Managing the new contract
Aims and objectives
The Optimise phase focuses on those activities that ensure the outsourcing arrangement is managed and continuously improved beyond transition and
transformation. The focus is not only on management of the vendor but also includes looking inward into the client’s organisation to ensure that contractual obligations are fulfilled in a timely and effective way and that service demand is properly managed and satisfied.
The phase also includes the preparation for the renewal (or in some cases exit) of the contractual relationship.
Following the transition and transformation of services, it is important to focus on the conditions under which the arrangement can flourish and services and costs can be optimised.
Realisation of a projected outsourcing business case requires sustained commitment and effort to manage the vendor, rigorously track and manage projected benefits and build strong internal understanding of the service scope, pricing and obligations. Key activities to support this include:
- Operationalising the agreed governance model and setting conditions for a strong, mutually rewarding relationship
- Internally agreeing a strong, appropriately empowered function to manage business demand and vendor supply
- Providing the focus and resource for dedicated, sustained ‘benefits realisation’ activities
- Building an experienced, commercially-focused team to contract-manage the client and associated vendor rights and obligations
- Investing time, effort and sponsorship in innovation management to ensure improvement and transformation objectives are pursued after signature
Frequently once the ‘ink is dry’, commitment to these activities falls away and expectation gaps begin to open
– leading to self-feeding cycles of client criticism and vendor defensiveness. Such behaviours can needlessly undermine the deal’s objectives.
Looking further along the contractual term, regardless of current performance, clients need to plan and prepare for next steps, ranging from tactical remediation work to mid-term renegotiation or even to a full re-tender process at the end of the term.
During the Optimisation phase, it is important to keep a focus on the demand of IT services from the business. The contract is responsible for ensuring the correct price is sought in the P*Q model however robust demand management is required to manage that quantity utilised.
This is done through the retained organisation using such processes and levers as:
- Linking IT consumption to IT cost so the business has a transparent view of the implications of their consumption decisions
- Managing business expectations
- Project manager challenge process during the receipt of quotations from the vendor during service request management
- A clear forecasting processes
Key to ensuring the contract performs against objectives is a functioning, efficient governance model and strong senior relationships. Achieving this can be challenging but critical success factors include:
- Ensuring senior interactions and meetings take place regularly and at least as per contractual commitments
- Ensuring interactions focus on the right things, through good preparation and appropriate inputs and facilitation to ensure clear, fair and informed decisions are made
The diagram below summarises the key activities of this phase.
Well-designed performance monitoring is an important part of this phase and the implementation of a balanced scorecard approach which monitors a broad range of performance indicators is good practice. This may include
- Customer satisfaction (formal and informal, e.g. via a survey)
- Service delivery performance (i.e. via traditional SLAs)
- Relationship alignment (e.g. via annual senior interviews)
- Transformation progress and other client strategic and operational objectives
Although cost reduction is not always an explicit primary objective most outsourcing deals nonetheless seek to reduce costs for particular services. Whilst well-constructed deals can help address the supply side of such service provisioning, our experience is that neglecting the quantity and nature of underlying demand risks compromising business cases and can erode savings.
A specific example of this from an outsourced IT contract could be when a projected business case assumes a shift from physical to virtual servers as part of a transformed service but in practice internal clients continue consuming physical servers. In such a scenario a demand management process would include review gates to check the validity of client requests and a sensitively designed challenge step to push-back on such requests, suggest different approaches and articulate the benefits to the business of alternatives.
Additionally, although direct contact between the vendor and the internal clients may appear beneficial, vendors consistently attempt to create a privileged position directly with business clients. More often than not these privileged positions lead to an excessive supply of services beyond the projected business case.
As in any type of relationship both client and vendor have a responsibility to work together to achieve the deal’s objectives.
A key management tool of any deal is a mature benefits tracking approach. In a multi-year contract, achieved benefits are likely to differ from projections for any number of reasons but active benefit tracking will enable the source of such differences to be understood and articulated and should enable ‘value leakage’ to be identified and remediation plans against deviations to be developed.
Along with retention and maintenance of the original business case, it is fundamental to:
- Implement a robust invoice verification process and seek to manage by exception non-verified spend
- Regularly audit and update inventory records and compliance to inventory obligations
- Properly verify foreign exchange and cost of living adjustments
Other financial processes that must be considered include:
- Forecasting and budgeting (along with demand and supply management)
- Internal allocation and chargeback processes based on actual consumption rather than historic or other types of algorithms
Process and Scope
Innovation is often a victim in outsourcing arrangements. Once an arrangement is ongoing and the focus is on meeting contractual transformation objectives or steady state delivery, any initial impetus around ongoing innovation may subside.
However a lack of internal innovation is often an underlying driver for outsourcing in the first place as clients are looking to benefit from the scale and
research and development capabilities of a new service vendor. De-prioritising innovation therefore undermines the long-term value of a deal.
To avoid missing out on innovation opportunities, clients should recognise its importance by instituting processes to incentivise, capture and sensitively review innovative thinking, for example through facilitated forums where ideas can be presented.
To encourage ideas any administrative overhead around submission and review needs to be minimised to enable good but immature ideas to be investigated. That said, innovation can still be encouraged within a four phased structured framework:
- Idea generation: Large numbers of ideas generated for discussion
- Formulation: Ideas are formed into more concrete potential solutions and may even be presented at forums
- Proposal submission: Well-formulated ideas are documented in a structured way that enables comparison and financial evaluation
As an outsourcing deal moves through its term, operational and contractual requirements evolve and changes to the arrangement are likely. Such evolution needs careful commercial management to ensure the true, long-term implications of changes are understood.
Strong, experienced and sophisticated contract management is a must. Good contract management recognises that benefits must accrue to both the vendor and client and that negotiation is not always ‘zero-sum’.
Contract management scope must include the following:
- Managing and tracking client and vendor obligations
- Managing contract compliance
- Maintaining a contract library for contractual documentation
- Providing contract interpretation and advice
- Signing off of all key decisions and formal correspondence
- Identifying change requirements and managing the contract change process
Ideally all commercial discussions should be reserved for the commercial team and all agreements should be documented, signed-off and logged in a contract library. In our experience, a relaxed approach to commercial management governance has resulted in major issues for clients ranging from simple disagreements to complex disputes for delayed or non- delivery and disrupted services.
Long-term planning and preparation for the next steps is a critical activity. As the contract progresses towards its natural expiry date. However well a vendor has delivered the projected benefits of a contract, a new contract will almost always make sense because of:
- Opportunities to improve pricing
- Desire to increase service performance
- Change of requirements/demands from the end customer
End of term contract renegotiation and/or re-tendering of contract scope are now becoming more the norm rather than the exception. However most such activities still end with the incumbent vendor retaining key elements of the evolved contract in some shape or form.
The importance of optimisation
Implementing and effectively managing the optimisation activities outlined in this section will increase the likelihood that the projected benefits of the arrangement are realised, resulting in greater satisfaction amongst the internal customers and a greater likelihood that financial benefits and expectations are realised.