Even after the frequent reinforcements of the fundamental principles that are inevitable for outsourcing success, most buyers and providers fall short of realizing 100% outsourcing success. What makes it happen? Here is a quick overview:

SLA’s – Are they realistic?

The buyer needs to find out whether the SLA’s laid in the contract are really attainable in the buyer organization or are they just wishful thinking? Often as it happens in most of the standard practices followed by the buyer, there are generic SLA’s in every contract of his. However rarerly or occasionally does the buyer performs a benchmarking exercise of the contractual SLA’s with his organization. A benchmarking exercise will enable the buyer to see which SLA’s are actually pertinent to the contract and which are not. Removing the redundant SLA’s and limiting the contract to valid SLA’s fine-tunes the overall scope of the contract and makes it easier for both the buyer and his provider to interpret and to implement them.

Pricing Model - kinks in a garden hose

The pricing model agreed with the provider is a key determinant of outsourcing relationship success.  However a rigid pricing model can act as a kink in a garden hose and can obstruct the desired flow of services. Consider the following example:

A UK based firm entered into a contract with one of the established application development firm.  The pricing model agreed upon was more like “as-is scenario” but failed to consider “what-if scenario”. As the buyer’s business grew after the contract was signed, it had new set of requirements with changing business needs. It expected its current provider to meet those needs. But the provider didn’t dedicate money and resources to provide added value. The reason - the pricing model in the outsourcing relationship was not configured to motivate the provider to deliver such services.

A good pricing model should be flexible and be adaptive to evolving needs of both the buyer his supplier.  It should also act as a mean of addressing operational and relationship issues. For instance, the earlier buyer and his provider could have negotiated a pricing model, which involved buyer paying a base rate to the provider for the standard services and a differential rate for value-added, ad hoc services with some of the value-added funding in advance and remaining/ or add-on year over year. This kind of pricing model ensures transparency in its cost elements. Hence, the buyer gets the level of services he wants with the added benefit of getting decreased prices over subsequent years for the standard services; and the service provider gets increased revenues with increased scope and minimized financial risk when the scope changes.

More to be continued in our next blog…

HCL is a US$ 5 billion leading global Technology and IT Enterprise that comprises two companies listed in India – HCL Technologies & HCL Infosystems. Founded in 1976, HCL is its range of offerings spans Product Engineering, Custom & Package Applications, BPO, IT Infrastructure Services, IT Hardware, Systems Integration, and distribution of ICT products across a wide range of focused industry verticals. The HCL team comprises over 71,000 professionals of diverse nationalities, who operate from 26 countries including over 500 points of presence in India. HCL has global partnerships with several leading Fortune 1000 firms, including leading IT and Technology firms.

Financial Highlights

• Consolidated revenue reported for the quarter at USD 699 Mn and for the year at USD 2628 Mn
• Profit Before Tax reported for the quarter at USD 21 Mn and for the year at USD 75 Mn
• Board of Directors has recommended a final dividend of Rs. 2 per fully paid up share, taking the total dividend for the year 2009-10 to 375%

Business Highlights

• Overseas expansion through inorganic growth
• Bagged India’s 1st RAPDRP order of over Rs 500 cr to implement a state wide power solution in
  Rajasthan
• Won project worth Rs.100cr from Delhi Government to roll out country’s first Government Radio
  Network
• Awarded a project to implement India’s 1st smart card based Public Distribution System in
  Chandigarh
• Project awarded for digitising data from Census of India for the year 2010 –11
• Won a contract of over Rs 100 cr, from Gujarat Government to deploy IT educational solutions for
  the development of the tribal districts schools in the state of Gujarat
• Forays into the gaming market with its range of handheld gaming consoles
• Launches HCL O’zone, an end-to-end cloud based computing infrastructure
• Announced the return of Beanstalk ‘Desktop Computing 2.0’, one of the most popular desktop
  range
• Rolled out new marketing initiative ‘Mobile Excitement’, a multi dimension initiative with more
  focused marketing strategy towards today’s youth
• IDC Dataquest survey ranked HCL Infosystems as No.1 in ‘IT Services’ in India

http://www.hcl.in/files/HCLI-qtrly-rslt-q4-aug2010.pdf

The Dataquest Top 20 annual industry survey tracks the growth of the IT and BPO industries and ranks the top companies by their revenue.

