Thursday 23 May 2013
How Neuroscience and falling out of a tree could help you shape your next deal
Time to start blogging again. After 4 years as a CFO I am returning to the world of customers and contracts, although it was a CFO event that inspired me to write this piece. It started with a talk by the renowned neuroscientist Baroness Susan Greening. She explained that all brains develop differently in response to a variety of stimuli over time. Accordingly, the physiology of the brains of twins identical at birth would be markedly different by the time they reach adulthood as result of the different connections made within the brain in response to their different day to day interactions with the world. This would be particularly noticeable in the event that (say) the twins had spent time apart in different classes or even different schools. We are truly a product of our experiences.
Research has also shown a growing inter-generational effect. So called Digital Natives (typically the under 25's that are now emerging into the employment market) have grown up with computers and have been exposed to screens and IT activities throughout their formative (physical; intellectual and emotional) years. This research has shown that consistent exposure to computer gaming inhibits the development of that part of the brain that controls risk evaluation (.... the Pre Frontal Cortex since you ask). This is probably because the consequences of failure are not really "experienced", only "observed". For example, failure at a particular level of a typical "hunt ' em down and shoot 'em up" game results in the player having to start over again, costing time and no doubt causing some frustration, but no real hardship. Compare this to the development of their parents, the so called Digital Immigrants, who actually experienced the consequences of their games as they grew up. For example climbing a tree and falling out would have resulted in real pain, and maybe a broken arm or leg - a powerful learning experience which would have effectively taught risk assessment and lead directly to the child either learning to climb more competently or to avoid climbing trees completely.
Baroness Greening uses these sorts of examples to posit the hypothesis that we are potentially building a more reckless society without the same checks and balances in the future that have existed in the past. People who lack real experience of risk and have not worked through the actual activities to put things right may also become a less caring society.
What has this got to do with outsourcing ? Consider the point of maximum risk in a deal - pre contact signature. Both parties are keen to do the deal and the inherent risks, and their consequences, need to be acknowledged and mitigating actions carefully considered. Are these deals being done by those who have only observed the risks and consequences, and may not actually have to deal with them if things go wrong, or are these deals being done by those who have actually lived through the pain of real life cock ups ?
My messages are therefore:
For suppliers:
Are you letting deals be done, controlled, or at least dominated, by your sales teams ? Have you got enough experienced operators on the bid team ? .....are there people with skin in the game ? ...who will actually have to deliver the deal when the ink is dry and the bubbles in the contract signing champagne have gone flat ?
I believe that these folk will be much more alert to potential risks, and they will have a direct interest in up front prevention rather than post contract remediation.
In practical terms, this means that the early assignment of Account Management and Delivery staff (and particularly Project Managers if there is a major transformation as part of the deal) to allow them to be part of the bid team. This will improve the sense of reality in the solution design and the claims made in the bid. They will also have a sense of ownership of the deal....and have a reduced amount of wriggle room for making excuses if things go awry.
For customers:
Are you letting your Procurement Department and / or Third Party Advisors drive the agenda and evaluate supplier responses ? Have you got enough operational IT and key business users involved in evaluating the inevitable trade offs between cost and value ?
Procurement departments typically focus on price, and third party advisors typically focus on comparability and standardisation of solutions. They do not have an emotional connection to the real business pain points nor are they adequately equipped to make the sort of trade offs decisions set out in my earlier blog piece entitled "Palmer's Pyramid".
Again, the practical point is that those who will actually have to live with the contract are well placed to work alongside the procurement professionals to evaluate the deal as it is being put together. They also have a role to play in selecting the supplier that they wish to work with - "chemistry" is as important as technical competence and depth of experience.
The conclusion is that both sides need to field balanced teams and operate effective governance that considers all aspects of a deal, preferably from the perspective of having "been there and done that". Outsourcing, like tree climbing, requires hands on experience.
A good question for Business Leaders on either side to ask is "how many people on your deal teams have actually fallen off a rotten branch and broken their arm, rather than just laughed at someone else doing it on YouTube" ?
