opinion piece Meeting the Challenges of Supplier Relations in a Multisourcing Environment

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1 opinion piece Meeting the Challenges of Supplier Relations in a Multisourcing Environment

2 New approaches and skills are required to effectively manage the increased volume and complexity of relationships between the various parties involved in multisourcing deals. Contents 1. The Move to Multisourcing Tactics for Managing Client / Supplier Relationships Adopting a Partnership Approach The Right Measurement Tools Supplier Management Skills Introducing Shared Risk / Reward Commercial Models Conclusion 04

3 Dimension Data explores the unique challenges associated with managing client / supplier relationships in multi-vendor sourcing environments and provides suggestions as to how these can best be addressed. 1. The Move to Multisourcing The outsourcing of discrete functions of a business has been a way of life for many years. Divestiture of non-core business processes allows the organisation to focus on more important matters, make better use of skills, mitigate risk and, in certain cases, reduce costs. Information Technology outsourcing has gained in popularity, with huge international contracts worth billions of dollars signed annually. However, recent years have seen significant changes in the way organisations approach outsourcing. Whereas a decade ago, the typical organisation either fully outsourced their IT function to a single vendor, or provided IT in-house through the IT department, today the option of relying on a single provider is less attractive for many reasons: The expected reductions in IT spend are not being realised, there is no alignment to business objectives and more often than not, the relationship contributes little in terms of innovation and thought leadership. Today, organisations are demanding more from their outsourced service providers and are seeking more of a partnership where common goals and aspirations are targeted. By employing a variety of best-of-breed service providers, organisations are seeking to enjoy greater agility and reap competitive advantage. 2. Tactics for Managing Client / Supplier Relationships The case for multisourcing is compelling. Using multiple suppliers allows companies to negotiate better deals with providers concerned about competition, and to establish comparison points between internal service organisations and outside suppliers. But companies also have to address new complexities in this sourcing strategy: How do you deploy end-to-end delivery processes across multiple providers? How do you transfer accountability and responsibility, to whom and under what circumstances? How do you optimise the contribution of each supplier, determine the scope of their activities and, more problematic still, adjust roles and scope over time? Clearly, this terrain brings with it certain challenges. Specific skills are required to effectively manage the volume and complexity of relationships between the various parties involved. 2.1 Adopting a Partnership Approach In traditional client / supplier relationships, the primary focus is generally on cost or price. Moreover, organisations often view the service provider with suspicion and a lack of trust exists between the two parties, which can jeopardise the success of the overall engagement. When adopting a multisourcing model, the development of a partnership relationship between client and supplier, based on trust and focused on mutual business outcomes, is key to the success of the contract. This model requires organisations to adopt a new attitude toward service providers as strategic partners not just as vendors from whom goods and services are procured, but as business partners with experience, skills and assets that can be harnessed to create competitive advantage. Service providers, in turn, must be prepared to work to better align their services and contracts to their clients unique needs. These factors have resulted in organisations opting for selective sourcing or Multisourcing models, where certain functions are outsourced and selected functions are retained in-house. 01

4 At Dimension Data, we recognise the new expectations flowing from the multisourcing approach. We understand the need for greater collaboration and focus upfront on preparing the ground for a solid and mutually rewarding relationship between ourselves and our clients. One way of achieving this is by adopting a service model that involves us working closely with our client s people in a blended team, thus becoming a true trusted partner. Often, traditional sourcing relationships become strained due to fears on the part of the client relating to loss of knowledge and intellectual property, as well as loss of career development opportunities for their internal staff. Dimension Data, through its blended team approach, partners with and grows the client s staff professionally, thus avoiding any concerns about loss of knowledge and increased staff turnover. The multisourcing model requires organisations to adopt a new attitude toward service providers as strategic partners not just as vendors from whom goods and services are procured. Dimension Data provides the following perspectives on how to overcome some of these challenges: 2.2 The Right Measurement Tools Effective measurement techniques are critical to establishing a trusted partner relationship between clients and service providers. A common problem in traditional sourcing relationships is that often Service Level Agreements (SLAs) just measure incidental items that have no bearing on business outcomes. The result is that the organisation cannot ascertain whether it is getting value for money and is unable to prove to management that it has made a good decision to outsource. Adopting a multisourcing model therefore requires a new discipline to measure and monitor the performance of sourcing relationships. Key to this process is commitment on the part of both the client and supplier to being fully transparent. For service providers, this means being willing to share true cost and delivery effort information with the client. Clients need to allow service providers get to know as much as they can about their organisation, for example, by briefing them on their short and long-term strategy, business goals and priorities, as well as present and future IT ventures. Both parties then need to find ways of linking this transparency to business value rather than just to costs. Delivery of concrete proof of return on investment requires the introduction of more refined scoring mechanisms. The balanced scorecard approach to measurement of the relationship is one option: Linking service delivery to elements such as reducing service desk incidents, improving infrastructure utilisation and ongoing systems enhancements. Delivery of concrete proof of return on investment requires the introduction of morerefined scoring mechanisms. Dimension Data s position is that a detailed scoring model, which clearly defines measures and targets that are agreed up-front by the two parties, will make a significant impact on the success of the partnership. One approach, for example, is for the service provider s performance to be formally measured each quarter by both parties. The outcome will directly determine the variable payment to the service provider each quarter. This ensures that the service provider gets out into the open as to where it is performing best and where it can improve. Underperformance at a granular level is immediately identifiable, enabling corrective actions to be agreed with the client. While many aspects of the service are intangible, a quarterly review process and the performance measures will ensure that the services provided match up to contracted obligations and performance deliverables. One of the main benefits of this approach is that if it is planned and implemented correctly, it will stand up to the audit reviews required as part of any sound governance regime. Clients need to set out rules that describe interaction and demarcate responsibilities between multiple vendors. 2.3 Supplier Management Skills One of the hardest parts of moving to a best-of-breed outsourcing approach is managing the process. With this model, one sourcing relationship is not autonomous of another and numerous service providers depend on each other and on internal services to reach goals. Managing multiple suppliers is much more complicated and demands a new set of skills and management techniques. Many companies find themselves ill-equipped to manage multiple IT outsourcing relationships. To effectively cope with these new challenges, organisations need to develop a coherent plan for the ongoing management of their supplier relationships and the services that are provided. This includes re-evaluating the roles and responsibilities of in-house IT personnel, building up internal skills to track the performance of the outsourcing contract and developing techniques to assess whether value is being delivered. Multisourcing models require two or more vendors with different roles and responsibilities to work together to deliver a service. While they are individually accountable to the client through SLAs, they are not necessarily accountable to one another. Good management practices are therefore critical in order to keep the sourcing relationships from veering off-course. Clients need to put in place a formal multisourcing framework that sets out rules that describe interaction and demarcate responsibilities between multiple vendors. This will help avoid disputes and finger-pointing between different outsourcing partners which could potentially jeopardise the success of the engagement. If an organisation s internal capabilities are immature in terms of governance and processes, it will find managing supplier 02

