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Prescription for Sourcing Success: Remember the Three Cs

By James Foreman, PMP

Business and government organizations today are spending a considerable - and growing-amount of their annual budgets on services contracting. Consider these facts:

• The average Fortune 1000 company today spends 30-35% of its budget on external services procurement.
• In 2002, IT services was a $536 billion market, and it is forecasted to reach $700 billion by 2007. The U.S. government alone will contribute between $40 billion and $65 billion to this total.

Several factors have enabled these trends:

• Uninterrupted increases in global competition across all industry sectors have brought on continuous business pressures.
• There have been rapid advances in information technology, particularly in communications technology.
• Due to the "9/11 Effect," companies of all sizes have evaluated their current business models in order to minimize exposures to business continuity on a worldwide basis.

Services Contracting: A Project in Itself

Services contracting is defined as the purchase of goods and services from outside entities. This can include anything from repetitive custodial work to full business process outsourcing. Study after study shows that the services acquisition, or sourcing, process doesn't always go well. As more and more back-office operations and information technology functions are being outsourced, cost, customer satisfaction, project schedules and quality is being adversely affected. At their 2003 Spring Symposium, the Gartner Group reported:

"…half of all projects involving external service providers would fail to deliver what organizations had expected, and will be considered unsuccessful…."

Based on a U.S. study of more than 13,000 projects, a large percentage of which involved external service providers, the Standish Group reported in March of 2003:

"Project success rates are… just over a third, or 34%, of all projects…"

The litany of problems associated with services contracts is extensive. Some of the reasons for unsuccessful sourcing relationships include:

• Unclear, insufficiently written contracts, including associated Statements of Work and Service Level Agreements
• Poor execution, from pre-bid phase through contract expiration or termination, in the areas of project management, governance and relationship management
• Poor understanding and documentation of business and technical requirements across the board, from smaller, one-time projects to long-term outsourcing contracts

You may notice that these services contracting problems are similar to the problems associated with projects of any type. This similarity is not surprising, since most, if not all, of services contracts are, in fact, projects. "Outsourcing governance" and "vendor management" are more than buzz words. These critically important business areas demand systematic processes and skills. Successfully managing the sourcing of products and services through external firms requires a set of integrated functions, processes and skills.

Turning Ideas into Action Using the Three "Cs"

There are three factors-competence, collaboration and communication-that are key to success in services contracting.

1. Competence
   To support the development of the required competencies, a clearly defined, repeatable life cycle model, such as the one depicted in Figure 1, should be made a permanent part of the business processes of your organization. Having defined a viable process, you can then map process tasks to well-defined roles, such as Business Analyst, Contract Administrator and Project Manager. Role definitions are often times more useful than job descriptions for various reasons, including the matrix structure of many organizations and the lengthy life cycles of today's projects. Once you have clearly defined roles, along with the required skill sets for each role, you can use this information to develop a training program that meets the needs of your employees and your organization.
2. Collaboration
   Cross-functional teams foster improved performance and are essential to the success of services contracts. The services contracting life cycle process should be designed to promote collaboration by explicitly recognizing the concept of cross-functional teams as the normal way of doing business. This approach should always include not only the people actively creating and managing the sourcing relationship, but also the ultimate customer community - the users.
   
   Extending the concept of collaboration one step further, you must reach out to the supplier and create integrated environments for monitoring progress and performance, handling issue, and processing change requests. At the heart of an effective collaboration between the buyer and seller in services contracting is a clear understanding of the goals and objectives of each party. The contract that defines the relationship and the performance expectations of both parties is, by definition, intended to be beneficial to both parties. Buyers can lose sight of this fact in an overzealous drive for cost reduction, as can sellers when they lose sight of the ultimate need to satisfy the user.
3. Communication
   In the end, most sourcing situations succeed or fail based on the quality of the relationship between the parties. Nothing promotes a positive and effective relationship like clear and reliable communication. To create a basis for effective communication between buyer and seller, you must first develop an approach for internal communications in the buying organization that identifies and includes all stakeholders (defined to be anyone who is affected by or can affect the outcome of the project/contract). This communication plan should capture strategic thinking - the rationale behind the make/buy decision - and extend to the end of the life cycle.
   
   Having defined and implemented an effective internal communications approach, the logic can then be extended across the contractual divide to include the seller. Such things as the provision of clear requirements and performance expectations fall under the heading of effective communications, as do clear documentation of problems and issues and timely communication.
   
   Finally, the maxim "If it isn't written, it isn't real" should always be incorporated into both internal and external communications. Given the large number of people involved in a services contract, the tendency for roles to change and the long life cycles, clearly written communications and documentation are absolutely essential.

The Future

We are moving toward a business model that has, at its center, global collaboration. Collaboration and collaborative solutions are emerging as a fundamental change in the way we conduct business. Closely united partnerships with emphasis on greater life-cycle visibility and proactive responses to changing market conditions are going to be the requirements, rather than the goals, placed on businesses.

The distributed, global collaboration model will have significant implications on how communication occurs within a business process or project team. It will no longer be enough to focus on the basics of strategic planning and tactical operations. The tag line of tomorrow is "competence, collaboration and communication."

James Foreman, PMP, is ESI's Vice President of Client Solutions. His responsibilities include facilitating direction-setting for the corporation, as well as establishing strategic partnerships and advising on key acquisitions. Mr. Foreman also contributes to the design of client improvement programs. E-mail Mr. Foreman jforeman@esi-intl.com.

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