Tuesday 5 August 2008
Turned out nice again.....
We English have an obsession with the weather. My friends from other countries tease me rotten about it, but I have just been away for a weekend in York and this short break emphased how much it is a matter of necessity in this country to plan and then adjust according to the weather rather than just let (say) rain ruin an activity for the sake of not thinking about alternatives.
Remember the old tongue twister rhyme that we learned in nursery school ?
Whether the weather be hot,
Or whether the weather be not,
Whatever the weather,
We'll weather the weather,
Whether we like it or not.
And that brings me to my point about Outsourcing. However well we write the contracts, however good we are at foreseeing the future industry issues and specific business changes, the future will be different from how we think it will be. There are many contracts (and sub-contracts) in place right now that did not foresee the global Credit Crunch, or the weakness of the US Dollar, or the rates of inflation now being experienced in India and China.
The law of unintended consequences is immutable and these (and other) unforeseen economic issues are now having an impact on deals signed anywhere between 12 months and 7 years ago. Such issues can affect any or all of the parties concerned in a deal; be it the Customer; the Supplier; a sub contractor; the employees; in fact any one who is a significant stakeholder in a business affected by an outsourcing deal. Dealing with these issues on a timely basis is important - a party that is apparently unaffected by the issue ignores the impact on another party at their peril.
For example, a sub-contractor who is the unwitting beneficiary of an exchange rate movement may feel good about it, and refuse to acknowledge that the prime contractor may be making a loss on their services with the Customer. Sticking rigidly to the contract may earn some short term benefits, but may ultimately result in the prime contractor blowing an unrelated minor performance issue out of all proportion in order to terminate the contract for breach. As a result of the sub-contractor's intransigence, the consequences could include loss of the contract and a damaging affect on their reputation in the market.
The point is that if there is an unforeseen event that has a significant enough impact on one party, then the other parties should take note and be prepared to adjust in some way, otherwise the affected party is unlikely to take it lying down. Even if the contract places the risk entirely on one party, if the impact is damaging enough, then it is naive to think that that party will suffer the consequences entirely without taking some action to mitigate its losses. This is where Outsourcing is fundamentally different from a transactional business relationship as a result of the timescales involved. Taking a loss on a single sale or purchase is one thing, taking consistent business damage for a period of years is another.
This is not a call to ignore all contracts as soon as they have been signed, but a simple recognition that the sooner the issue is dealt with, typically the less drastic is the action/reaction required.
So my message is simple:
Customers: Is your supplier hurting ? ....badly enough that delivering consistently poor service in order to reduce costs to an acceptable level to match the income being received is the best alternative ? ...then get in there and try to work something out before their behaviour has a lasting impact on your business. .
Suppliers: Is your rigid contract compliance conflicting with, or preventing your Customer meeting their desired business outcomes ? ...then get in there and try to work something out before your behaviour endangers the overall relationship and kills the deal.
Contracts cannot guarantee behaviours, only the fundamental economics will....so deal with it.
As a certain English old style music hall and film artist used to say whenever it stopped raining in his films, "...turned out nice again !"
Remember the old tongue twister rhyme that we learned in nursery school ?
Whether the weather be hot,
Or whether the weather be not,
Whatever the weather,
We'll weather the weather,
Whether we like it or not.
And that brings me to my point about Outsourcing. However well we write the contracts, however good we are at foreseeing the future industry issues and specific business changes, the future will be different from how we think it will be. There are many contracts (and sub-contracts) in place right now that did not foresee the global Credit Crunch, or the weakness of the US Dollar, or the rates of inflation now being experienced in India and China.
The law of unintended consequences is immutable and these (and other) unforeseen economic issues are now having an impact on deals signed anywhere between 12 months and 7 years ago. Such issues can affect any or all of the parties concerned in a deal; be it the Customer; the Supplier; a sub contractor; the employees; in fact any one who is a significant stakeholder in a business affected by an outsourcing deal. Dealing with these issues on a timely basis is important - a party that is apparently unaffected by the issue ignores the impact on another party at their peril.
