SERVICE MANAGEMENT & GOVERNANCE CHALLENGES. Are You Ready for the IT Service Management & Governance Challenges Ahead? An ISG Research Report

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1 SERVICE MANAGEMENT & GOVERNANCE CHALLENGES Are You Ready for the IT Service Management & Governance Challenges Ahead? An ISG Research Report Andrea Spiegelhoff, Director, ISG; and Denise Colgan, Director, ISG

2 EXECUTIVE SUMMARY The role of the chief information officer (CIO) and consequently the role of the information technology (IT) department as a whole has changed significantly in recent years, especially as the use of internal and external IT service providers has become commonplace. Today s IT organizations are expected to demonstrate excellence in the management of cost, capability and capacity. These skills are always in demand, but never more so than in the current challenging economic conditions where organizations are looking to control costs while simultaneously increasing flexibility and positioning themselves for the business upturn. With this pressure on IT departments set to increase, how well are they responding? What is the role of IT Service Management & Governance (SM&G) the capabilities required to enable successful end-to-end management of internally and externally sourced services? Is SM&G seen as an enabler or a sticking point? In answer to these questions, in April 2009 ISG carried out a survey of European CIOs to ask them, Are You Ready for the IT SM&G Challenges Ahead? SERVICE MANAGEMENT & GOVERNANCE CHALLENGES ANDREA SPIEGELHOFF AND DENISE COLGAN 1

3 The ISG research uncovered a number of interesting revelations about the difficulties of modern SM&G and the evolving role of the IT department as an architect of business change and success. The research reveals that many IT departments have put SM&G at the heart of their operations to enable successful end-to-end management of internally and externally sourced services. Furthermore, they have become far more closely aligned with the business, and the majority enjoy the support of their company s most senior executives. However, despite a strong start, it is hard to find SM&G structures that operate at best-in-class levels where business processes are defined, successfully implemented, regularly measured and improved over time. After years of denial, SM&G has finally moved up the executive agenda; but there remains lots of room for improvement in SM&G excellence. The next generation of SM&G is looking to thrive instead of merely survive. In all, our research concluded: Finding No. 1: The customer is king more than ever. More than half of the respondents identified the close working relationship with their internal customers as critical to their success. Future focus and alignment to the business are the main concerns of IT today, yet the challenge of on-time delivery of business-based projects is still a problem for more than two-thirds of CIOs. Finding No. 2: Change is the only constant. Organizational change is a top priority for most enterprises. More than 90 percent of the CIO survey respondents anticipate major change. At the top of the priorities list is the consolidation of applications and service providers as organizations look to improve performance and reduce costs and complexity by increasing standardization across the enterprise. CIOs are also concerned with the performance of their own departments. About one-third of those surveyed are currently restructuring their own IT or SM&G organizations to address gaps or low-performance issues. Finding No. 3: Broad communication is a missing change enabler. Though the CIOs surveyed believed strongly that their IT SM&G organization was closely aligned with the rest of the enterprise and most were confident that they had the backing of their organization s most senior executives they were less confident about whether all company employees actually knew and understood this strategy. Change management and communication across internal organizations remains an issue. Finding No. 4: Centralized versus local IT decisionmaking power must remain in balance. European CIOs reported consensus on the balance between centralized and local decision-making power, which is difficult to achieve in highly federated IT organizations. This high level of consensus when it comes to decision-making has not always been the case and indicates a growing capability in this area. Finding No. 5: Organizational size and skill benchmarks are needed for maturity assessment. Although most CIOs are dissatisfied with the sizing of their organization, there is a degree of confusion about how best to address this issue. Most CIOs surveyed have experienced organic growth in their SM&G departments as the services matured, with attendant cost ramifications and no means to benchmark their organization sizing against market best-practice. Although most CIOs surveyed were confident that their employees had the right business, technical and relationship skills to deliver excellence, they also reported that access to the right skills was their greatest delivery challenge. Finding No. 6: End-to-end business processes are key for integrated IT services. The CIOs in our study were aware that service delivery for IT organizations must meet business needs and be defined in business terms. They highlighted two business processes that remain an issue: consolidated business demand management and an integrated request-to-pay process that covers an integrated IT services