The Top 20 IT Companies were:

TCS, Wipro, Infosys Technologies, Hewlett-Packard India, Cognizant Technology Solutions, IBM India, HCL Infosystems, HCL Technologies, Ingram Micro India, Redington, Oracle India, Cisco Systems India, Dell India, Intel India, Accenture India, Tech Mahindra, SAP India, MphasiS, Microsoft India, and Patni Computer Systems, the report said.

The Top 20 IT Export Companies were:

TCS, Infosys Technologies, Wipro, Cognizant Technology Solutions, HCL Technologies, IBM India, Accenture India, Tech Mahindra, MphasiS, Oracle India, Patni Computer Systems, Hewlett-Packard India, Capgemini, CSC India, L&T Infotech, Syntel, Aricent, Prithvi Solutions, Polaris Software Lab, and Mindtree Consulting, the report said.

The Top 20 BPO Export Companies were:

Genpact, TCS BPO, Wipro BPO, Aegis BPO, WNS Global Services, Firstsource Solutions, IBM Daksh, Aditya Birla Minacs, Infosys BPO, Accenture India, HCL BPO, Exl Service, Xchanging India, Cognizant BPO, Convergys India, 3i Infotech, Intelenet Global, Hinduja Global Solutions, 24/7 Customer and MphasiS BPO, the report said.

http://dqindia.ciol.com/dqtop20/2010/CompanyRanking/default.asp

Vendor Management Office or VMO, as many put it across is a framework for managing and governing your outsourcing vendors and to ensure that your desired business outcomes are achieved through your outsourcing efforts. However certain factors when not taken care of can hinder your efforts in setting up an agile and flexible vendor governance framework. Let’s look at the most prominent ones:

SLA Maze – Often SLAs are too many, generic, and are not properly spelt out that makes it difficult for both client and the vendor to understand and execute them.

Communication Barrier – Most of the times we only see top-down communication that involves senior management and executives. Bottom-up communication that generally involves technical team responsible for execution and delivery is either missing or given a secondary treatment. Thus organizations fail to have a two sided view of their contracts.

What about Qualitative Outcomes? – KRAs/ KPIs (Key Result Areas/ Key Performance Indicators) are employed to assess vendor performance, these metrics measure and track quantitative outcomes of the outsourcing contract but leave the qualitative facet of the contract that are important to your organization. Qualitative outcomes such as customer/ employee satisfaction, stakeholder expectation, client-vendor expectation mismatch, long term relationship with the vendor are indispensable for the maximum contract value realization.

Endless Meetings – Does carrying on innumerable, lengthy meetings yield the expected results? Not always. Most often the result of these meetings is ever piling cumbersome status reports that further complicate the overall project and load the project personnel.

Lack of a single consistent tool for measuring the Vendor performance – Manual or partially automated processes do not fully monitor the vendor performance and lack an ongoing vendor review. They demand considerable time of project personnel in feeding data and extracting and interpreting results.

Proof of Concept - More often than not clients seek value, but fail to ask for a proof firsthand, a demo of the system/ infrastructure/ application at the client premises with the help of client “people and data” is not always run by the vendor beforehand.

Vendor Selection and Negotiation - Negotiate with the top two. After evaluating multiple vendors, carry out contract negotiations with the final two, and not just the final one. This increases competition and chances of getting a vendor with the top choice.

Keeping Compliance out of Contract – Client often overlook whether the offered product by his vendor is compliant to all legislations and regulations. Once the product is implemented at the client end, any compliance risk and cost of non compliance may have to be borne by the client and can affect the product performance.

Infrequent Vendor Evaluations – Most organizations carry out vendor evaluations at randomly defined periods. The period may be monthly, quarterly, annually or at the start, somewhere middle, and the end of contract. More frequent evaluations may result in weekly or monthly evaluations. Lack of well thought out ongoing evaluations leads to overlooking performance inefficiencies and required improvement areas.

Don’t buy Solution, buy Features – A solution is a broad-based term. Often 70% of the solution is generalized and 50% is customized to the client needs. However this may lead to a client paying for the features which are not of use to him.

