A Document Services Company and Its IT Outsourcing Service Provider Turn Around an Ailing Five-Year Relationship Take a pdf of this article with you At a Glance Purchaser Company Profile The company is a leading document services provider that helps organizations increase efficiency, reduce costs, mitigate risks, grow revenue and meet the challenges of globalization. Service Provider Company Profile The company is a technology solutions provider to consumers, businesses and institutions globally. The company’s offerings span IT infrastructure, global services, business and home computing and imaging and printing. Services Featured Financial Benchmark Governance Diagnostic Business Processes Involved Infrastructure and Applications Support  Equaterra Conducts Financial Benchmark and Assesses Governance Health to Define the Path Forward for a Productive Client/Service Provider Relationship Executive Summary In the final year of a five year information technology outsourcing (ITO) relationship, the purchaser was dissatisfied with the arrangement. The purchaser was concerned about price and felt "nickel and dimed." In addition, the purchaser believed that key aspects of the contract were not being delivered, including continuous improvement, best practices, access to additional resources and innovation. The provider was concerned that no matter how well they delivered their contractual commitments there was little or no recognition of a job well done. All service level agreements (SLAs) were being met and the "lights were on," despite legacy systems with unsupported hardware and software in many instances. The provider also felt "nickel and dimed." With the initiation of each project, costs were challenged as well as time and allocation of key resources. Both parties spent a considerable amount of time and energy debating as to what was (or was not) in the contract. Both parties also believed that they were working with the "C" team. Yet, both parties knew it was essential to figure out what was going wrong and to find remedies before a renewal or formal RFP was issued. In frustration, the purchaser invoked the benchmarking clause in the master services agreement (MSA) forcing the provider to agree to a financial benchmark. After discussions with senior management, EquaTerra recommended a Governance Diagnostic be conducted at the same time as the financial benchmark. As per the benchmark clause in the MSA, the parties shared the costs of the engagement. Business Challenge In 2004 when the contract was first signed, the purchaser’s business environment was foreshadowing tough times. Cost cutting would be essential for the company’s future as they shifted their time and resources towards developing new, more competitive offerings and breaking into new verticals in the marketplace. The architect of the contract believed that two key things were required moving forward – a standardization of the processes within their IT environment and access to best practice, continuous improvement and innovation. The purchaser focused on a solid contract, SLAs and putting in place a small but dedicated governance team. Over the five years since the inception of the contract, key management and service personnel within both organizations had changed. A lean organization became leaner as continuous cost cutting resulted in a stressed and stretched organization. Personnel were cut significantly. The dedicated governance person for the purchaser was moved on to other activities. The purchaser negotiated price concessions from the provider. In order to meet the price challenges, SLAs were adjusted or removed. On the provider side, the original account manager proved unsatisfactory and was replaced. The new account executive was experienced in the industry but he was new to the company. As the provider implemented structure, they faced increasing challenges as the purchaser desired flexibility, visibility and access to resources in addition to the continuing financial constraints. Despite changes in personnel, the relationship continued to deteriorate. The "negative noise" persisted resulting in a gradual erosion of trust, continued misunderstandings and escalating tensions. At the point of contract renewal, the purchaser invoked the benchmarking clause and engaged EquaTerra to conduct both a Financial Benchmark and a Governance Diagnostic. How We Helped Equaterra conducted two streams of work to diagnose the challenges facing these companies. A unique aspect of this project was that EquaTerra was engaged by both parties – the purchaser and the provider. Objectivity, factual analysis and transparency would need to be demonstrated to both entities. Financial Benchmark – Findings The approach to conducting the financial benchmark included: Interviews to understand the operational model. Review of key financial reports. Agreement on the financial baseline and approach prior to benchmarking. During the interviews and subsequent relationship surveys, price was mentioned as a significant issue several times by both parties. The final benchmark results indicated that the pricing was close to the mean market average and, at an aggregate, pricing was slightly above mean. The recommendation included suggestions for improvements moving forward; however, pricing was within market mean despite the negative perceptions of the interviewees and senior management. Relationship Assessment – Findings What was driving the dissatisfaction? After conducting several interviews and surveys, the results confirmed that the relationship was in need of repair. Exemplifying the state of the relationship were the dramatic differences in the trust levels between parties. The purchaser respondents had dramatically low levels of trust in the provider and, conversely, the provider had relatively high levels of trust with the purchaser. EquaTerra found that the following actions and behaviors were needed in order to restructure and repair the relationship Relationship The companies needed a clear roadmap for the desired level