catalog, order system, invoicing and chargeback. Finding No. 7: Value creation comes to the fore. Nearly 90 percent of the CIO s customers expect highquality services to be delivered at the right cost. More than half want complete cost transparency, and threequarters expect a strong relationship with the SM&G team. However, less than 12 percent of respondents believe that their internal relationships were working as well as they should and that customers are frequently happy with the service they receive. Finding No. 8: Customers are difficult to delight. Just one in 10 CIOs believes their business stakeholder relationships are working very well and more than one-fifth noted they faced significant difficulties with stakeholder satisfaction. Being good enough does not SERVICE MANAGEMENT & GOVERNANCE CHALLENGES ANDREA SPIEGELHOFF AND DENISE COLGAN 2

4 meet the forward-thinking business model that these CIOs strive for. Finding No. 9: There is still room for improvement in service provider management. Relationships with external service providers are also rated by CIOs as merely satisfactory. More than half of respondents feel that their service providers purely deliver to contractual obligations, with only very few service providers exceeding expectations. Of those surveyed, more than one- fifth stated that they are looking to renegotiate their current arrangements. Finding No. 10: Managing costs before they occur is the nirvana for all IT organizations. The management of customer demand with on-time requirements supported by accurate cost information and forecasting is clearly seen as a burning platform and current management practices do not give the kind of visibility to the CIO that is needed. CIOs are now more likely than ever expected to play a direct role in setting business strategy. This requires the CIO to be in greater control of the entire IT sourcing life cycle than ever before and this need for excellence in management extends into every aspect of the IT organization. Skills, processes, overall performance measurement, financial management, understanding the mechanisms of innovation, and heightened awareness in every IT member are critical to address the challenges ahead, especially in times of uncertain economic conditions. SURVEY BACKGROUND AND OBJECTIVES In the spring of 2009, ISG invited CIOs from leading European companies in a variety of industry sectors to take part in a survey that looked to measure the extent to which CIOs and their IT SM&G organizations had evolved to fully support their wider enterprise and business goals. It should be noted that the companies surveyed did not necessarily utilize the services of ISG or any other sourcing advisor in defining and implementing their IT and sourcing strategies. This report summarizes the experiences of CIOs from a variety of nationalities and industry sectors and offers an insight into the current aims of and challenges affecting SM&G organizations in European companies. ISG DEFINITION OF SERVICE MANAGEMENT & GOVERNANCE SM&G encompasses the capabilities required to enable successful end-to-end management of internally and externally sourced services. Its components are often referred to as: Governance Relationship Management Vendor Management Contract Management Service Provider Management Client or Account Management THE ISG SM&G SURVEY FINDINGS Finding No. 1: The customer is king more than ever Establishing and maintaining good working relationships with internal business customers has never been more important. The ability of the CIO to gain support for standardization and other enterprise-wide initiatives rests heavily on the department s ability to deliver relevant, high-quality services in a timely fashion. It is no surprise that two-thirds of the surveyed respondents currently see the on-time delivery of business-based projects and operational services as the major challenge that, if addressed, would have the greatest impact on the organization. Although this has always been the central role of the IT department, it has never been an easy one to fulfill. However, the current challenging economic conditions have forced senior executives to focus on containing or reducing corporate costs. Now, more than ever, IT SM&G teams are challenged to accomplish on-time delivery under enormous cost pressure and restrained or sometimes reduced resources. In addition, many IT organizations are being sidetracked by major ongoing IT organizational transformation programs. Keeping to the theme of the internal customer as king, more than half of the surveyed CIOs highlighted the cooperative management of business relationships with internal clients and customers as a major challenge for IT that, if addressed skillfully, would have enormous impact on the organization as a whole. Counter to what some might believe, successful SM&G organizations are now focusing less on the successful management of contracts and relationships with service providers where one would expect additional savings potential and more on putting internal business relationships into perspective. On the one hand, IT organizations have become more sophisticated in managing their service SERVICE MANAGEMENT & GOVERNANCE CHALLENGES ANDREA SPIEGELHOFF AND DENISE COLGAN 3

