It used to be that CIOs were measured on delivering technology infrastructure. Today they are measured on the business outcomes derived from technology infrastructure. Business leaders want technology that enables new business opportunities, that is more responsive to change, that is highly efficient, and that is economically predictable.

Many companies have found that outsourcing the management of their technology infrastructure or applications management can provide the predictable results that the business requires while helping mitigate risk and cut overall costs. Outsourcing can also act as a catalyst within the organization to enable the appropriate innovation and transformation for the future. This in turn allows companies to refocus assets and resources back into the core business. However, outsourcing is not fail proof and choosing the most appropriate outsourcing partner, or set of partners, and managing the relationships over time is not a  simple task.

From time-to-time we read in the press that IT Outsourcing (ITO_ agreements have failed. While we don’t necessarily know why they’ve failed, we do know that there are critical ingredients required for a successful outsourcing relationship. In HP’s experience, long-lasting, fruitful relationships are built on strong relationship and expectation alignment, consistent execution, compatible business culture, and stringent governance and project management.

Governance is Key
According to TPI, a sourcing advisory firm, in 2000, 81 percent of outsourcing buyers chose to work with only one or two technology service providers, with just 19 percent working with three or more. In 2007, the number of buyers using three or more providers has almost doubled to 36 percent. A trend referred to in the industry as multisourcing.

By using multiple service providers, companies can gain access to best-in-class processes and industry expertise. However, companies are also challenged with finding suppliers that work well together, aligning vendor strengths with requirements, and managing all of the providers effectively, particularly since the needs of your firm will evolve over time. What makes this even more complicated is that many of them are also direct competitors in the overall market. To manage a multisourced environment effectively, governance is critical in mitigating risks and ensuring that service-level agreements are met.

The intent of governance in outsourcing is to provide an agreed-upon framework for the way service providers and the customer will work together over the life of the partnership to achieve both the firms’ goals. Central to good governance is not to focus just on aligning expectations initially, but on a rigorous process to re-align expectations over time as the needs of the customer evolve.

There are two dimensions of governance: The first involves how a company’s IT stays close to the needs of their lines of business. This is a hallmark of any well run IT shop, whether outsourced or not. The second is establishing governance in the supplier-to-IT organization. Both dimensions of governance are critical in an ITO engagement and become even more important when dealing with multiple IT service providers.
One of the best-known examples of a comprehensive governance process is General Motors’ Information and Services Group. In February 2006, it announced $15 billion of outsourcing contracts with six IT service providers, which included HP. GM is using multisourcing to leverage best-of-breed capabilities from its suppliers. As part of this strategy and business model, GM recognized the need for standardized processes, project management acumen, overall governance best practices and a more collaborative approach. GM engaged its suppliers and HP’s leadership in IT Infrastructure Library (ITIL) best practices to help achieve its objectives.

Properly designed, the governance process is supported by a management framework that includes a set of standard, documented management processes and decision rights, which link to operational processes and procedures. It is also designed to be compatible with the business culture of the customer. Governance enables seamless activity between the parties’ business and service delivery responsibilities. It enables a service provider and its customer to mutually oversee and manage: 

• Expectations for each other’s actions 
• Expectations surrounding how the parties will work together to achieve their agreed-upon objectives 
• Contractual obligations and dependencies
• Change management  
• Information sharing 
• Service performance 
• Strategic direction of the relationship.

Good governance enables a company to effectively implement change. It also helps ensure that all parties — IT suppliers, lines of business, the internal IT team – expectations’ are aligned and remain aligned as they partner to achieve the buyer’s required business outcomes. Finally, governance also ensures that the CEO and Board understand that steps have been taken to ensure a successful and organized outsourcing program.

Five Key Areas to Consider for Outsourcing Success
In addition to governance, there are additional factors you need to consider when developing your outsourcing plan and choosing a partner:

1. Sourcing Strategy
According to Gartner, fewer than 30 percent of enterprises have formal sourcing strategies and appropriate governance in place. Given the Gartner figures, 70 percent of potential outsourcing customers are contemplating an outsource agreement with no formalized framework in place to ensure the relationship will be fruitful.

The first step to successful outsourcing is to assess your business needs. Why are you considering outsourcing? To respond to changing business needs? Drive faster modernization and transformation of the IT environment? Achieve cost savings? Keep pace with your company’s growth strategy?

By first determining the business drivers for outsourcing, you can effectively decide on the best sourcing strategy that will deliver on your business objectives. There is no one size fits all solution for outsourcing. There are choices that can be made for what gets outsourced, how many partners you choose, whether you decide on total outsourcing or a strategic mix of outsourcing, managed services or IT as a service. A good outsourcing partner can provide you with choice across a continuum of services that allows you to create your own optimized mix as well as to make changes over time and as needed when the needs of the business change.

2. Transformation Expectations
What kind of change are you seeking from your IT outsourcing engagements? Are you looking to modernize your IT environment? Drive IT and business innovation?   Cost reduction? Addressing these questions up front will help you identify how much change you’re seeking in your IT environment and aid in your selection of the most suitable service provider.

When selecting service providers, it will be important for most customers that they do more than just stabilize the current environment and reduce costs. We’re finding that many of our customers have a strong desire for greater technology and service innovation and breakthroughs while continuing to contain costs. In response to the changing needs of our customers’ businesses, we’ve been evolving our outsourcing offerings to more readily help them transform IT into an adaptive infrastructure that lowers cost of IT operations, increases quality of service and accelerates IT change.

3. Service Management Best Practices
Increased regulatory scrutiny results in the need for service providers to offer customers the same level of attention to regulatory compliance and operation controls that they do for their own business processes. Make sure your providers work with you to develop a framework for IT processes that includes planning, training, adoption and adherence to industry standards such as ITIL and Capability Maturity Model Integration (CMMI) and CMMI for Acquisition (CMMI-ACQ).

The outsourcing contract should cover proven process improvement guidance for organizations engaged in acquisition as well as IT service design, deployment and management processes, and efficient service operations. It should include escalation and notification processes, and most importantly, alignment between IT and the business to optimize the value IT brings to the enterprise.

4. Depth of Capability
Next, identify the breadth and depth of your prospective suppliers’ capabilities. For example, do you need a broad-based supplier that has experience in many industries and a global presence? Does your business require business technology capabilities in close proximity to your business? Or does it make more sense to leverage offshore capabilities? Does a niche player meet your company’s needs? It’s important to find a supplier that will meet your needs in areas like responsiveness, high quality work and innovation.

5. Business Culture Alignment
Another key consideration is the cultural fit between your company and a potential service provider. A few ways to test cultural compatibility include:

• Conduct on-site visits to the provider’s premises (if the outsourced services will be remote)
• Hold formal meetings with the provider’s team members that would be working with after contract signing
• Initiate an informal session (lunch, dinner, etc.) with the provider's team members with whom you'd be working after contract signing
• Find out their track record in working alongside other IT service providers: Do they have a reputation for quality, collaborative work?

As I mentioned at the start of this article, change is imminent and what sets apart great business leaders is the ability to flex, adapt to and manage change well. Strategic outsourcing can help an organization manage change, but it is critical to first identify what your sourcing needs are, from tactical execution to strategic outsourcing partnerships. The considerations outlined in this article will start you down the path of picking the right service partner that best fit your business needs.

Patrick is the VP of Outsourcing Services Portfolio, Marketing and Alliances for HP Services.