How to manage outsourcers after the contract's ink is dry

When the global trade association SEMI experienced a big revenue decline last year and had to cut staff, CIO Gil McInnes turned to outsourcing. He hired CenterBeam to consolidate and manage the semiconductor industry association's servers and infrastructure on a variable cost basis.

McInnes lauds San Jose-based CenterBeam's collaborative approach, and he feels the vendor has a great cultural fit with SEMI, which is also based in San Jose. The deal cut SEMI's IT budget by 8.3%.

Now comes the hard part: managing the aftermath.

McInnes says that although the shift to outsourcing is saving the organization money, SEMI paid a nonfinancial price: The remaining IT staff had to change the way it operates on a day-to-day basis. Accustomed to doing everything themselves, staffers now function at arm's length from both the physical devices and the people managing them.

"We've lost half our staff, [the remaining workers'] jobs have changed radically, and the challenges are just as big," McInnes says. Those challenges include developing metrics that accurately measure the provider's performance, even as projects evolve; refining processes in tandem with CenterBeam; and maintaining open lines of communication at all levels.

"If you're used to managing people, and now you're managing an external supplier, it's a tremendously different skill set," says Lawrence Kane, who performs IT sourcing strategy and competitive assessment work for a Fortune 50 company.

Observers say that despite decades of outsourcing in one form or another, IT organizations still have difficulty managing relationships with vendors after the ink dries on the contract.

In a 2009 survey of 57 IT executives by the CIO Executive Board, 54% of the respondents reported challenges with managing vendors. Improving this situation is crucial, because failure to manage vendor relationships effectively can destroy up to 90% of the value expected from the contract, the CEB says.

Indeed, without a good relationship, the provider can't be relied upon to help out in times of need and to suggest innovations and process improvements, says Ken Emery, a former CIO and a senior consultant at Ouellette & Associates, which conducts workshops on vendor relationship management.

Managing service providers requires a different mind-set from managing an in-house team. For instance, you might be accustomed to coaching and developing in-house employees, whose objectives are typically in line with those of the business. "But you're not doing that with an outside vendor, who has their own agenda and objectives," Emery says.

As a result, IT managers working with contractors suddenly need to be involved in a whole new realm of activities, such as bridging cultural differences and monitoring contractual performance metrics. They also have to bolster their negotiating and influence skills. "You might be trying to push the provider the same way you pushed your staff," Emery says, "but they're not directly under your control, and you can't dictate to them."

Outsourcing "is one of the most powerful weapons an IT executive has, but you can really shoot yourself in the foot with it," says Nick Krym, author of the e-book The Pragmatic Outsourcer and chief technology officer at PDR Network LLC, a provider of print and online pharmaceutical information in Montvale, N.J. "The impact could be worth millions to your company and even the loss of your career."

With that in mind, here are nine tips for managing outsourcers.

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Vetting service providers will become one of IT's top responsibilities, McInnes predicts, as companies realize the importance of aligning their own visions, goals and objectives with those of the provider.

A big reason for SEMI's success with CenterBeam, he says, is the ease with which their business models meshed. For example, CenterBeam offered a flexible pricing model that will enable SEMI to add capacity as its membership grows, without having to hire additional staff; other providers could only discuss pricing based on full-time staff equivalents. "That didn't have any meaning to me," McInnes says. "It wasn't a unit of measurement I was interested in."

2. Manage Cultural Differences

An often-overlooked area of alignment is culture, Emery says. Clashes can arise not just from, say, differences in nationality, but also from differences in company structure, such as cases where one party is entrepreneurial and the other is process-driven, or one is hierarchical and the other collaborative. Challenges can also arise when younger workers are mixed with older ones. If such differences are not dealt with, "they will cause intractable problems with the working relationship down the road," Emery warns.

3. 'Socialize' the Contract Talks

The writing of the contract is another area rife with pitfalls that can impede healthy relationships, Emery says. For instance, it's typical for contracts to be hammered out by executives in the purchasing and legal departments and then "thrown over the wall" to the managers working with the provider day-to-day. Instead, Emery says, operational staff and process owners should be involved early on, helping to create performance metrics and statements of work that really measure what you want to accomplish.

Kane agrees that it's important to work the requirements and expectations of business users into the contract. "If all of a sudden Fred from the help desk is gone, and [employees are] given a phone number to call for tech help, people will rebel," he says. Instead, ask representatives of the affected business units what they need and how they would like to see the process work so you have their buy-in. "You need to socialize the changes," Kane adds.

Ditto for the provider's side, he says. During the RFP and negotiation processes, insist that personnel who are going to manage the project be involved, not just salespeople. "You want people managing the contract who you've gotten to know, looked in the eye and believe can do the work," Kane says.

You also need to find a balance between working within the contractual framework and getting overly legalistic, Kane contends. "You won't be successful if you pull out the contract and get out the lawyers every time you need to talk about something," he says. "If you've hired the right supplier, you can work more with the spirit of the law than the letter of the law."

4. Refine Internal Processes

To ensure that a provider can work smoothly with your company, you will likely need to adjust your internal processes for incident management, change management, project management, contract management and requirements capture, says Bea Schrottner, a research director at the CEB. "This should enable you to interact with someone outside the organization that doesn't have strong knowledge of how things work in your organization," she says.