5 providers. On the other hand, effective service provider management is tied inextricably to the buy-in and cooperation of the business. Only the effective alignment of internal customer requirements with the provision and management of agreed-upon services will achieve the cost, capability and capacity goals desired. The concept that the customer is king is a staple within everyday business and is equally valid in an SM&G environment. If you take a restaurant as an analogy, then successful restaurants use what are effectively SM&G concepts as a core of their business model. The customer selects what they want from the menu. This is the equivalent of IT service catalog and business service levels. The meal is then delivered by the chef in the right sequence, at the right time and to the correct quality. This is the equivalent of the heads of projects and operations service delivery providing end-to-end business services. The restaurant manages its supply chain to ensure that it can deliver the meals listed on the menu. This is the equivalent of an IT department managing its service providers. This approach provides very simple business rules that, if followed, will mean the difference between success and failure. Finding No. 2: Change is the only constant Organizational change has become business as usual for most companies as they react to challenging economic conditions, mergers and acquisitions, and regulatory change. In tandem, most SM&G organizations 94 percent of those surveyed are themselves changing to support the new business priorities. As change becomes a constant in business, so it has become imperative to design a flexible SM&G operation that can be expanded or contracted as required. Unsurprisingly, the need to respond to the challenging economic conditions leads the current motivation for change. In an attempt to generate additional savings from their current sourcing arrangements, around 70 percent of respondents are in the midst of a service provider or applications consolidation exercise. As well as possibly achieving very high savings, such consolidation exercises can significantly simplify the management burden and performance, freeing up resources to address other needs and projects. As a result of their closer alignment with both the wider business strategy and their corporate internal clients, a third of the CIOs surveyed have identified that perceived underperformance and service gaps have driven them to restructure their IT SM&G organization. However, it is important to note that there are many reasons for underperformance, and these can be identified and addressed through maturity assessments designed to provoke dialogue and spur much-needed process improvements. Indeed, where a formal SM&G operating model is in place, these core issues can be more easily identified, resulting in a reduction in conflict and an increase in value realization. Organizations with a mature SM&G operation in place are more likely to achieve cost savings, improve services, reduce strife and create an environment for innovation the holy grail of sourcing. Finding No. 3: Broad communication is a missing change enabler Most CIOs are confident that the steps they have already taken to more closely align with the business have resulted in improved relationships with internal customers and a wider acceptance throughout the organization that the IT function is a key contributor to the success of the business overall. Overwhelmingly, the majority of CIOs questioned (71 percent) stated that the IT strategy was strongly aligned with the wider corporate or business strategy. We were encouraged to note that almost as many CIOs believe that they have the full support of the executive team and are no longer seen as just a back-office function. Interestingly, although most CIOs are confident that they have successfully defined and communicated a clear IT and sourcing strategy, far fewer are confident that these strategies and goals are properly understood by company employees. It seems that while relationships at a senior executive and customer level appear to be working well, wider change management communication throughout the organization remains less successful. Many companies continue to struggle with change management and the communications it necessitates. Although some IT organizations feel strongly that they have achieved strategic alignment with the business, in many cases the organizational changes that need to be imposed to ensure success are not made or sufficiently enforced, resulting in confusion and negatively impacting results. Many client examples illustrate that companies too often take a turnkey approach to SM&G, expecting that it will automatically be successful. Based on ISG experience gained over years of observation and involvement in numerous engagements, we note that, even when companies develop a best-in-class operating model, they often have trouble implementing and using it. This is SERVICE MANAGEMENT & GOVERNANCE CHALLENGES ANDREA SPIEGELHOFF AND DENISE COLGAN 4