of collaboration. Although there was close alignment on the relationship objectives of consistent service delivery and price, there was a misalignment on expectations — particularly innovation and best practice. It was essential that both parties worked together to create a common set of expectations and shared objectives with appropriate motivation and incentives. Secondly, to build trust and to change behaviors, a set of ground rules were needed to help build the foundation for collaborative behavior. Management for both parties would need to be proactive to change the "us versus them" attitudes. Fundamentally, both parties needed to understand that their success was interdependent. Work needed to be undertaken to have a common set of processes, incentive structures, and management systems that encouraged and rewarded collaboration. Organization It was imperative that the purchasing organization review existing roles to create a dedicated, structured governance team with clarity of roles, responsibilities and decision rights. The lack of structure and role definition was contributing to the dissatisfaction, confusion and escalations for both parties. Operations Implementing a structured governance approach would provide clarity and improve communication. Defining decision rights, independently and jointly, would reduce confusion and ensure decisions were made within the appropriate process with the appropriate individuals and corresponding rights. Also, clarity on decision rights would identify who needed to be informed on what issues and when. In addition, a defined approach and process to translate business needs into technical needs was required. Performance Although both parties agreed that day-to-day performance was adequate, the SLA structure needed improvement. Not all SLAs reflected current market norms. The SLAs did not cover the scope of the agreement and in some instances were not appropriately weighted for the services being provided. A recommendation to review gaps within the statement of work (SOW) and to set priorities was essential before any extension or new agreement could be put in place. Moreover, both parties need to collaborate to define "innovation" with a common set of expectations, goals and measures. Process Existing processes needed improvement or to be put into place. In order to meet the stated objectives within the MSA, strategic meetings needed to be held to translate business needs into technical needs. Particular emphasis was needed on developing an approach and defining clear responsibilities for demand and consumption management. Although some good communication existed between individuals, the relationship overall required clear and transparent communication. By introducing and prioritizing communication protocols, the trust levels would improve. Additionally, putting in place strong governance processes would eliminate "hero" behaviors. Once all the governance processes were reviewed and evaluated, EquaTerra guided the document services company and its IT service provider in indentifying the priority processes upon which to focus first. EquaTerra recommended a series of workshops to design a new governance structure and processes for the purchaser. The agenda would encompass all governance activities for outsourcing relationships beyond the scope of this agreement. Moreover the workshops would create the groundwork for better communications and trust between the two parties. Secondly, EquaTerra recommended a strategic review of all technology outsourcing relationships to help define a sourcing strategy, an internal structure and a "go to market" approach. With these in place, the company could better meet its business requirements for these relationships including price, structure, innovation, best practice and flexibility in advance of maturing contracts. Results The following benefits have resulted from EquaTerra’s advice: Defined the key contributing factors for dissatisfaction and relationship breakdown. Defined a roadmap and set priorities for the required activities to improve the relationship, including definition of roles and responsibilities and communication. Helped the parties to understand the time investment for setting common expectations and measurement, and how this activity would improve the relationship, trust and satisfaction levels. Improved the purchaser’s understanding of how they have contributed to the dissatisfaction and what concrete actions they could undertake to improve the relationship and results. Moving forward, the company and its provider will share a significantly improved relationship. They now have a clear roadmap of how to work together in a more positive and mutually rewarding manner. Advisor Insights Julie Sullivan, one of the EquaTerra advisors supporting this project, says that, "EquaTerra, as a neutral third party, was able to effectively assess the relationship and focus the two parties on creating a practical roadmap and timeline. We brought our experience, objectivity, tools and processes, including a relationship assessment tool kit and financial benchmarking approach, to ensure the right things were done at the right time." This situation illustrates how a company can derail a contract by not investing in the appropriate governance model with clear roles, processes and protocols and ultimately not achieving the desired outcome for the outsourcing relationship. About EquaTerra EquaTerra sourcing advisors help clients achieve sustainable value in their IT and business processes. Our advisors average more than 20 years of industry experience and have supported more than 2,000 transformation and outsourcing projects across more than 60 countries. Supporting clients throughout the Americas, Europe, and Asia Pacific, we have deep functional knowledge in Finance and Accounting, HR, IT, Procurement and other critical business processes. EquaTerra helps clients achieve significant cost savings and process improvement with internal transformation, shared services and outsourcing solutions.