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Introduction
The
daily pressures confronted by today’s CIO are greater
than they were just a few years ago. New thinking and tools
must be continuously applied by business and technology leaders
to achieve the next incremental improvement in alignment,
productivity, and business success. As such, nearly all CIO’s
have looked at the question of IT sourcing. However, most
CIO’s I talk with have not used good techniques for
creating the outsourcing deal. It is the deal that aligns
external providers with business, IT, and sourcing strategies.
Misalignments are bound to create unhappy engagements, resulting
in contract re-negotiation at best and early termination at
worst.
Sourcing
Decisions: Many strategies are available to the CIO
Most
CIO’s strive to think strategically: “How might
I acquire the technology, skill sets, rapid response capability,
and global presence needed to serve this business? “
The fundamental answers are well known and discussed in the
literature: in-house sourcing, out-sourcing, transitional
outsourcing; with one supplier or with multiple suppliers;
or all of the above. Many CIO’s develop and execute
a sourcing strategy, albeit a bit haphazardly. Regardless,
good decisions based on your company’s needs and an
honest assessment of risk can keep you out of hot water
Write Note to Self: It’s All in the Deal
OK, so
you’ve read the books, attended a conference or two,
and developed a sourcing strategy that makes you proud. However,
you may still be a sourcing problem waiting to happen. It
is the deal that sets the stage for a long-term relationship
- one that all parties strive to enjoy.
First,
forget the way it was done a few years ago.
The
new model looks more like this: Note from the CIO:
“Dear
Candidate External Service Providers: Our Company has developed
a contract for services that we would like to share with you.
This deal is based on our knowledge of our industry, our business,
and our IT and sourcing strategies. Along with our contract,
we include statements of work that clearly explain the scope
of work to be accomplished, and our requirements for your
services/technology. We explain our objectives, the problems
we wish to have you address, and our expectations on pricing.
We show how we will measure each other, how incentives and
penalties are based on your performance, and how we will work
together (i.e. governance) for a long time. We appreciate
your creativity, expertise, economies of scale, and will leave
most of the ‘how’ up to you. By the way, no need
to send lots of sales people – we wouldn’t have
sent this note if we weren’t already interested. Be
advised: your response must be made within the strict format
of our RFP rules and definitions, so we may quickly make our
decision. We are inviting you to bid on this well-defined
business transaction – and pledge to you that you have
equal opportunity to win. If you choose not to participate,
that’s OK. If you break the rules, we will simply say
‘thanks and goodbye.’
What
CIO’s Need to Know:
- CIO
– Know Thyself – And Your Unit Costs. In addition
to knowing your costs by tower, category (labor, HW, SW,
etc), analyze your environment to determine your unit costs
and economies of scale. How much does it really cost your
organization to buy, develop, and operate, say, a database,
operating system, or server?
- Admit
to why you are outsourcing, and be able to articulate that
objective. Clearly link your Sourcing Strategy, IT Strategy
and Business Strategy. Looking for a low price and nothing
else? – be careful, the hidden costs and management
overhead may hurt you. Many times, access to skill sets
is what matters - so say it like it is.
- Take
control of constructing the outsourcing deal. Demonstrate
your business and industry knowledge by creating a deal
that makes sense for your business and is open and fair
to suppliers.
- Proactively
identify specific risks and how they might be mitigated.
Risk belongs to either you or the supplier, so be real clear
on who gets what and when.
- Establish
metrics beyond IT component availability and reach into
user satisfaction measures. Translate these metrics into
service level targets.
- Stay
flexible on service level agreements (SLA); some things
lose importance as business changes, and you’ll want
to change SLA emphasis along the way.
- Build
in contractually required, measurable improvements in price,
technology, and service.
- Build
in the right to benchmark your supplier; but stay real and
pass the salt.
- Establish
contractual rules that specify price changes based on unit
volume changes.
- Share
the gory details of your environment to eliminate ambiguity.
Remember: ambiguity increases risk increases price.
- Develop
a comprehensive Base Agreement and include in the RFP. Require
suppliers to ‘accept’, ‘reject’,
or ‘accept with change’ each portion of the
contract as part of their response.
- Leverage
the suppliers for their creativity, expertise, and ability
to absorb risk and costs, and know when to stay out of their
way. (Hint: many of the ‘how’s’ are no
longer up to you.)
- Negotiate
for ‘win-win’ or stay home. You want your suppliers
to be successful, and that means they make money.
- Prepare
for the long-term before Day 1. Establish a ‘best
practice’ Governance / Relationship model and practice
the spirit and letter of the model. Take the lead of this
multi-functional team comprised of your company’s
and the supplier’s employees.
- Change
your organization. Find or develop the requisite soft skills
for managing long-term supplier relationships, and support
that team all the way.
- Have
fun and Good Luck!
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