6 usually because the wider organization has not made the necessary adjustments in philosophy and business execution with regard to operational management that would institutionalize the needed changes and enable effective SM&G. Finding No. 4: Centralized versus local IT decisionmaking power must remain in balance One enabler of effective SM&G is cooperation across the IT organization. The greater the number of businesses, regions or countries in scope, the more difficult it is to implement common solutions. Although most IT departments are now embedded in complex matrix organizations, European CIOs reported consensus on the balance between centralized and local decision-making. This finding was something of a surprise, as ISG experience with clients over many years suggests that many IT organizations are still federated, thus complicating the implementation of lean, centralized SM&G. Our survey respondents did not recognize this as an issue, however. Overall, corporate, business, IT and sourcing strategy will influence decision-making rights. Depending on the organizational roles, scope and geographic distribution of the organization, different degrees of centralization versus decentralization apply. Many attributes of an SM&G function or individual SM&G roles can be centralized or decentralized. Understanding and defining each facilitates implementation and avoids future conflict. Funding, priority setting, goal setting and rewards generally define where decision-making will reside. The case for centralization versus decentralization is organization-specific and depends on many drivers: Who funds the role? Who sets priorities for the role? Who sets goals and objectives for the role? Who rewards performance of the people? Who defines the methods to be used? Who defines the systems to be used? Where will the people be located? One thing is certain: the balance of decision-making power between centralized and local IT functions will have a huge impact on the sizing of the SM&G organization. Finding No. 5: Organizational size and skill benchmarks are needed for maturity assessment The tricky issue of balancing skills and resources remains a key concern with European CIOs. The ability to grow and retain much-needed skills and experience while ensuring that staff are offered new roles and opportunities as well as being appropriately rewarded is just as important as ever. In general, our survey respondents are very satisfied with the available skills within their departments, and they view training and career development as important. This is very encouraging, as strong talent management will result in ongoing performance improvements, which in turn will positively impact overall business performance. In addition, this type of focused talent management can also significantly impact employee satisfaction, making it more likely that the organization will be able to retain these skilled individuals. What is less clear is the ability to assess the quality of staff compared to market standards. Most companies are intrinsically inward-looking, and this is not helped by a lack of available information against which CIOs can benchmark the skills and abilities of their staff. In general it seems that companies might benefit from seeking advice from a specialist firm experienced in guiding clients through the complexities of skills assessment and people development. They should look to answer these three questions: What are the considerations, skills and capabilities necessary for effective SM&G? How do you assess available resource capability and skills? What can you do to maintain these skills during the long run? Allied to the question of skill is that of optimizing the size of the IT organization. Sizing is the No. 1 cost issue within the IT organization, and the survey clearly showed that this is an issue that still needs to be addressed. More than half of CIOs surveyed reported that they were unhappy with their organization s size and that they did not know how to appropriately address the issue. The fact remains that there are simply no reliable benchmarks that can be applied. It should be remembered that sizing is as much about quality as it is about quantifying numbers and costs. If the team is too small it will be overrun by its customers and service providers. If it is too large it will be a case of checkers checking checkers. So what does good look like? This is not an easy question to answer. Because every organization is unique and has different requirements, the challenge is to define the optimal staffing model for that specific set of circumstances. As a general rule, sizing should be driven by functional, organizational requirements; therefore, a bottom-up SERVICE MANAGEMENT & GOVERNANCE CHALLENGES ANDREA SPIEGELHOFF AND DENISE COLGAN 5

7 approach should be more appropriate. Key factors that influence the size of the SM&G organization include: The chosen operational model The degree of centralization versus decentralization Geographic distribution of the organization Managed volumes Budgetary constraints/realities or costcontainment goals As one survey respondent commented, Organizational size has a lot to do with the control mechanisms and amount of outsourcing. This is absolutely right; for example, extensive use of offshore capabilities can increase the size of the SM&G organization by 2-3 percent. The trend toward multisourcing and the need for service integration can also substantially influence the sizing of the SM&G organization. How much control does the client wish to retain for the integration of the various components of the end-to-end IT services? How much responsibility should be outsourced? At each stage in the sourcing lifecycle, the issues to be managed are different, and that often drives an evolutionary approach to organization size. The No. 1 benefit of having the right sized organization with the right skilled people in place is the avoidance of value leakage. Value leakage is an immediate view of the actual cost of failures to deliver promised services. So in terms of staff, value leakage identifies the time spent either duplicating promised work or following up for failures to perform. A recent assessment that ISG carried out on