Most of the outsourcing contracts are in troubled waters right from the start of the contract. In spite of lengthy vendor selection, contract negotiation process, and abundant contract agreement clauses, they don’t achieve the expected business objectives both from the client and vendor side. What makes these outsourcing contracts fail? Some of the main problems facing failed relationships are:

Unclear Expectations on Client front

Client lacks a clear picture in mind as to what are the business objectives that are to be achieved through this contract. The contract outcome is measured in terms of service level agreements which are quantitative and rigid and does not consider the qualitative aspects. They leave other important parameters for measuring the real value such as business process optimization, risk mitigation, change management plan, innovation etc. In addition, processes followed for contract implementation are not clearly defined and mapped out.

Poor Cultural Fit

Cultural incompatibility between the vendor and the client is another major factor for the relationship failure. The corporate culture of both the client and the vendor might not be similar in aspects related to decision making, risk appetite, and way of communicating. One company may be risk-minded and a slow decision maker while the other can be agile and accustomed to making proactive decisions. The cultural differences are escalated to contract implementation differences due to different approaches followed by each of these companies.

Information Exchange Barrier

Vendor and the client do not proactively share necessary information with each other. Client does not disclose all relevant information to enable the vendor to accurately assess the business requirements at the start. Both parties share information reactively and not openly, proactively.  

Communication Barrier

Multiple official and unofficial communications drive any kind of work. The end result does not depend as much on the official communications than on the unofficial ones. The unofficial communications help assure that the task requirements are accurately conveyed to the concerned people. In failed outsourcing contracts, all of these unofficial relationships are given an afterthought. People don’t communicate very well and all communication flows through relatively few authorized channels. Hence rather than people constantly interacting with others who better understand the work, directions are passed down a chain of people who don’t understand them. The end result is costly mistakes. The more complicated the web of unofficial communications, the bigger the adverse impact on outsourcing will be.

Poor Working Relationship

The partners do not have a trusting working relationship where they understand each other's expectations and motivations, and can engage in good dialogue.

Deal Inflexibility

Vendor lacks flexibility and is unable to meet client's changing needs. The parties' interests were aligned at the beginning of the contract but became misaligned as the client's business environment or needs changed. Vendor is not committed to the ongoing change management effort necessary for success and wants the client to adjust the solution rather than incorporating requisite changes.

Poor Governance Structure

Governance problems are cited as the reason for failure for 80 per cent of outsourcing contracts. Most relationships fail because they lack “effective vendor governance structure” for managing the ongoing relationship and ensuring that the outsourcing efforts meet both the vendor’s and client’s goals. The reporting structures followed are ineffective with “information overload” and "frequently missed" performance items. Senior management spends most time reading reports without giving attention to items that matter most.

Poor Vendor Performance

The vendor fairs poorly against the agreed service level agreements. Certain services/solutions that the vendor initially committed didn't actually happen; or the vendor in one or more instances did not treat some of the important aspects of the contract in an honest, up-front manner.

The bottom line is

An outsourcing relationship should be built on mutually beneficial goals and with a highly effective vendor management and vendor governance structure that facilitates collaboration, visibility, and realigned interests. Otherwise, the relationship health will suffer and the relationship will ultimately fail. The partners should establish a structure for open communication and should create rules for having regular discussions about the relationship, its progress, issues faced and resolution procedures. By dealing with issues before they become problems, the likelihood of relationship success rises dramatically.

Outsourcing is no longer a hands-off relationship, as enterprises look forward to do more than just transfer existing processes and ask vendors to achieve the SLAs. They rather aim at partnership development and strategic alignment with their vendors. Managing the Vendor Relationship becomes more important when clients expect their provider to deliver long-term business value. 

SLA’s as a performance driver – A Myth

SLAs/Metrics are ingenuous tools for measuring the overall success of an Outsourcing contract; they are too many and too detailed to be truly meaningful. These should be aided by rigorous governance structures on both sides; ongoing performance reviews; and continual refinement of the Outsourcing contract goals. Linking business goals to the SLA metrics can get both parties much more focused on the key aspects of the operational and relationship aspects of the deal which benefits both.

A Vendor Management Framework enables the organization to continually improve its IT and Business operational capabilities throughout the relationship with its vendor. Its key takeaways are:

Vendor Relationship Management

Ensures business strategy and IT strategy are translated and communicated to vendors with respect to services and projects they deliver, thereby ensuring that the organization drives maximum business value from its Outsourcing arrangement. IT Managers need to create an environment that encourages both the vendor and customer to suggest improvements and two way exchange of ideas/concerns.