For example, a sub-contractor who is the unwitting beneficiary of an exchange rate movement may feel good about it, and refuse to acknowledge that the prime contractor may be making a loss on their services with the Customer. Sticking rigidly to the contract may earn some short term benefits, but may ultimately result in the prime contractor blowing an unrelated minor performance issue out of all proportion in order to terminate the contract for breach. As a result of the sub-contractor's intransigence, the consequences could include loss of the contract and a damaging affect on their reputation in the market.
The point is that if there is an unforeseen event that has a significant enough impact on one party, then the other parties should take note and be prepared to adjust in some way, otherwise the affected party is unlikely to take it lying down. Even if the contract places the risk entirely on one party, if the impact is damaging enough, then it is naive to think that that party will suffer the consequences entirely without taking some action to mitigate its losses. This is where Outsourcing is fundamentally different from a transactional business relationship as a result of the timescales involved. Taking a loss on a single sale or purchase is one thing, taking consistent business damage for a period of years is another.
This is not a call to ignore all contracts as soon as they have been signed, but a simple recognition that the sooner the issue is dealt with, typically the less drastic is the action/reaction required.
So my message is simple:
Customers: Is your supplier hurting ? ....badly enough that delivering consistently poor service in order to reduce costs to an acceptable level to match the income being received is the best alternative ? ...then get in there and try to work something out before their behaviour has a lasting impact on your business. .
Suppliers: Is your rigid contract compliance conflicting with, or preventing your Customer meeting their desired business outcomes ? ...then get in there and try to work something out before your behaviour endangers the overall relationship and kills the deal.
Contracts cannot guarantee behaviours, only the fundamental economics will....so deal with it.
As a certain English old style music hall and film artist used to say whenever it stopped raining in his films, "...turned out nice again !"
Thursday 13 March 2008
Starting again - it's a marathon, not a sprint
I have written in a previous blog about my knee operation in January. I am pleased to say that I am making a good recovery, so much so that I am now able to start exercising again (I damaged the knee in the first place through a combination of over enthusiastic activity in the gym, followed by a long run).
In the last couple of weeks I have managed only a handful of runs – short, slow and more of a well intentioned shuffle – but runs nevertheless. The original knee damage had taken some time to diagnose properly, and then there was a wait for theatre time through the Christmas holiday, so I have not run for nearly 6 months. Boy, was it hard going starting all over again, but I already feel better for making the effort. I found that after the first couple of sessions I had to revisit the basics in order to make progress. This may sound odd, because running is what comes naturally isn't it ? Well, not quite – you see I had to remember to stretch a bit (but not too much) beforehand, and then again at the end; start slow and then build up ; and run to the heart rate monitor, not to a pace per mile. The average speed was a good minute or so per mile slower than I had been used too 6 months ago, but each run felt progressively better as I re-learned the things that had proven beneficial before the injury (and might, in hindsight, have prevented the injury if I had done them every session).
This voyage of re-discovery got me thinking about outsourcing practices. How often do we ignore the basics and blindly charge ahead…and not take corrective until there is a significant loss of business value ? How often do we suffer during a contract and have to re-learn the basics at times of crisis ? Could we avoid loss of business value by having a relationship health check ? …by going back to the training manuals or even going to an external advisor ?
My message this time is short and simple:
For Customers: Could we avoid the service received being percieved poorly (or even better, loss of face in a management review) by having a relationship health check with our Service Provider? Could we have a better conversation (more fact based; more collaborative) with our SP when we are not under pressure to deliver some remedial action plan than when we are subject to close scrutiny by our peers ?
For Service Providers: Can we improve/maintain our margins through getting some customer responsibility actions agreed in order to help us deliver better service ? Would we get a better hearing if we addressed some of the softer measures of performance (satisfaction survey results ; business outcome issues) rather than just those that carry service credit penalties ?
Conclusion: Both parties should conduct some kind of “post investment review” rather than wait until the deal performance is escalated out of the hands of the front line account executives to the senior executives of both companies.