behalf of a client identified US$1 million in value leakage per year in just three areas. People alone will not mitigate value leakage. The solution requires the right mix of people and governance process to improve overall receipt of value and delivery of end-to-end services. Finding No. 6: End-to-end business processes are key for integrated it services Having the right skilled employees to manage the complexities of IT service integration is considered a major challenge in the delivery of end-to-end integrated IT services. Although the saying holds true that an organization is only as good as its people, these people need to be supported by the right organizational frameworks. And business processes are an important part of it. Process immaturity is an issue that, if not addressed, will result in failures in service delivery. IT organizations need to provide services that meet business needs defined in business terms. And two business processes remain an issue: consolidated business demand management, and an integrated and transparent request-to-pay process that covers an integrated IT services catalog, order system, invoicing and chargeback. Process development is an iterative practice that requires integration among SM&G, service providers, business and/or stakeholder teams. Clear goals and leadership buy-in are prerequisites for successful process design. Process maturity assessments can help pinpoint areas where organizations can focus efforts to reduce time, resources and costs or to improve quality without harming overall services. Process improvement will also bring about additional control and will supply the power to make positive change. Finding No. 7: Value creation comes to the fore The right proportion of skills and resources is also a key contributor to customer satisfaction. The delivery of high-quality services at the right cost was identified by 85 percent of survey respondents as the most important customer expectation from the IT SM&G team. In support of our earlier conclusion that IT has become much closer to the business, almost three-quarters of respondents felt that customers expected to enjoy strong relationships with the IT team. Interestingly, the traditional IT SM&G roles of managing contracts, performance management and increasing purchasing power were seen as far less important than previously. As the IT department becomes more sophisticated in its management of contracts and external service providers, we are seeing an evolution of its role away from pure service delivery and toward value creation. The issue for many SM&G organizations has now become that of managing this process going forward. To this end, ISG has noted that many are utilizing a balanced scorecard for sourcing ; a management system that allows them to look at a variety of business factors beyond financials and service level agreements in order to understand both the current results and future requirements. By taking this view it is possible to have both early warning of problems and the means to create process improvement and value. Finding No. 8: Customers are difficult to delight Despite this increased sophistication and the closer alignment of IT to the business functions, there is still a marked lack of customer delight. Although most respondents (68 percent) felt that their internal relationships were working quite well and that customers found their service satisfactory, only a very small SERVICE MANAGEMENT & GOVERNANCE CHALLENGES ANDREA SPIEGELHOFF AND DENISE COLGAN 6

8 proportion less than 12 percent stated that these relationships were working very well and that their customers were frequently happy with the service. More than 20 percent of CIOs a significant number admitted to sometimes facing difficulties, with services often rated as unsatisfactory. In practice, unsatisfactory client relationships result in non-collaboration, shadow SM&G organizations and poor communication. Since broken relationships can be difficult to fix, it is advisable to introduce change management and proactive communication as early as possible. In its broadest sense, change management deals with the human dynamics and risks associated with performing effectively against an organizational strategy. Managing change in a planned or systematic fashion is required to more effectively implement new methods and systems in an evolving organization. Finding No. 9: There is still room for improvement in service provider management We noted a similar lack of delight when we asked CIOs to rate their satisfaction with their service providers. More than 50 percent of respondents felt that their service providers only go so far as to meet contractual obligations. Unsurprisingly, as a result, more than 20 percent of CIOs have stated their intention to renegotiate the terms of these relationships. It is important to note that there are always two sides to every relationship and that issues with service providers are rarely the fault of the provider solely. Clients often fail to realize the full value of their outsourcing arrangements because they do not effectively manage the services. It is also all too easy for clients to become caught in a cycle of frustration, emotion and failure to resolve core issues with providers. However, the establishment of a formal SM&G operating model and processes has been shown to help clients to realize value and reduce strife and conflict in their relationships. As with internal business relationships, it makes sense to formalize provider