vendor take the outsourcing deal," says Gartner analyst Christopher Ambrose.
A survey of CIOs taken in February on cio.com showed that 42 percent use three or more outsourcing vendors, while 36 percent use fewer than three, and 22 percent are sticking with one.
Leading the pack of organizations that split up outsourcing among multiple vendors is GM, where Group Vice President and CIO Ralph Szygenda promotes the use of numerous, competing outsourcers. GM's so-called third wave of outsourcing comes after the automaker began to sever ties with EDS, a former subsidiary, in 1996. Although EDS is still one of GM's major IT suppliers, Szygenda and his team have sought to distribute deals among competitors. Right now, GM has "dozens" of outsourcing vendors, including "most blue-ribbon providers," says Maryann Goebel, CIO for GM North America.
Goebel praises the arrangement and stresses that the company's outsourcing approach has helped it cut its IT costs by $1 billion per year over the past six years. But she also says that the multisourcing strategy presents some major challenges and time commitments for IT organizations—and that she talks with one vendor or another "on a daily basis."
GM's version of multisourcing goes far beyond P&G's more measured approach, which currently aims to keep the number of strategic suppliers between two and five. "More than that would bring too much complexity," says Passerini.
The time commitment can mean higher costs, at least initially, although the actual cost of managing multiple outsourcing vendors is difficult to quantify. Gartner's Ambrose says managing any outsourcing arrangement adds 3 percent to 11 percent to the total cost of the deal. So if you have a $100 million deal with a single provider, it will cost from $3 million to $11 million to manage it.
To oversee P&G's vendors, for example, the company has designated 100 people to form a governance organization under Passerini. Those employees focus exclusively on managing the outsourcing relationships. Although the company hasn't broken down the added expense of this governance team, such a large structure would add considerable cost. "There's no question you need more management bandwidth to handle multiple providers," says Larry Bonfante, CIO of the US Tennis Association.
The Need for Specialization
From the large multinationals such as P&G and GM to midsize and smaller companies, many CIOs are finding they have to break up their outsourcing deals in order to find the services they need. The US Tennis Association, which has annual revenue of $200 million and an IT staff of eight, outsources almost all projects and operational services.
Affiliated Computer Services (ACS), Bonfante's primary vendor, takes care of infrastructure services and application support, while a specialty business, TMA Resources, handles his membership management. He also works with Quero for data mart services and is investigating possible partnerships with application development groups.
For Bonfante, the former head of global IT planning for Pfizer, the need to find specialized services, such as for membership management, requires him to slice up his outsourcing pie. "I have yet to find one vendor who can do everything at a good-to-great level," Bonfante says.
However, he says that because of his organization's small size, the larger outsourcing providers—such as HP and EDS—aren't interested in hearing from him. "You can find people, but it really limits who you can bring to the dance," says Bonfante.
Dave Copas, senior vice president of logistics and information systems at privately held chocolate maker Russell Stover, agrees that CIOs at companies in the middle tier (with revenue between $100 million to $1 billion) need to gauge how significant they are to an outsourcing partner. "If I were at a $40 billion company, I might go to an IBM and have them do the entire infrastructure," he says. In his current situation at a midsize company, however, he thinks he gets better service from a group of smaller, more specialized vendors.
Governance Is Key
To ensure better service, however, companies need to dedicate time and staff to oversee vendors' performances. And to avoid losing control of service levels or the scope of an outsourced project, they'll have to make sure they have qualified people in place to manage the contracts and create a governance structure. "Companies that don't put professionals in there to handle the relationships will get outmanaged and outexecuted by the providers," says Mark Hodges, chairman and cofounder of EquaTerra.
Since P&G's Passerini signed outsourcing deals, he has successfully built a 100-person governance structure dedicated entirely to the major outsourcing deals—including (in addition to HP) a $400 million, 10-year deal with IBM for HR services; a five-year agreement with Jones Lang LaSalle to handle P&G's facilities management; and a five-year deal with Sykes Enterprises to outsource customer care, CRM applications and global fulfillment services.
