With tax revenues down and demand for services up, it's becoming critical for public CIOs to accurately monitor, manage and assess their outsourced relationships with IT vendors. Unfortunately many public entities can't do these things well because their governance models are nonexistent, inadequate or just sitting on a shelf.

Government is learning the hard way that outsourced services are not self-governing. The good news is that by dedicating up-front resources for good governance practices, public entities can drive significant value from their outsourced relationships, including enhanced effectiveness, greater innovation and reduced costs. It's not unreasonable to anticipate savings of 2 to 5 percent of the total contract value through improved operational efficiency and management.

Good governance can also deliver improved service levels, streamlined administration, easier performance monitoring, and a cultural shift toward better performance and management of internal projects throughout an organization.

"I wouldn't go into an outsourcing relationship or a service-provider relationship without setting up a governance structure from the get-go," said Lynn Willenbring, CIO of Minneapolis, which reduced the cost of its IT services contract by $1 million annually after instituting a best practices governance model. "That was a huge lesson for us. Public entities that believe these relationships are self-governing are in for a rude awakening."

Old Ways Aren't Working

Generally public-sector organizations could do a much better job of managing contractual arrangements with vendors and service providers. In some instances, public-sector entities' relations with service providers are so strained they're almost irreparable -- or worse. In a 2006 industry survey about managing outsourcing relationships, more than half of public-sector buyers and 60 percent of providers felt at least 30 percent of their annual contract value was at risk because of poor or nonexistent governance.

There are many reasons, but the bottom line is outsourcing relationships are too complicated to handle without a proper governance structure and expertise. The resulting failures evidence themselves in many ways.

In some organizations, there are too many committees. In others, new committees have been established to address issues the current management structure hasn't. Political motivations -- internal or external -- are a catalyst for this type of behavior, with the result being unnecessarily long decision-making processes and poor decisions.

Many government entities also suffer from poor governance definitions and delimiters. Governance bodies are often established without clear "scopes" -- explanatory charters, defined powers (advisory, policy or supervisory) or decision rights. This leaves members wondering what they're supposed to do and exactly how far they can go, resulting in an inability to reach an actionable consensus.

Another common issue: Government entities often pay insufficient attention to whether providers are hitting agreed-upon service levels. Most contracts call for remedial action for underperformance, but these penalties can't be imposed if nobody knows precisely how the provider is performing.

How important is monitoring? Here's one example: During a recent engagement, we struggled to find five -- of a total of 80 -- service levels that were being implemented according to the contract. With little to no oversight of the service-level program, both sides of the client-provider equation showed huge failures.

Despite all of these issues, government organizations still turn to the private sector for help with their IT management. This trend will accelerate as:

• workers currently managing legacy systems retire;
• organizations update technology;
• enterprisewide software applications are implemented and shared services arrangements are adopted;
• infrastructure and applications become more complex; and
• securing talent at government salary levels becomes more difficult.

Six Steps in Vendor Management

Here's how to move forward to save money, streamline oversight and get