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Outsourcing relationship management

Outsourcing relationship management (ORM) is the business discipline widely adopted by companies and public institutions to manage one or more external service providers as part of an outsourcing strategy. ORM is a broadly used term that encompasses elements of organizational structure, management strategy and information technology infrastructure.

Origin

Outsourcing gained prominence as a business strategy in the early/mid 1980's and was originally driven by the desire to reduce costs in labor-intensive business processes. The benefits of this labor arbitrage are still possible, but in the most recent five years companies are increasingly seeking innovation, flexibility and scalability in their business operations through outsourcing.

Outsourcing relationship management appeared as a specific management discipline in 1999 after an industry consortium, the Sourcing Interests Group, began developing guidelines for its member companies. Following this introduction, the theories of outsourcing relationship management have been developed by numerous global industry groups, universities, consulting/advisory firms and software companies. The term is in wide usage today and the practice of outsourcing relationship management is becoming increasingly important to companies that are using external service providers as part of their organizational strategy.

ORM in the Enterprise

ORM is complementary to other established enterprise management strategies in its relationship to established enterprise resource planning (ERP) tools and the linkage to important business constituents.

A challenge in implementing ORM strategies lies in the nature of the outsourcing relationship itself. In his 2004 book "The Outsourcing Revolution., author Michael Corbett discusses the challenges of integrating two separate business entities (the client and the external service provider) across the different organizational boundaries and differing motivations and objectives. This book was one of the earliest works to focus on outsourcing relationship management as one of the keys to successful outsourcing strategies. More recently, Gartner has launched an outsourcing specialty which has conducted significant research in this area.

The importance of ORM will only increase as companies continue to pursue "Extended Enterprise" or "Corporation 2.0" strategies to take advantage of the skills, resources and global footprint of external service providers. In the 2006 Global CEO Study, IBM has identified business model innovation as the most important success factor cited by the 765 global CEOs surveyed. The survey noted that "fully 65 percent of chief executives and other leaders say they will have to make fundamental changes in their businesses over the next two years. New products and services remain a priority, but they’re placing increasing emphasis on differentiating themselves through innovation in the basics of their business models. They believe that external collaboration across their business ecosystems will yield a multitude of innovative ideas."

Aspects of ORM

There are three aspects of ORM which companies typically pursue as part of their outsourcing stragegy:

  • Management Strategy - determining the most appropriate combination of contractual terms (service level agreement) and relationship management techniques
  • Organizational Structure - building the appropriate in-house management/oversight structure and mechanisms
  • IT Infrastructure - the supporting infrastructure to enable the monitoring and management of a network of external service providers

Management strategy

Most major outsourcing initiatives are driven by top management. It's not unusual for a CEO to be directly involved in the early stages of the process.

One often unexpected demand of implementing an outsourcing strategy is the requirement for new management techniques and specialized skills among the client-side management team. Over the last five years or so, this need has become more generally known but companies are still struggling to address the requirements adequately. For example, a 2002 Computerworld article documents the need for managers skilled in ORM for managing IT outsourcing. A more recent article in DM Review points out that there is still a need for specialized outsourcing relationship managers and cites this as a career opportunity.

University researchers are also studying the requirements and developing models and methodologies around this phenomenon. For example, Carnegie Mellon University has developed a detailed Sourcing Capability Model to measure the maturity and skills required for effective outsourcing relationship management. The University of Michigan sponsors research and events focused on the challenges and management strategies for successful outsourcing.

Recent trends in outsourcing strategies find clients adopting a "multi-sourcing" strategy in order to better leverage and scale the outsourcing operations and find more specialized service providers. In early 2007, a CIO Magazine article explores this trend.

Organizational structure

By its very nature, outsourcing changes the client-side organization structure. Work that was once done by in-house groups is moved to specialized domestic or offshore service providers. Often, groups of employees are transitioned to the service provider company and others remain in-house to manage the outsourced function. This outsourcing governance function is an area where companies continue to struggle. A Computerworld article talks of the lack of adequate in-house governance as one of the "Seven Deadly Sins" of outsourcing.

Unfortunately, companies usually think of formal organizational design for governance only after they are well into the implementation phase, if they think of it at all. There is growing recognition that effective governance is critical to success in outsourcing. Rather than deal with governance as an afterthought, the outsourcing enterprise should evaluate successful outsourcing governance models as they develop their outsourcing relationship management strategies.

IT Infrastructure

The technology requirements of an ORM strategy can be complex and far reaching. Several commercial ORM software packages are available which vary in their approach and capabilities for supporting ORM requirements. The common functionality of software infrastructure includes managing contract documents, tracking metrics, providing dashboard views and alerts, issue tracking/management, and analytics/reporting. The technologies vary in their delivery model, some offered as SaaS or on-demand and others offered as on-premise software.

One consequence of outsourcing is that the IT infrastructure of the organization is severed and must be reestablished in some way to the external service providers. There are significant compliance, security and technology barriers to accomplishing this, however. One important aspect of ORM is building the technology infrastructure and tools required. Here again, this is too often an afterthought, only being addressed after issues of communication, performance monitoring and reporting are discovered in the implementation phase of the outsourcing deal.

Market structure

Given below is a list of top ORM advisors and technology vendors
Vendor Focus
International Association of Outsourcing Professionals Professional certification
EquaTerra Outsourcing advisory
Vantage Partners Negotiation and relationship management
PricewaterhouseCoopers (PwC) Outsourcing advisory
Hiperos Strategic Relationship software
DigitalFuel SLA management software
Enlighta Outsourcing governance software
Janeeva On-demand ORM software
Oblicore ORM software

Importance of ORM

The success or failure of an outsourcing engagement is not guaranteed on the day the contract is signed. Getting the contract right is necessary, but not sufficient for a successful outsourcing strategy. One study by Vantage Partners (Boston, MA) found that at least 15 percent of the total outsourcing contract value is at stake if outsourcing governance is not managed well. It's apparent that a cooperative partnership between the customer and service provider based on effective relationship management and trust can add value to an outsourcing deal. A strained relationship, however, can detract significant value from the expected benefits of the initiative. Value in terms of cost reduction, increased innovation and improved flexibility is degraded by the greater need for monitoring, auditing and issue management. In that environment, conflicts frequently turn to major, disruptive disagreements and important projects are stalled.

In the book, "Multisourcing," Gartner analysts point out that successful outsourcing is built on "a network of relationships, not transactions," and outsourcing governance is the most important factor in determining the success of an outsourcing engagement. But many companies still haven’t realized the truth of this statement. Gartner found that fewer than 30 percent of enterprises have formal sourcing strategies and appropriate outsourcing governance mechanisms in place. In a 2004 survey of 130 CIOs, 42 percent said they were dissatisfied with their outsourcing relationships, according to outsourcing advisory company EquaTerra, primarily due to poorly developed, underbudgeted and undersourced governance models.

See also

References

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