The governance team conducts monthly reviews with each vendor to make sure all service-level agreements (SLAs) are being followed.
Passerini acknowledges that the operation has been difficult to manage because P&G has had to develop new skills that range from service-level agreement monitoring to how to draw up vendor scorecards within the organization. "This governance area is completely new to us," he says.
Passerini trained his own staff by bringing in P&G purchasing teams to teach them best practices for dealing with suppliers and also made sure that he had experts in subject matters from IT to CRM and facilities management. One of the more difficult aspects has been turning the mind-set of P&G staff from doing everything to overseeing vendors. "Our company has traditionally been a culture of doers," he says.
P&G's outsourcing governance team uses software to track hundreds of service levels and to enter the data into a "scorecard" that allows them to visualize vendor performance. "This is nothing revolutionary," he says. "It's getting a feel for it that is key."
Ideally, companies should manage their outsourcing contracts as a portfolio in order to get a better value, according to outsourcing experts. Mark Hodges notes that several large multinationals that juggle from eight to 12 outsourcing contracts manage their vendors by separate business functions, rather than with one central group.
The result, he says, is that these companies buy more services than they actually need. "If you manage these deals collectively, as a portfolio, you will spend 15 percent to 20 percent less than if you let outsourcing deals go unsupervised or uncoordinated," Hodges says. The best way to do this, says Hodges, is to create a project management office that will oversee all of the relationships.
An alternative would be to have a "center of excellence"—or a group that sets standards on procurement—so that the actual outsourcing relationships are handled by the lines of business.
Hodges notes, however, that there are very few examples of such portfolio management of outsourcing contracts, with the possible exceptions of GM and Procter & Gamble.
At P&G, members of the governance team are assigned to work on one of the outsourcing contracts, but they interact and keep tabs on how their colleagues manage the other vendors.
Goebel says that in order to assure smooth operation of GM's multiple outsourcing contracts, she and her colleagues ask each vendor to meet with them on a monthly basis to identify projects that need special attention—a major production outage, for example, or some other problem. "We bring everyone to the table to talk about what is going wrong, and how we can fix it as a team," Goebel says.
Then, Goebel and her colleagues put together annual vendor report cards that detail each key vendor's performance in the service it provides and its level of innovation. The results are improving service levels across the board, Passerini and Goebel say.
Joe Eckroth, CIO at toy maker Mattel, says that although he doesn't have a designated office for managing his multiple IT outsourcers, he appoints a senior IT person to work directly with each vendor. "If you don't manage and nurture that relationship like it is your own development team, you could get totally out of sync and watch the level of your services drop considerably," says Eckroth, who works with five to 12 outsourcing vendors at any one time. For example, he recognizes achievements from his vendors. "You can't treat the vendors working with you as stepchildren," he says.
The more complex management structures at GM and P&G help those companies to focus their attention on vendor relationships. At GM, Goebel describes an "unusually thin layer" of IT staff who focuses almost exclusively on vendor management because so much of IT is outsourced.
This "thin layer" comes to about 2,000 people around the world, and most focus on managing outsourcing vendor relationships, she says. At P&G, the existence of a massive shared services department makes it simpler to place all outsourcing relationships under one group.
Keeping Track of Vendors
With multiple outsourcers, sometimes the sheer number of relationships to be managed means you'll also need to automate. Such was the case in April 2000 when Cheryl Rowden took over as director of IT finance at Verizon Wireless.
The wireless provider doesn't outsource IT infrastructure but regularly brings in consultants from a stable of 150 vendors to work on IT projects. "It was clear that I could never add enough headcount to track all of these relationships," Rowden says.
To Go Multiple Or Not?
For some companies, staying with a single outsourcing vendor is still the way to go.
Verizon Wireless wanted to competitively bid on consulting services from a wide variety of vendors, so it set up a structured system to compare vendors and then handle payments. The following year, Rowden selected InSite, a Web-based services procurement application from Chicago-based Fieldglass.