These are functions that many organizations don't outsource, Kane says. "It's common to retain a layer of integration staff for architecture, design, maybe security, contract management and relationship management," he says. There needs to be someone in-house who's intimately familiar with the contract; if providers are asked to do things they're not paid to do, or they get the customer to do work they're supposed to do, slowdowns, duplicate efforts and wasted money can result.

In some cases, it makes sense to adopt the provider's processes. That's what McInnes did for the help desk functions he outsourced to CenterBeam. "We had our own escalation processes, and there were things we monitored that CenterBeam did differently, but it worked well for them and their customers," he says. "Once we understood them better, it also worked for us."

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The old understanding of outsourcing was that you handed off work to an outside provider; the new understanding is that you're fully integrating the provider into your management processes, says Jagdish Dalal, president of JDalal Associates LLC, an IT outsourcing consultancy in Avon, Conn. "More companies recognize that they're integrating the service provider into their corporate fabric, which means it can no longer be a hands-off relationship," he says.

This is particularly true when you're expecting the provider to offer ideas for process improvements and innovations, Emery says. He suggests educating providers on corporate strategies through workshops, presentations, joint teams and face-to-face meetings. One company, he says, held a half-day presentation, where it described its short- and long-term priorities and asked providers how they could help meet those goals.

IT managers need to create an environment that encourages both the vendor and customer to suggest improvements, Emery says. "If you have a legalistic environment, you're arguing terms and conditions versus being in more of a partnership."

Relationships should be established at all levels of the organization. "The executives here have to trust the executives at the provider organization, and the guys on my team have to respect the people they're interacting with," McInnes says. "I'm in the middle, communicating up, down and horizontally."

6. Be a Good Customer

It may seem counterintuitive, but when negotiating agreements with the service provider, try to create terms that are favorable not only to your own company, but also to the provider, Schrottner suggests. "You don't want it to be painful for them to work with you," she says. "The easier you are to work with, the more beneficial the relationship."

For instance, she says, rather than bargaining for the absolute minimum price, she says, ensure that the provider can profit from your business within a reasonable range, and even seek opportunities to partner with it in areas where it wants to grow. "Try to find a spot where you are an interesting customer for the vendor," she says.

Kane agrees. Once a provider begins to see shrinking profit margins, the relationship can start to go south. If you sense problems, it might be time to work with the provider on establishing a win-win situation, perhaps looking for areas where it can expand its business in your company, he says.

Krym uses metrics to ensure he's not overworking the provider's staff. "I've made the mistake of driving the vendor too hard," he explains, "and they ended up saying, 'We're losing money on you.' " He makes sure developers get training and don't stay on his projects more than a couple of years; otherwise, they get bored.

Moreover, Krym measures how many hours developers are working, keeping it to an average of 45 a week. In one case, developers were working 60 hours a week, but he was being billed for just 40. "It was driving the employees insane to keep me as a customer," he says. "It wasn't sustainable, and people started quitting."

7. Develop Meaningful Metrics

Metrics are fundamental to managing providers, and they should be developed at the service, operating and governance levels to measure everything from network speeds to customer satisfaction, Kane says.

But McInnes says it takes a few tries and ongoing reviews to ensure that the metrics you're using are meaningful and applicable to everyone. This is particularly true as projects move from the deployment phase to ongoing support. "We've learned you usually get them wrong to start with," he says. "Or the tech staff might be happy with them, but they don't translate up to the management level."

Another mistake is creating complex scoring mechanisms that have little connection to reality. In some cases, McInnes says, he has adopted the metrics offered by the provider, with some modifications. "It's common to want to use your own metrics, but the vendor has them for a reason."

8. Try Two-way Scorecards

Commonly used in procurement, scorecards are now recommended to track providers' performance by rating them on key performance indicators. Rather than using the traditional one-way ratings, however, Schrottner suggests choosing a subset of metrics and having the vendor self-report on its performance. At the review meeting, you can discuss areas where there's a large difference in perception, she says. "It guides the discussion and enables you to have a focused and productive conversation," she adds.

You can also ask the vendor to rate you as a client to determine ways you could be easier to work with in areas such as bill payment or internal processes.

9. Delegate, Don't Abdicate

Just as you wouldn't assign work to a junior employee without frequently checking in, you can't expect a service provider to operate without your involvement and control, says Krym. "You're supposed to delegate work to the vendor, not abdicate all responsibility," he says.

In fact, service providers have to be managed tightly, since problems can arise for so many reasons, including language, cultural and time differences, not to mention the fact that you often have to communicate via middlemen. "Everything that could be misunderstood will be misunderstood," Krym says.

Combine this with providers' natural inclination to make as much money off of outsourcing deals as they can, he adds, "and the only way to prevent them from doing that is controlling their behavior and verifying what you've been told."

You can't develop provider relationship management skills overnight. The Fortune 50 company where Kane works has been outsourcing IT services in a big way since 2003, "and we still find areas where we're not as good as we need to be," he says. "If you're thinking of getting into or increasing your sourcing, you've got to have a strong set of tools and processes and the right people involved, or you just can't be successful."

Brandel is a Computerworld US contributing writer. Contact her at marybrandel@verizon.net.