Communication Management

Communication is a crucial factor in achieving performance and process improvements across the Outsourcing lifecycle. When the communication channels between the vendor and his client are fully open, and when there are right people on both the sides, it is possible to achieve better results and add value by bringing out areas of concern and suggesting areas for improvement. This also helps address certain intangible risks involved due to information loss and mismanagement.  The vendor should also utilize practical experience learned from one client to other deals of similar nature.

Vendor Performance Management

Ensures adequate measuring and monitoring of services delivered and prompt resolution of issues faced.  It also includes on-going reviews of vendor contribution to the business and the delivery of assured business value. Relationship Management Scorecard is a strategic Vendor Governance tool that conducts regular health checks on the vendor performance and outsourcing relationship.

Vendor Financial Management

Validates, manages and monitors economics of the Outsourcing contract. It manages financial risks associated with the contract, ensures accuracy and audit-ability of all financial transactions and places proper financial controls across the agreement lifecycle.

Vendor Service Agreement

Ensures that vendor’s services are properly aligned and integrated into the organization’s IT service portfolio. It works with the organization’s service and process owners to continually improve IT services underpinning business processes. It facilitates business transformation by driving the approach to systematically integrate the vendor’s advancements into its internal IT service and process structure.

An Advisor can help you navigate the Outsourcing Contract maze by:

• Providing an actionable plan through an objective evaluation of vendor’s offerings
• Setting timeframes and provide a proven roadmap for business target realization
• Navigating clients through a pragmatic, fact based process
• Leading or supporting negotiations with a focus on key elements of the contract to ensure a smoother long term sustainable relationship with the   vendor
• Building a strong foundation for on-going vendor governance
• Using a pragmatic yardstick to evaluate outsourcing outcomes

The use of Vendor Management System has seen a dramatic increase in the past couple of years. Going by the results of a latest study, about 63 % of the companies surveyed already had a Vendor Management System in place. We expect that number to go higher - about 80 % - which is an astonishing fact considering that the outsourcing industry as a whole is not a lot more than a decade old.

There are various benefits of using a Vendor Management system, but overall we can classify them into 4 broad areas or perspectives:

(a) Transparency or Visibility
(b) Regulatory Compliance towards set Organizational rules
(c) Control of Costs Incurred on Managed Services
(d) Overall improvement in Efficiency of the Outsourcing Engagement

By having a 100% transparency within the specified workforce, the data that is shared is dynamic and correct – thus enabling companies to determine problem areas and mark out changes or improvements that are required. Various metrics that measure time, cost, compliance, quality, and quantity metrics are more meaningful when they are applied company-wide. Of the companies surveyed, one large retailer reported that through their use of their Vendor Management Tool, they were able to reduce resource lead times by 75% and Managed Services Cost by approximately 20%.

Achieving Regulatory Compliance via a Vendor Management Tool is another important advantage. With a VMS, companies can incorporate financial oversight and enforce corporate and governmental policies as it relates to the acquisition and management of contingent workers and outside services.

The biggest Return on Investment, especially in this particular economic environment, is provided by the later 2 benefits.

Companies can enforce strict budgets and, calculate hourly rates, claim volume discounts, regulate markups and overtime, and eliminate off-contract spending to cut costs immediately. Some cost savings are immediate - a large-scale retail customer of a VMS tool expects to realize $2 million in savings during the first year itself.

Lastly but very importantly, with a VMS solution deployed, companies can take quick decisions to help them automate and streamline the requisition process, enhance Vendor Connectivity and Collaboration – thereby reducing resource lead times and improve overall process standardization. The sum of these parts allows the companies to achieve greater efficiency while reducing overall costs.  

Zensar Technologies is among the top 25 software services providers from India. Zensar is the world's first enterprise-wide SEI CMM Level 5 Company and is certified as a CMMI Level 5 Company with industry expertise that spans Retail, Manufacturing, Banking, Insurance and Utilities. Zensar has more than 4700 employees with sales and operations presence across US, UK, Germany, Sweden, Finland, Middle East, South Africa, Hong Kong, Singapore, Australia and Japan. The Company supports Fortune 500 clients by delivering comprehensive services in mission-critical applications, enterprise applications, e-business, BPO and Knowledge Services. The Company has developed tools and methodologies, including the proprietary Solution BluePrint (SBP), which enables its clients with innovative business solutions and a rapid ‘go-to-market’ capability.