With her staff trained in the application, they currently track 110 active vendors that consult with Verizon Wireless. During the first year, the competitive bidding process saved Verizon Wireless 17 percent of its approximate $100 million total IT spending on consulting services.
The savings came as a result of putting everything out to bid, thereby getting services at a lower cost.
Using the application has also allowed her to compare vendor performance and reward those who do well. And ven-dors have not been complaining, she says, because the streamlined systems, which also keep track of what the company owes to vendors, mean they get paid in "record time."
Lawyers working on outsourcing deals advise clients to use a software application to track vendor relationships and performance, and to help create regular reports and dashboards. "The relationship management people and IT people in charge of outsourcing deals need to live and breathe this kind of stuff," says Kevin Colangelo, a senior associate at Kramer Levin Naftalis & Frankel who works on large outsourcing deals.
Play Well Together
Collecting and storing hard facts on vendor performance provides ammunition when you need to get tough. Copas of Russell Stover says that after years of experience working with multiple vendors, he has learned that it pays to be forceful at times—especially when those vendors aren't cooperating with one another. Six months ago, for example, he was rolling out point-of-sale systems in his stores, which involved his ERP outsourcer OneNeck IT Services, NT specialists at another smaller outsourcer called IT21 and several other groups working on installing broadband. One of those groups, a third-party aggregator, was supposed to provide an IP feed but ended up squabbling with some of the other vendors. "I wrote them a letter and canceled their contract," Copas says. "At the end of the day, ideally, we're not sure who's working for who. We just have to get the job done."
Copas has learned over the years to monitor outsourcing vendors from the start. He makes sure that he has a clear set of performance indicators in his contract, such as uptime percentages for major systems and data centers, so that he can go back on a regular basis to track performance. "If there are violations, the SLA bells start ringing and money changes hands," he says. When he took over the IT department at Russell Stover in June 1999, he determined that the current outsourcer was doing a poor job and considered bringing the Baan ERP system back in-house. But fearing he would have trouble finding the talent, he decided to outsource the ERP system to OneNeck. Soon after, he outsourced payroll to ADP, the company's EDI manufacturing system to Sterling Commerce and desktop support to IT21. Recently, he outsourced the website to MarketLive. For the most part, those vendors work well together, he says.
David Karabinos, EquaTerra's chief operating officer, says that companies should draft contract agreements that enforce cooperation. One example is the "operating level agreement," which can require that providers work together for the company's benefit. Joe Hogan, vice president of worldwide marketing, strategy and alliances for HP Managed Services, says all parties—including the client and other outsourcing providers—usually sit down and spell out the need for cooperation at the start of any deal. "Sometimes it's a handshake; other times it means signing an integrated service-level agreement," Hogan says.
Copas would agree.
"You have to manage your relationships so that you don't have finger-pointing," he says. Simply put, he advises CIOs to make it clear at the start of contract negotiations that the vendors risk losing the job if finger-pointing starts. "You have to say, 'Look, we're the customer, and you're here to solve the problem.' If they can't play that way, they're not a good partner for us."
Send your outsourcing management ideas to Susannah Patton at spatton@cio.com.
Emergence of tools for outsourcing services governance
Strategic sourcing governance is a new management discipline in the formative stage.
As multi-sourcing grows, the role of commercial software tools to provide insight into services delivery, automation of processes and executive dashboards will grow.
Whether buyers should invest in these tools themselves, or use what is offered by providers - or co-invest with providers would have downstream implications on how easily multiple providers can be measured and compared against the same set of metrics, who is the ultimate "owner" of the performance data and how easy is it to replace or add-on additional vendors.
As a senior officer involved in providing offshore CAD services to mid-size companies, I might mention another smart governance measure for the outsourcer: to post an executive at the vendor’s premises.
This way the outsourcer can detect early signs of corporate ’illness’ in the vendor before the illness starts wrecking the service provided. The outsosurcer has more time to switch providers, or to try and help out the ailing vendor.
Author: Lucky Balaraman,
Executive Director
The Magnum Group
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