Gartner Says Increasing Dependency on External Service Providers Demands New Skills and Better Processes
Egham, UK, 26 April 2004 — Gartner Inc. today said relationship management must take centre stage in 2004 as businesses become increasingly dependent on complex, long-term relationships with External Service Providers (ESPs), following continued growth in outsourcing.
Gartner estimates that 50 percent of outsourcing deals in Europe fall short of expectations. This view was supported by new findings from a year-long study of more than 20 organisations in Europe involved in major outsourcing deals. The study also confirmed initial findings from numerous Gartner benchmarking studies, which pinpointed internal IS teams as the primary weakness in many outsourcing deals.
"The internal team is frequently overworked and undervalued and lack the skills and tools to perform complex business critical roles," said Roger Cox, Managing Vice President at Gartner. "Companies should invest three to four percent of the total IS budget in the critical skills and know-how required to build high performance relationships. This is not optional, it is business critical."
Gartner presented its analysis of outsourcing trends and how to create sustainable business value from outsourcing at its annual Outsourcing and IT Services Summit in London today.
According to Gartner, companies focus excessively on the process of selecting a service provider and negotiating the deal at the expense of working out how to make the deal work for the business.
It said there are four critical stages in the outsourcing life cycle; sourcing strategy, evaluation and selection, contract development and sourcing management. Companies should start at the end by defining the management stage. Answers to questions such as; what will success look like, who will manage it internally and what will the governance process be, should define the strategy.
Gartner said the three key ingredients to high performance relationships are the right mix of internal skills, formal relationship management processes and active management of trust between customer and service provider.
Internal Team — Higher Business and Behavioural Skills Deliver Better Deals
Gartner research has identified five essential roles that must be established and retained in the internal IS organisation to manage the combination of internal and external service provision successfully.
IT leadership - create IT vision, fuse IT and business strategy and manage resources. Architecture development - create blueprint for the business-driven technical design. Business enhancement - business process analysis and design, manage process and relationships with users. Technology enhancement - application and design excellence. Sourcing management - manage and develop relationships with internal and external service providers.
The Gartner study found significant correlation between the quality of business and behavioural skills and the overall success of outsourcing deals, while organisations with a predominately technical team had poor outsourcing deals.
Cox said, "IT Leadership will remain the most important role, but the need for roles and skills to manage supplier relationships is increasingly important as organisations become more dependent on external, and increasingly global, service provision. Few IS organisations currently have the career paths to develop these skills."
Relationship Management — Six Processes
Most outsourcing deal failures are caused by a breakdown in the relationship between customer and outsourcing provider.
"Outsourcing success frequently relies on 'a few good individuals doing the right thing'," said Cox. "Companies continue to make the same mistakes because there is no formal relationship management process and they consequently suffer significant problems when individuals move on."
In addition to day-to-day service delivery, Gartner research has found that there are six key co-management processes needed to manage long-term relationship successfully. These processes formally establish the key interfaces and interactions between service provider and recipient.
Strategy - develops the overall objectives, priorities, policies and procedures, and makes the broad decisions that define how the agreement will work. The strategy process sets expectations and maintains high-level integration and commitment across stakeholders on both sides.
Membership - identifies the capabilities the company needs for its business and selects appropriate service providers.
Integration - builds and maintains disciplined cooperation between all the service providers and the company. Includes defining and updating roles, responsibilities, priorities and performance targets of each stakeholder.
Equity - controls the commercial arrangements, e.g. funding, pricing, billing, asset ownership and intellectual property ownership. Ensures continued alignment of commercial objectives and assigns responsibility for day-to-day administration.
Audit - monitors the performance of all the stakeholders - not just service providers - against agreed targets. Assesses four critical components: price and service level, the state of the contract and relationships, stakeholder satisfaction, and vision and alignment. Most importantly, monitors specific targets to improve performance and resolve problems.
Feedback - deals with regular reporting, captures lessons learned and supplies the flow of information needed for short-term corrections and long-term enhancements. The feedback process provides information that makes it possible to look ahead, identify potential problems and anticipate required changes.
Managing and Measuring Trust
Gartner said the level of trust between customer and service provider can enable or destroy the value of a deal and must be actively managed.
"Organisational agility and the ability to create value require flexibility and creativity that go beyond process excellence," said Cox. "These factors are often 'negotiated out' of outsourcing deals due to traditional approaches based on control, but we have seen that relationships with higher trust levels deliver more value, waste less and resolve problems more effectively."
In the recent study, Gartner's confidence index, which measures the perceived level of confidence an organisation has in its relationship with the ESP, found that capability, the ability to do the job, and congruency, where perception and reality are the same, were the two most important trust factors. Predictability came next, followed by dependability and mutuality. Reputation and compatibility, often dominant factors during the selection of a service provider, were far less important in the long term.
"Management techniques in the IT service industry are currently at a similar stage to those in the construction industry in the 1850s," said Cox. "The construction industry saw a slow rise of 'professions' that grew to dominate the industry, founded by practitioners who had developed the critical combination of technical, managerial, commercial and communication skills. These are the skills increasingly required by IS leaders today."
Cox added, "Evidence from the construction industry shows it is not only possible to improve quality of long term deals by improving relationship management, but found significant operational savings as a result. The IT industry lacks the maturity, the skilled professions, the standards and the regulation of the construction industry. As outsourcing continues to increase, it will need all of these."
About Gartner:
Gartner, Inc. is the leading provider of
research and analysis on the global information technology industry. Gartner serves more
than 10,000 clients, including chief information officers and other senior IT executives
in corporations and government agencies, as well as technology companies and the
investment community. The Company focuses on delivering objective, in-depth analysis
and actionable advice to enable clients to make more informed business and technology
decisions. The Company's businesses consist of Gartner Intelligence, research and
events for IT professionals; Gartner Executive Programs, membership programs and peer
networking services; and Gartner Consulting, customized engagements with a specific
emphasis on outsourcing and IT management. Founded in 1979, Gartner is headquartered in
Stamford, Connecticut, and has 3,700 associates, including more than 1,000 research
analysts and consultants, in more than 75 locations worldwide. For more information,
visit www.gartner.com.