...and for me, it won't be the Stratford Half Marathon this year....but maybe a couple of local 10K's ?
In the last couple of weeks I have managed only a handful of runs – short, slow and more of a well intentioned shuffle – but runs nevertheless. The original knee damage had taken some time to diagnose properly, and then there was a wait for theatre time through the Christmas holiday, so I have not run for nearly 6 months. Boy, was it hard going starting all over again, but I already feel better for making the effort. I found that after the first couple of sessions I had to revisit the basics in order to make progress. This may sound odd, because running is what comes naturally isn't it ? Well, not quite – you see I had to remember to stretch a bit (but not too much) beforehand, and then again at the end; start slow and then build up ; and run to the heart rate monitor, not to a pace per mile. The average speed was a good minute or so per mile slower than I had been used too 6 months ago, but each run felt progressively better as I re-learned the things that had proven beneficial before the injury (and might, in hindsight, have prevented the injury if I had done them every session).
This voyage of re-discovery got me thinking about outsourcing practices. How often do we ignore the basics and blindly charge ahead…and not take corrective until there is a significant loss of business value ? How often do we suffer during a contract and have to re-learn the basics at times of crisis ? Could we avoid loss of business value by having a relationship health check ? …by going back to the training manuals or even going to an external advisor ?
My message this time is short and simple:
For Customers: Could we avoid the service received being percieved poorly (or even better, loss of face in a management review) by having a relationship health check with our Service Provider? Could we have a better conversation (more fact based; more collaborative) with our SP when we are not under pressure to deliver some remedial action plan than when we are subject to close scrutiny by our peers ?
For Service Providers: Can we improve/maintain our margins through getting some customer responsibility actions agreed in order to help us deliver better service ? Would we get a better hearing if we addressed some of the softer measures of performance (satisfaction survey results ; business outcome issues) rather than just those that carry service credit penalties ?
Conclusion: Both parties should conduct some kind of “post investment review” rather than wait until the deal performance is escalated out of the hands of the front line account executives to the senior executives of both companies.
...and for me, it won't be the Stratford Half Marathon this year....but maybe a couple of local 10K's ?
Thursday 6 March 2008
Business Value - Again
I have blogged on this subject a nmber of times already, and I will no doubt return to it many times in the future. The thing is, it is the whole point of what we do.
The trigger this time is a short but memorable book that I picked up in Marylebone station on the way home last week. Entitled "How to be Brilliant" by Michael Heppell and published by Prentice Hall, it is one of the modern self improvement classics. Although it deals with people and how they can improve their personal performance, it is relevant to business operations. The core message of this book is that knowledge is good, but nothing changes until and unless it is put into action. This sounds remarkably like my definition of Business Value which I defined in a post last June as:
BV = Capability x Usage
Heppel recommends setting goals, identifying the key inhibitors, and then doing something about that one big issue, all inside 90 days. In the world of outsourcing, this sounds just like SLA's, root cause analysis in the event of failure, and then setting up a corrective action plan.
Heppel's other key recommendation is also relevant - when you decide to do something - take Massive Action in order to get things going. I like this concept - don't do something half heartedly, if you are going to do it, do it properly and get noticed for it.
My message this time can be summarised as follows:
For Customers: You have the Capability - are you getting the Business Value ? If not, what Massive Action can you take to deliver the usage ?
For Service providers: If your customer is not satisfied, what Massvie Actions can you take to shift that perception by the end of the next 90 days ?
Conclusion: The Nike ad's got it right - Just Do It !
The trigger this time is a short but memorable book that I picked up in Marylebone station on the way home last week. Entitled "How to be Brilliant" by Michael Heppell and published by Prentice Hall, it is one of the modern self improvement classics. Although it deals with people and how they can improve their personal performance, it is relevant to business operations. The core message of this book is that knowledge is good, but nothing changes until and unless it is put into action. This sounds remarkably like my definition of Business Value which I defined in a post last June as:
BV = Capability x Usage
Heppel recommends setting goals, identifying the key inhibitors, and then doing something about that one big issue, all inside 90 days. In the world of outsourcing, this sounds just like SLA's, root cause analysis in the event of failure, and then setting up a corrective action plan.