Financial Highlights

Consolidated Results for the quarter ended 31st March, 2010 vis-à-vis last year

• Revenue was up from Rs 908.08 Cr to Rs 952.76 Cr showing a 5 % growth y-o-y
• Net Income grew from Rs 86.56 Cr to Rs 127.56 Cr showing a 47 % growth y-o-y
• EPS up from Rs 36.12 to Rs 54.23 a growth of 50% y-o-y growth
  

Highlights for Fourth Quarter 2009-10

• Revenue was up from Rs. 214.76 Cr to Rs 232.65 Cr as against same quarter last year, showing 8% growth
• Net income was Rs 27.42 crores against Rs 23.03 crores for the same quarter last year, showing 19% growth
  

http://www.zensar.com/media/system/pdf/Investors/InvestorUpdates/Zensar_Investor%20_FY_2009-10_Final.pdf

Rolta is an Indian multinational organization that has executed projects in over 40 countries by providing innovative solutions in Enterprise Geospatial Information Solutions (EGIS), Defense & Homeland Security; Enterprise Design & Operations Solutions (EDOS); and Enterprise Information Technology Solutions (EITS) and Engineering, Procurement and Construction Management (EPCM) services for power, oil, gas and petrochemical sectors. Rolta employs over 4500 professionals with international subsidiaries across the globe. Rolta is accredited with the prestigious BSI ISO/IEC 27001:2005 certification; the BSI ISO/IEC 20000-1:2005 IT Service Management Standard; and has been assessed at Maturity Level 5 of the Capability Maturity Model Integrated CMMI SW version 1.1. The Company is listed on the NSE in cash and F&O segment and forms part of CNX IT, NIFTY Midcap 50 and CNX 500 indices.

• Consolidated Revenue for Q3 FY-10 at Rs. 3945.6 Million against Rs.3755.6 Million in Q2 FY-10, registering a Q-o-Q growth of 5.1%
• Consolidated EBITDA for Q3 FY-10 at Rs. 1491.6 Million against Rs. 1422.7 Million in Q2 FY-10, registering a Q-o-Q growth of 4.8%
• Consolidated Net Profit for Q3 FY-10 at Rs.671.0 Million against Rs. 627.9 Million in Q2 FY-10, registering a Q-o-Q growth of 6.9%
• Consolidated Revenue for Q3 FY-10 at Rs. 3945.6 Million against Rs.3320.3 Million in Q3 FY-09, registering a Y-o-Y growth of 18.8%
• Consolidated EBITDA for Q3 FY-10 at Rs. 1491.6 Million against Rs. 1064.8 Million in Q3 FY-09, registering a Y-o-Y growth of 40.1%
• Consolidated Net Profit for Q3 FY-10 at Rs.671.0 Million against Rs. 491.3 Million, before exceptional item of Rs.840.1 Million in the previous year in Q3 FY-09, registering a Y-o-Y growth of 36.6%

In current business scenario organizations are facing increased pressure to reduce costs, improve productivity and efficiency. Many of them have chosen outsourcing as an option by leveraging third party vendors to drive change. This has resulted in an increased dependence on providers to meet organization’s business objectives.

Managing vendor relationships and driving vendor performance has become key for successful outsourcing engagements. Organizations are at different maturity level when it comes to outsourcing governance. The more mature ones are moving towards a separate Vendor Management Office (VMO) for monitoring and managing increased complexity in vendor relationships. There is also greater engagement of strategic vendors in long term planning.

One of the key challenges for any VMO is to demonstrate the ongoing value delivered by outsourcing engagement. Leading organization are turning to tools for analysis and reporting of vendor performance for greater transparency. One of the powerful frameworks used to monitor and manage effectiveness of outsourced relationships is Balanced Scorecard.

Benefits of Managed Services / Relationship Management Balanced Scorecard

• Relationship Management Scorecard puts an Organization’s objectives at the center of its performance measurement
• Translates the objectives into tangible measures and metrics to manage vendor performance
• Integrates and directs the performance and efforts from the lowest levels in the vendor metrics
• Enhance accountability by measuring and reporting on both Client’s and Vendor’s perspective
• Focus on achieving relationship nirvana with your chosen vendor