The trend in IT services is clearly pointing towards multi-sourcing, which involves multiple service providers tackling different pieces of technology. This includes specialist service providers for infrastructure management, application development and maintenance, third-party application management, and IT strategy. Consequently, the deal sizes for IT services have gone down, shorter deal durations have set in, and there is an increased need for governance. Multiple service providers have increased the burden of managing and governing outsourcing relationships.

Global outsourcing market is set to grow at 8.1 percent in 2009 and 35 percent of the clients find non performance as the reason for restructuring their IT agreements, according to a survey by PA Consulting group,a U.K. headquatered management consultancy. These reasons justify the need for and importance of governance of offshore IT outsourcing deals both from the customers as well as providers perspective.

After investing every one-dollar on IT governance, an organization gets back $100 in five years, explains Vivek Nijhon, Global Sourcing Head, EquaTerra, an advisory firm. A report by EquaTerra reveals that 41 percent of the organizations invest a minimum of 3 percent ($3 million) of their total contract value ($100 million) on IT governance. (See Chart 1.)

It is a very tedious and well-defined task for any organization to have an efficient and effective IT governance set up. It is an elaborate process to balance the risk versus the value one realizes in terms of standardization and optimization of an IT outsourcing deal. (See Table 1.)

Nijhon of EquaTerra also explains that the success rate of those IT outsourcing deals where governance is discussed at the first day of the deal is much higher than others. It is mandatory to understand a typical and centralized IT governance model and what are the basic objectives which governance should achieve in a deal.

Chart 1

Source: EquaTerra

Table 1 

Source: EquaTerra

Chart 2

Source: EquaTerra

Equaterra believes that 50 percent of governance work falls in this lower left transactional quadrant and that it is possible to automate upto 40 percent of that work. Of the remaining 50% of the governance work, Equaterra believes that another 40 percent is consultative and 10 percent is strategic. (See Chart 2.)

Though the basic ingredients of a governance model would remain same for each organization,  the design and way of functioning would vary for each depending upon the size, duration  and geographical set up of the deal. “The most typical governance set up includes representatives of the IT department, sourcing group and the service providers organization, and the meeting schedules and escalation mechanisms vary widely. A typical rhythm may include monthly conference calls and quarterly in-person meetings, and certain conditions may trigger escalations or ad-hoc meetings,” says Mark Livingston, Senior Vice President, Cognizant Business Consulting (CBC) Practice, Cognizant, a provider of consulting, technology and business process outsourcing services.

Brendan P.Flynn, Outsourcing Services Manager, Ingersoll Rand, a client of ACS (a provider of business Process and Information Technology Services) discussed with Global Services, the success of the governance relationship between Ingersoll and its supplier, ACS. He believes that there is a joint relationship of governance for the success of any outsourcing deal. The service delivery manager from ACS' s perspective and the relationship manager from the customer's side are in constant touch and at least meet on an annual basis to discuss the targets and strategies for coming year. “Our global technology supplier management services focus on cost, quality, service, customer satisfaction, continuous improvement and the relationship with supplier. However, the three core elements of  IT governance would be relationship with the strategic partner, people (IT governance team) and process (delivery model, provision service, managing supply),” says Brendan.

Areas to focus: challenges
PA’s 2009 IT sourcing survey found that only 16 percent of companies describe their sourcing governance as mature. Immature sourcing governance opens the door to a number of problems that includes, most importantly, unmet expectations.  PA finds that unmet expectations are a leading reason why sourcing initiatives underperform or fail outright.

Chart 3

 Source: PA Consulting

When lack of understanding of the cost of retained governance in an organization and lack of maturity in governance set up  is coupled with adoption of a multi-sourcing strategy, it usually leads to a major dilemma.
According to Cheryl Spellman, Outsourcing Project Executive, IBM, a provider of Information technology and business process outsourcing services, misaligned expectations, contract clarity, changes in business or expectation time to time  and breakdown in trust are the basic challenges  which a governance team should overcome. He also adds, “Multi-geographic and multicultural environments introduce additional complexity that must be actively managed through well-thought-out governance structures and mechanisms.”

Moreover, as per EquaTerra , there are no broad industry accepted outsourcing governance performance “benchmarks” available in the market. Invoice verification is a time consuming process for most outsourcing customers, yet the magnitude of these projects warrant careful review of work performed and money spent with service providers.

Sachdev Ramakrishna, Director, Marketing, Steria India, an end-to-end IT services provider, highlighted the fact that measurement is the crux of governance. It is very important to be clear of what a customer and supplier need to derive out of a deal and at the same time have a clear budget for governance.

Another challenge is to decide that for whom is governance more required, service provider or customer. Traditionally, service providers have been scared of governance as it brings invoice verification, contract compliance, accountability and reporting on the table. But with the latest trend, when global outsourcing is growing at a continuous pace, a service provider needs good governance to manage all his deals in terms of role/ responsibility or accountability and a customer needs it for the success of his multiple deals with multiple suppliers. It thus becomes more and more important that the supplier and customer's service level management matches and both have equally structured governance set up. “Both customer and supplier have to match with every layer of IT governance for an efficient governance set up. It is necessary for escalation,” says Chad Harris, Managing Director, ITO, ACS.

The growth and trends ahead
At this time of meltdown, companies seem to be investing more in IT outsourcing governance. “We believe that close working relationships with our clients are the key. Customers are asking their strategic providers for help navigating these tough economic times, and IT governance helps ensure that their investment is maximized,” adds Livingston of Cognizant. He also explains that it is more important now to check whether the service providers are not replacing experienced, high-quality resources with untrained, new resources. The quality of deliverables is as agreed upon, and economic slowdown does not become an excuse for non-conformance.

Outsourcing of the governance of IT outsourcing deals is an upcoming trend, and organizations are skeptical to invest in it right now. Customers are also scared of giving their confidential information regarding a deal to any third party. Most organizations believe that the involvement of the customer is very important in the governance of an outsourcing deal. Only the day-to-day management or governance of a portion of the deal should be outsourced. “You can consult or buy tools from outside, but it is not a great idea to outsource completely,” adds Nijhon from EquaTerra. Some of the ongoing management processes or operational governance elements can, however, be “outsourced” if the skills or resources are not available to the client, as long as well-thought-out scope constraints and clarity of roles and responsibilities are included in the implementation.

Janeeva, a company, which provides services in outsourcing relationship management reveals, “Our customers are typically buyers of outsourcing and not the providers of outsourcing services. Customers are generally dealing with multiple providers, and need a central point to manage the multiple data streams and communications from these multivendor operations. Janeeva provides that place.”

Till now, governance has been people driven largely. But with the emergence of OMG (outsourcing management tools) we see a trend of shift towards automation rather than manual handling. These tools help in objectivity and the results derived from them are data driven which give appropriate track records. With outsourcing becoming more global in nature, it is very important to implement automation for centralization of IT governance.

Michael Latchford ,principal consultant in PA Consulting Group's IT Consulting practice concludes that the IT governance market is still in need for better process management. There is scope for major improvement and organizations are not moving at a required pace  to shift from manual techniques  to automation of governance.