Across the corporate landscape IT functions are completing their transformation to a service-orientation. Slowly but surely, “governance” has become a core mission, if not yet the core competency, of the IT organization. Governance involves many fronts and addresses many levels – there is architectural governance, IT finance and projects governance, and of course, supplier governance. All call for new skills and new structures.

In addition there are other trends that grow the ‘workload’ for governance such as; more and more IT responsibility is moving to the business units (a trend accelerated by cloud) and the commoditization and globalization of IT delivery (see figure 1).

Furthermore, over the past decade, many have found that the conventional wisdom of concentrating the outsourcing to a few large strategic suppliers with long term contracts has often worked to the disadvantage of the client as entrenched suppliers become complacent and dis-incentivized to innovate or implement best practices for the client’s benefit.

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Multi-Supplier GovernanceTurning Complexity into Value

Strategy Brief | Supplier Governance

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“As CIOs turn to multiple suppliers to drive down prices and obtain best-in-class services, they would need to redefine their supplier governance to extract the promised value from this more complex ecosystem.”

Eric LiangPrincipal, WGroup

Fig. 1 Multi-supplier governance must be viewed within the larger context of IT governance

Source: WGroup

T reating suppliers merely as vendors

– and targets of pricing squeezes – alone will not motivate them to collaborate with each other or to innovate for the long term benefit of the client.

The knowledge that the “strategic” supplier is able or willing to transfer is also limited. Hence, when the corporations’ first generation major outsourcing contracts came due for renewal, many opted to re-source and multi-source, fundamentally altering the dynamics of the supplier-client relationships. But that brings new risks; none the least of which is increased governance complexity.

The Balancing ActParadoxically, as mega-contacts are being broken up and re-distributed to multiple suppliers, it does not mean that the ‘trusted advisor’ role for suppliers is no longer relevant. Increasing outsourced productivity requires increasing competition from among best-of-breed suppliers. But it also requires collaboration. Treating suppliers merely as vendors – and targets of pricing squeezes – alone will not motivate them to collaborate with each other or to innovate for the long term benefit of the client.

Motivation can be structurally built into the system at two levels: mechanisms for monitoring integrated services, and contractual incentives for collaboration.

End-to-end services, such as the standing up of a server, typically requires the successful completion of provisioning actions by multiple teams including security, networking, database, and of course system hardware and software. What IT’s customers care about are that the end-to-end services, and service catalog SLAs (Service Level Agreements) represent IT’s commitment to the customers. Nowadays, however, those activities are increasingly being outsourced to multiple suppliers each responsible for only one component of the service. Their contractual obligations are governed by SLAs only at the service component level. The net result can be that while each individual component SLA is being met the end customers are still not receiving the service they expect.

To remedy the situation, the hand-offs between suppliers must be rigorously defined in the form of formal CSFs (Cross-Supplier Procedures) each governed by an OLA (Operation Level Agreement.) The best practices for OLAs include 1:

• Detailed process steps for end-to-end services must first be mapped, complete with ‘swim lanes’ (roles and responsibilities) of the players

• There will be numerous handoff points, but not all are equally important. To reduce resource requirements to a practical level, the handoff points lying along the critical paths of the processes should be given priority for definition

• The CSFs should be formulated prior to sourcing decisions and signing of service delivery contracts

• Overall accountability of performing to the OLAs should be retained within IT; CSF oversight should not be outsourced

• If there are OLAs to which internal teams are a party, those should be addressed first

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Figure 2 illustrates the intertwined relationships among OLAs, component SLAs, and end-to-end SLAs. Centrally provisioned end-to-end SLAs (from a shared service center) can be further customized for different end user groups such as a particular business unit. Mirroring this cascading set of SLAs which forms the core of service-centric metrics should be a set of supplier-centric metrics, KPIs and balanced scorecards. Together, the two sets form a complete, hierarchical ‘metrics tree’ for IT suppliers management.

All these metrics bring transparency to both the suppliers and client that enable monitoring of integrated services. Clients will be able to root-cause and pinpoint accountability for failures to meet end-to-end service requirements, and suppliers will be motivated to perform as a team. But to truly encourage collaboration in a positive atmosphere, cultural and contractual incentives are also necessary.

Most contracts emphasize the use of penalties (maybe with some earn back provisions). However, basic psychology tells us that penalties and rewards do not work symmetrically. Not all rewards need to be formal or financial – it could be just an award to the supplier who demonstrated the most team leadership presented in a multi-supplier social event setting. And formal incentive clauses in contract can take the following forms:

• Savings sharing• Meeting end-to-end SLAs as a member of a team (above and beyond

meeting individual supplier SLAs)• Attaining certain metrics for the supplier’s internal operational excellence

related to the service• Performance incentives for accelerating achievement of long term targets

(e.g. year-over-year cost reductions)• Innovation incentives

Metrics bring transparency

to both the suppliers and the client that enable monitoring of and accountability for integrated services.

