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OUTSOURCING: Getting the Best Value from Your Outsource Provider?


Recent Gauteng Business News

Outsourcing, especially of ICT services, is a very popular model in South Africa as it has the potential to deliver cost saving as well as provide specialised and often scarce skills as and when they are needed for certain projects or implementations, or on an ongoing basis, according to Allan Dickson a Consultant at Compass Management Consulting South Africa.

Outsourcing can deliver a number of benefits to organisations, including potentially reduced costs, improved service delivery and a degree of flexibility in terms of business operations. Smaller businesses can also take advantage of improved economies of scale.

However, once they have outsourced services in place many organisations remain unsure as to whether this was the right decision for their business, and perhaps more importantly cannot discern whether their outsource partner is providing a quality service.

With the release of the King III report, there is an increased emphasis being placed on IT governance and the expenses and effectiveness of the IT department. Historically the governance of IT has been left up to the CIO, but because of new regulations and recommendations this has now become part of the responsibilities of the entire board of directors in large businesses.

As a result, there is a corresponding interest in discovering exactly how efficient and effective outsource providers are. Service Level Agreements
(SLAs) may provide a framework for levels of quality and service, but especially a few years into a contract issues may creep in, including inconsistent pricing, gaps in service expectations, cultural fit, governance and performance measures.

The 'failure' of an outsource partner to deliver often goes all the way back to the beginning, to the formulation of the contract between the client and the outsource company. From a client perspective, because of the enormous pressure on the CIO to reduce costs quickly, clients may enter into a very complex contractual arrangement without adequately understanding the contract and the implications. Rushing into signing a contract often causes discontent further down the line.

It is also vital to ensure that the selected outsource partner actually has the skills and expertise to handle the client's needs. This requires research on the part of the client as well as a clear view of exactly what business needs or skills gaps need to be addressed.

Further down the line, organisations need to be able to monitor and evaluate their outsource provider to ensure that service levels are still acceptable, that pricing is consistent with the market and that the services provided are still the services that are needed.

At some point in the duration of the contract an organisation should be able to conduct a benchmarking exercise to verify these and other factors. While many outsource contracts do provide a benchmarking clause, very few organisations actually utilise this. However, with increasing pressure for accountability and the need to prove service levels, this is something that needs to be exercised.

The fact is, King III and the new Companies Act, due to come into effect very soon, will require people to measure performance effectively, including financial performance. IT forms a large part of this, and enterprises need to make sure that they can provide accurate data on the costs, service levels and so on of the outsourcer. At the end of the day, the CIO is accountable for the performance of IT, which means that he or she is also responsible for the service levels, costs and effectiveness of outsourced services.

Getting the contract right at the outset is an important step to ensure accountability, quality and high levels of service throughout the life of the agreement. Because many CIOs simply do not have the skills and experience at contract negotiation, it is a good idea to involve experts who do have the experience in this part of the process.

CIOs need to ensure that as part of the contract, aspects such as monitoring and evaluation of service levels are included. A benchmarking clause is also vital, and this needs to be used to evaluate the agreement during the contract period. This is often a great time to renegotiate the contract, as technology costs tend to decrease during contract life cycle, so pricing agreed upon at the start may be excessive further on in the contract life cycle.

When signing a contract with an outsource provider there are several factors that the CIO should ensure are a part of the agreement. Firstly, the service catalogue needs to be accurately defined, outlining exactly what services are being provided over what period. The chain of escalation of queries and issues must also be defined up front in the service catalogue, and responsibilities should be clearly defined to ensure appropriate levels of service.

A threshold for adequate performance levels needs to be included, along with penalties or incentives to ensure that these levels are delivered. Reporting on targets, whether or not they are being reached, should also be conducted on a regular and predefined basis. These reports should be distributed for review by both the client and the outsource provider. The benchmarking clause needs to be in place and exercised to ensure that quality of service is delivered, and to make certain that from a market related point of view prices are fair.

Conducting an analysis of service providers not only ensures that service levels are maintained, but also ensures that prices remain market related and that CIOs are more informed and accountable. During any analysis, the focus should be around addressing inconsistency in pricing across service towers, as well as looking at gaps in service expectations.

In this way, organisations can ensure that they are getting the best possible service levels and value from outsource providers, which will in turn help with governance and ensure that the CIO can ascertain whether outsourcing is the right option for the organisation or not, as well as how well the outsourcer is providing services.

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