Contractor Management is Crucial for Outsourced Services

Growth in government outsourcing drives need for public CIOs to improve management of contractors.

by , / March 25, 2009

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 the most value from your relationships:

  1. Don't shortchange governance. Earmark 5 to 7 percent of a contract's total value to cover the necessary costs of people, tools and implementation.
  2. Create a structured governance organization. Assign the right people and clearly define their roles and responsibilities. Ideally the core-governance team should be dedicated to governance only. Limit participants to fewer than 10. Appoint members from each functional area and ensure they have the authority to represent their areas.
  3. Establish a charter. You need to clearly communicate purpose, expectations and outputs. Implement a defined committee structure with the proper representation from both the organization and service provider.
  4. Establish decision rights. They should clearly articulate who is responsible, to be consulted or advised, and who has influence over an outcome. Do this by defining a quorum for decisions that affect the enterprise to ensure those decisions will be upheld and supported by executive leadership. Establish meeting ownership and structure, ensuring that you have an agenda, past and current business review, decisions, votes and published minutes.
  5. Identify the activities that must be implemented with your service providers/vendors based on the contractual agreement. These may include service quality, communications, contracts, financials, risk, compliance and change management.
  6. Market governance internally to win support. Though clear direction and proper authority are essential, governance organizations should communicate with the appropriate people and organizations. E-mail campaigns and Web sites are not enough. Governance members must get out and speak with people. It's the best way to communicate benefits, win the budget and motivate the internal constituency to move forward.


What to Look for in Governance Tools

Because management of multiprovider relationships is a challenge, it's important to find a consulting partner with proven expertise in advising public entities on maximizing their outsourcing relationships.

Look for an experienced vendor consultant who can provide scalable, off-the-shelf software that can be customized to mesh with your hardware, skills and experience. A good software tool can help you manage your service model and conserve scarce capital. Because the software applications are typically familiar to internal users, the governance team can get up to speed quickly.

Configured correctly, comprehensive governance tools can reduce governance expenses up to 18 percent annually. Such tools also make life much easier for governance team members by automating many routine, yet critical, governance transactions, such as invoice verification and services consumption. They also foster collaboration by enabling quick analysis and exporting of findings via charts, graphs, data on resource consumption, etc.


Prepare for Some Pushback

The usual institutional resistance to change, and then some, will apply when selling and instituting good governance. Willenbring's experience in Minneapolis is a case in point.

"There was pushback on almost everything," she said. "First, when we wanted to bring in a consultant to do the initial analysis to determine whether we would renegotiate or recompete our IT contract, we had elected officials who thought hiring advisers was a waste of money because they believed you should always recompete. Staff resistance came in the form of a 'grass is always greener attitude' -- if things aren't perfect, changing service providers will solve it.

"Our consultant helped us understand no relationship is going to be perfect and that we would have to become part of the solution. But the biggest pushback came when we implemented the governance piece of our renegotiated contract because it instituted a new level of accountability and responsibility."

The real issue, Willenbring said, was that previously decisions were pushed up to senior-level people who had better things to do. The decision to have the appropriate people take responsibility has had a positive ripple effect throughout her IT organization.


Start Now -- It's Not Getting Easier

Put governance on the plate early because it will add efficiency, streamline processes, save money and help you plan for what's needed over the next five to 10 years. The world is complex and will get more complex, but you can manage it with the right tools, systems and processes.

David Zeppieri, CIO of the Overseas Private Investment Corp. (OPIC), recently oversaw the federal agency's migration to a governance model and tools. He said it's good to question expenditures in tough times, but it's also important to focus on long-term gains.

"Like many small agencies, there were those in OPIC who questioned the ROI of implementing IT governance tools, saying it probably wasn't justified," Zeppieri said. "But the business case does not always point to in-house tools and process implementations. We are applying IT governance and operational best practices through outsourcing, and it's working."

The best organizations discover that they can learn from governing outsourced services to strengthen their own internal governance capabilities, using the methods/tools/momentum to foster internal culture changes that result in greater efficiencies, cost savings and higher performance throughout the entire organization.

Kendall Dean Contributing Writer
Kendall Dean is governance project director for EquaTerra.
Glenn Davidson Contributing Writer
Glenn Davidson is managing director of public sector for EquaTerra