relationship management through the use of relationship plans. Successful management of service providers is worth the energy invested given that it can result in cost reduction, improved services and stable business relationships that leave scope for innovation to occur. Finding No. 10: Managing costs before they occur is the nirvana for all IT organizations As CIOs continue to juggle skills and resources within a wider environment of economic uncertainty, their focus for the short term is very clear. Almost 60 percent of respondents stated that effectively managing customer demands with on-time requirements supported by accurate cost information and forecasting will have the greatest impact on their ability to manage their costs. It is interesting that although organizations are becoming ever more mature in managing their sourcing relationships, demand management often remains an unresolved issue. Given that demand management is one of the leading causes of value leakage, how can organizations better manage the balance between supply and demand? Over the years many organizations have been using project-based gateway processes to control decisions and costs through the various stages of the project. These approaches are now being developed into IT decision-based gateways covering all IT costs. This means that IT can start to predict cost at the strategy stage of decision-making and then follow it through demand, design, implementation and into operational costs. This helps to create a more predictable ongoing project and operational budget and forecasting process. When coupled with additional predictive indicators through enhanced governance, these can become key corporate tools as well. CONCLUSIONS The need for cost savings and long-term efficiency benefits has prompted a broad cross section of companies to pursue outsourcing arrangements as a way of gaining a competitive edge in an increasingly challenging global marketplace. Outsourcing relationships are becoming smaller, shorter, more numerous and more complex. Clients are increasingly using multiple service providers, and IT departments are taking an ever-more-challenging role in coordinating the work of these multiple providers with the needs of internal customers to deliver timely and cost-effective provision of services. These complex relationships require mature and professional SM&G and the survey data clearly shows that most organizations are not yet at the point where they can claim to demonstrate excellence in SM&G. Many organizations have made a start along this road, but they are truly at the beginning of their SM&G SERVICE MANAGEMENT & GOVERNANCE CHALLENGES ANDREA SPIEGELHOFF AND DENISE COLGAN 7

9 journeys. The issues with organization sizing, skills management and delivery highlighted by our survey clearly demonstrate that there is much focused work to be done before companies achieve the very best in provision of services, management of costs and return on investment. This involves all aspects of an SM&G operating model, including the drive to support the business, the organizational structure and sizing, the skills and capabilities of the IT team members (whether performing in-house IT work or managing providers), working processes that support the governance requirements and the ITIL or operational imperatives and clear financial measurement. The establishment of a strong and supported SM&G operating model framework ensures that the CIO can cover all the aspects that will bring the IT organization and governance capability to its highest level. Our experience at ISG is that all of the components shown in the accompanying diagram need to be in place for optimized performance and for the ability to bring the predictive indicators so needed in today s business to the company executive. CIOs can call upon help from the market to assist them in establishing workable SM&G models, building effective SM&G teams and benchmarking skills against market best-practices. A skilled and appropriately resourced team will ensure that costs are reduced, maximum value is achieved and customer needs are met in a timely and professional manner. SM&G is truly no longer a side function of the IT department. It is central to the ongoing success of the whole organization. The ISG Service Management Operating Model Framework SERVICE MANAGEMENT & GOVERNANCE CHALLENGES ANDREA SPIEGELHOFF AND DENISE COLGAN 8

10 LOOKING FOR A STRATEGIC PARTNER? Andrea Spiegelhoff and Denise Colgan are Directors with ISG. Contact the authors at andrea.spiegelhoff@isg-one.com or denise.colgan@isg-one.com. Information Services Group (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory services company, serving more than 500 clients around the world to help them achieve operational excellence. ISG supports private and public sector organizations to transform and optimize their operational environments through research, benchmarking, consulting and managed services, with a focus on information technology, business process transformation, program management services and enterprise resource planning. Clients look to ISG for unique insights and innovative solutions for leveraging technology, the deepest data source in the industry, and more than five decades of experience of global leadership in information and advisory services. Based in Stamford, Conn., the company has more than 700 employees and operates in 21 countries. For additional information, visit Copyright 2012 Information Services Group All Rights Reserved