Inside Out

Inside Out

Embracing outsourcing for strategy’s sake.

Many government entities are having a difficult time reaching out to a third party for assistance, but government bodies are at last beginning to see outsourcing as a key strategic initiative. In fact by 2005 executive leadership and legislative bodies will look favourably on government entities that outsource to deliver on mission-critical strategies.

There are some examples of large-scale, enterprise-wide outsourcing initiatives in government, but outsourcing is far from the norm. Governments tend to own assets and retain competencies within their IS organisations. Most government CIOs have attempted to hold on to assets and augment staff, and use systems integrators only for discrete projects.

But now compelling forces are driving change in government sourcing strategies, the least of which is the absolute need to use precious government resources in more strategic initiatives.

When viewed as an enabler, outsourcing has a great deal of potential to position government for successful resourcing. Government entities that invest in getting it right will be seen as leaders and will win the confidence of executives and legislative bodies. Those entities viewing outsourcing as a disintermediary will continually struggle to deliver on commitments.

Sourcing is all about effective resourcing. Leading government enterprises must view sourcing — to both internal and external resources — as part of a larger strategic plan.

Government vs commercial. While corporations have embraced commercial outsourcing, government agencies need a mindset change before they will look at their traditional practices and compare them to commercial outsourcing.

Gartner interacts with government clients in regions throughout the world, and we’ve seen that when governments say “outsourcing”, they usually mean “hiring a contractor”. In fact the classic outsourcing definition is the delivery of a full complement of persistent services through vendor facilities, normally involving the transfer of people, hardware and software from the enterprise to the external service provider (ESP). In short, the ESP owns the service delivery resources and the client enterprise contracts for specific services at specific service levels. The IS organisation is not relieved of overall responsibility for the services. Rather, the responsibility changes from one of delivery to one of management.

The government outsourcing market is immature compared with the commercial outsourcing market, a reality that will both drive more outsourcing as ESPs look to new opportunities and inhibit early success on the government side as enterprises learn the complexities of outsourcing deals. Government CIOs need to study different deal types within their own jurisdiction and in others to understand the drivers and resulting deal structures and, more importantly, learn the differences between traditional sourcing and outsourcing.

Increased security focus. One of the major drivers for outsourcing is the need to free government IS resources for strategy and process work. This is the strategic work that is always best architected and engineered by those with inside institutional knowledge.

The government IS organisation is typically top-heavy with delivery resources, and light on strategy and process expertise. Many government IS managers want to return to the days when all of these things were done (and seemingly controlled) inside, with occasional outside help. What they must realise is that the tide has turned. A new mindshift is required. External resources that are skilled, knowledgeable and competent in delivering IT services are often a more cost-effective choice. Additionally, a government’s resources are more valuable to constituents as strategists and process experts.

Selecting an ESP. One of the challenges for government entities is finding an ESP that can manage a government outsourcing contract. There are many more choices when looking to select a commercial outsourcing vendor. Ideally, a good candidate for government outsourcing will have years of commercial experience and a longstanding public sector focus, substantiated by a discrete industry vertical focus.

It is critical that the government agency follows a structured and repeatable process for evaluating and selecting ESPs for outsourcing contracts. This must incorporate risk management, benchmarking, innovation and flexibility, as well as allow adjustment of the procurement process to allow for a rigorous due diligence and discovery process. The government should require the ESPs to demonstrate commercial experience and best practices, as well as critical success factors for transferring commercial experience to the public sector.

New roles and responsibilities. Agencies often falsely assume that outsourcing means delegating the IT decision making to the ESP. Agencies need to carefully examine the functions that the services vendor will provide and determine which retained staff functions need to be handled internally. To do this effectively requires contract and operations managers in addition to relationship managers. Best practice also dictates agencies engage personnel from business units (who are directly affected by the ESP engagement) to participate in deal management.

The entire deal management team should: take part in regularly scheduled meetings; review annual operating plans; provide a forum for discussion of major issues; guide the relationship manager; review performance results (particularly out-of-compliance results); recommend changes to processes and procedures; review and act on contract terms, conditions and change orders; and act as arbitrator should problems arise.

These elements are common to all outsourcing deals. In smaller deals, roles will most likely be consolidated. In larger deals, it is common to find multiple individuals in each of the above roles. Regardless of the deal type or size, it is critical that the agency and ESP responsibly manage all aspects of the deal from transition to completion. The government agency will need to investigate its internal management capability and develop organisational skills that focus on managing complex relationships as opposed to managing complex contracts.

It is going to be hard for some government agencies to take the initial steps and transition some of their processes to outside vendors. However, when managed correctly, these government groups will see the return on investment, from a revenue and process standpoint, as well as from a resourcing perspective.

Leading government CIOs will adopt the mind shift necessary to enable them to strategically source services externally, as well as internally. This will involve not only improving selection processes but also reskilling the organisation to manage achievement of service outcomes rather than contracts. That in turn will provide a catalyst to refocus precious government IS resources onto achieving strategic initiatives and improving core business processes. There is no going back to an internal service focus when ESPs can deliver both IT and business process services efficiently and cost effectively, either now or in the future.

True IT leaders recognise that outsourcing processes frees internal teams to truly innovate and transform governments through thoughtful use of technology and services.

James Longwood is research director, sourcing, Asia-Pacific, Gartner

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