5 How the Multisourcing Approach Impacts Supplier Relations Focus on cost Vendor status Measurement via standard SLAs Independent sourcing relationships relations in the multisourcing space an onerous challenge. Now is the time for organisations to focus inwards and develop strong IT management processes to prepare to operate successfully in this environment. Dimension Data sees value in the use of Capability Maturity Models as a tool to audit an organisation s capabilities to manage interactions effectively. Capability Maturity Models can be used to assess an organisation against a scale of five process maturity levels. Each level ranks the organisation according to its standardisation of processes and is a useful tool to set the benchmark of the current As-Is situation. It allows the company to measure its current interaction capabilities and pinpoint gaps between where they are today and where they want to be. Armed with this information, they can then set out to develop an improvement path to achieve a set of mature, disciplined internal processes. Achieving healthy client / supplier relationships in the multisourcing space is obviously not a one-way street: Service providers also need to adapt their approach in terms of the way they interact with the client and the other service providers sharing other pieces of the pie. They must be able to understand how their services impact the company s business processes and be ready to work collaboratively with other service providers impacting the same area. At Dimension Data, we view shared risk / reward commercial models as an innovative way for clients and service providers to extract additional value from their partnerships, over the long term. In recent years, we have successfully implemented shared risk / reward commercial models with several of our key clients, with whom we have a strategic relationship. We do not see ourselves adopting this commercial model with all our clients however after all, not all relationships end up being Focus on mutual business outcomes Trusted business partner status Balanced scorecard approach Multiple vendor interfaces strategic, nor should they. Additionally, while many clients welcome the opportunity to implement this commercial model when engaging with us strategically, for others it is not appealing or appropriate. In line with our mantra of flexibility, we will accommodate individual client needs and where clients choose not to engage with us in this way, we still focus on achieving their business objectives within the parameters of a more traditional commercial model. 2.4 Introducing Shared Risk / Reward Commercial Models A basic support service relationship is typically managed on cost and the client pays for the service at a pre-agreed, fixed price. In most cases, the client is entirely responsible for the investment and all the associated risks. The provider is accountable for specific project deliverables, but not the final business outcome. However, when service providers engage with clients at the value-add, strategic level, where the two parties are involved in a partnership aimed at exploring new and creative ways to meet the client s business objectives, they may consider moving beyond fixed-price work, into a contract where the client and service provider share both the risks and rewards. As a strategic business partner to the client, the service provider s revenues and margins become dependent on the measurable outcome of the project. Risk and reward commercial models may not be appropriate for every client and every engagement. When is this approach a viable option and what are the requirements for success? In order to work, shared risk / reward engagements require a completely new mindset on the part of both clients and service providers. They are not appropriate for traditional outsourced relationships where a lack of trust exists Service providers must be able to understand how their services impact the company s business processes and be ready to work collaboratively with other service providers impacting the same area. and the focus is still on price rather than the value that is delivered. Shared risk / reward engagements must be underpinned by a relationship based on mutual respect and flexibility, where both parties are focused on reaping the rewards of each other s success over the long-term. Critical success factors include a firm commitment from both parties to working together in an integrated team with no hidden agendas, open communication and a willingness to look at the long-term big picture. Benefits of Shared Risk / Reward Commercial Models Dimension Data s experience has shown that when planned and implemented properly, shared risk / reward commercial models offer a number of benefits for both parties, for example: A performance-linked model drives the correct behaviour and ensures that both the client and service provider remain aligned to achieving the client s business goals. Clients are able to demonstrate to management that they have made a good decision to outsource and can deliver concrete proof of value. Clients have the confidence that comes from knowing that the service provider is taking each step with them rather than for them. The cost of services is calculated based on the effort involved, not the number of devices supported. The client pays for results not just deployments. 03

6 3. Conclusion The growing trend towards multisourcing as the IT sourcing strategy of choice brings with it a unique set of challenges for clients and service providers alike. If they hope to derive maximum benefit from their multisourcing relationships, both parties need to make a firm commitment to adapting and improving their approach to how they interact with each other. For clients, this means arming themselves with a new set of skills and management competencies, as well as a different mindset in terms of the way they communicate, interact with and oversee service relationships inside and outside the organisation. The service providers that will win in this new marketplace will not only be the ones that provide the best-in-class services but will also be those who make it easier for companies to do business with them by meeting their business needs and unique sourcing requirements. For service providers, this mandates a collaborative approach, flexibility, transparency and a change in the way they understand business goals and interact with the client and each other.

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