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Fig. 2 Illustrative interrelationships among OLAs, service component SLAs, and end-to-end SLAs

Source: WGroup

Granted, each of these types of incentives require careful crafting of the contractual language and corresponding measurements. Some suppliers may balk, at least initially, at being held accountable for the failure of a team over which they have no full control. Others may be nervous in letting the client peek into their internal operations. Still others may disagree with what qualifies as an “innovative’ idea and who does the judging. Significant innovations also require IP protection. Yet all these hurdles can be overcome. It represents the next level of outsourcing sophistication. It is outsourcing 2.0.

Implementing A Multi-supplier Governance ModelFigure 3 represents a Supplier Governance Capability Framework developed by WGroup. There are five relevant capability dimensions: 1) Articulating supplier governance goals and guiding principles; 2) governance model – the governance meeting cadences, structures and artifacts; 3) IT organization skills in supplier governance; 4) tools for supplier governance; and 5) the governance processes, of which there are ten.

While this framework applies regardless of the number of suppliers involved, the more fragmented and fluid multi-supplier environment adds complexity and challenges to all the dimensions. Examples:

• Strategy Alignment – Tracking ROIs for a multi-supplier outsourcing deal over the lifecycle of a contract becomes even more daunting than before. Clients typically track the year by year performance of the major (strategic) suppliers only. Also to handle a larger supplier ecosystem, some form of segmentation for more differentiated relationship management strategies is required.

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Fig. 3 Supplier Governance Organization (SGO) Capability Framework

Source: WGroup

• Governance Model – Forums for the supplier community to interact should become a cornerstone governance activity. Which supplier gets invited to what and at what frequency must be clearly articulated. In a multi-supplier environment, such forums should focus on forward-looking, collaborative problem solving rather than on backward-looking performance reviews.

• Organization & Skills – The ratio of IT resources dedicated to supplier governance should increase. Such skills are often in short supply, especially from an internal IT team traditionally focused on technical work. There also needs to be clarity on who ‘owns’ the supplier relationships at executive, contractual and operational levels – is it corporate, the business units, IT, corporate procurement, or even legal?

• Processes – In order to contain ‘contract leakage’ (client getting billed for services not rendered) and calculate SLA achievement, accurate, real-time and near real-time reporting of metrics is a must. Detailed OLAs are a must in order to characterize each handoff action between 2 suppliers including hand-off timings and quality of data transfers.

• Tools & Technology – With numerous end-to-end SLAs, OLAs and rolled up KPIs and scorecards added to the tracking list, automated tools for metrics monitoring and auditing will be almost indispensable. Also knowledge capture and knowledge transfer from the supplier can be greatly facilitated with formal knowledge bases and repositories.

Yet the rewards for overcoming these challenges are many. Figure 4 summarizes the benefits one can expect for a methodical approach to multi-supplier governance:

Multi-Supplier Governance 5

Fig. 4 The Benefits of Adopting Multi-supplier Governance Best Practices

Source: WGroup

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About WGroup

Founded in 1995, WGroup is a boutique management consulting �rm that provides Strategy, Management and Execution Services to optimize business performance, minimize cost and create value. Our consultants have years of experience, both as industry executives and trusted advisors, to help clients think through complicated and pressing challenges to drive their business forward.

For more information on WGroup, visit http://thinkwgroup.com

How WGroup Can HelpWGroup collectively brings decades of hands-on experience in IT supplier management to assist our clients with the multi-supplier challenge – from building the governance structures to defining sourcing strategies to facilitating contract reviews to transition management. Figure 5 highlights our approach in a typical 360 degree review. We also recognize the importance of the closely related need for innovation in order to take IT services to the next level of productivity, and have developed unique processes and frameworks to cultivate supplier-driven innovation.

For more details please contact WGroup:

Fig. 5 The Three Phase Approach for a Multi-supplier Governance Review

Current State Discovery

Future State Recommendations

IdentifyMitigation

Actions andFuture

Roadmaps

CompileDiscovery

DataIdentifyGaps

Identify and PrioritizeOpportunities forBest Practices

Reveiwand

Analysis

Governance Framework &

Processes

Governance Capabilities

MLS redivorp-itluMFramework

Contractual Change

Opportunities

Transition Plan Operational Performance

Current SLAs & Key provider

Contracts

Operating Model & Key Provider

Services

Governance Model sessecorP &

Stakeholder Needs & Objectives

Source: WGroup