Heppel's other key recommendation is also relevant - when you decide to do something - take Massive Action in order to get things going. I like this concept - don't do something half heartedly, if you are going to do it, do it properly and get noticed for it.
My message this time can be summarised as follows:
For Customers: You have the Capability - are you getting the Business Value ? If not, what Massive Action can you take to deliver the usage ?
For Service providers: If your customer is not satisfied, what Massvie Actions can you take to shift that perception by the end of the next 90 days ?
Conclusion: The Nike ad's got it right - Just Do It !
Sunday 13 January 2008
Knee Surgery with Ockam's Razor
Okam's Razor states that any solution/explaination should not be any more complicated than necessary to solve the problem. As I drifted off into unconsciousness under the effects of the anaesthetic, I was confident that this principle had been applied and that I would wake up and find the dressings on the correct leg - a real boost when you are just about to undergo invasive knee surgery.
Yes, I had surgery on my left knee a couple of days ago - not too serious in the grand scheme of things, but serious enough for me. I have run since I was 11 years old, but infortunately I have not been able to get out for a few months now. The Doctor recommended surgery to repair the damage and promised that I would be out running again in pretty short order. However, the thing that was troubling me when I went into the hospital was "would they cut into the correct knee ?" You hear about people having the wrong kidney removed, and I was anxious that all concerned knew which one was the correct one because I would not be able to remind them if they went after the right (wrong !) one when I was out cold under a general anastheitic.
Initially things went well and I was pleased when the Receptionist, the Ward Clerk, the Charge Nurse and the Anaesthetist all checked their notes and confirmed that the operation was to take place on my left knee. My wife, who had some medical training many years ago, surprised me by asking each of them to ensure that they meant MY left knee, rather than the left knee as they looked at the patient from the end of the bed. This disturbed me because this potential problem of perspective had not even occurred to me ! I became more nervous than I had been before. However, they all took it in their stride and understood the point she was making - apparently left and right in hospitals do get referred to in this way (my Wife claims this is why to this day she is awful at giving directions when we are out driving) - and they each confirmed that it was my left knee that they would be dealing with. At each point, the staff wrote notes in their files, and I even had to confirm it in writing myself on the consent form. Good for "Traceability" I thought.
Finally, not long before the operation, the Surgeon himself came in to see me. He once again specifically confirmed that it was my left knee that was the problem, but then he asked me to roll up my trouser leg, and promptly got out a Permanent Marker Pen from his pocket and drew a big arrow on my left shin bone pointing to the left knee. " We cannot get it wrong this way " he said - adding "I have never got it wrong yet, and I do not intend to start now". How simple - after all the talking, paperwork, sign offs and traceability documentation, a simple black arrow and a marker pen were to provide a much more effective fail safe in the heat of the operating room, and became the cause of my peace of mind as I drifted off under the effects of the anaesthetic.
How on earth does this relate to Outsourcing ? Well I got to think about how well Service Providers ensure that mission critical tasks get done correctly - and just how useful ITIL and ISO processes and related documentation really is - or do they just help to demonstrate in the eventual root cause analysis project that the problem caused by a cock up was just an isolated exception. I did not want my knee to be "an isolated exception", and I suppose Customers do not want their systems outages to be one either. I wondered how many "Black Arrows" or "simple Marker Pen solutions" could be adopted in order to bolster up the fancy processes that are in place in many outsourced IT shops ?
My conclusions for pragmatic outsourcing are:
For Service Providers: Understand where the potential "left knee / right knee" issues are for your clients - and then address them in a way makes them comfortable and confident
For Customers: Are your Service Provider's answers to your sensitive issues all based on process and paperwork ? ..... are there enough "Black Arrow and Marker Pen" fail safe solutions out there as well ?
As the somewhat simplified version of Okam's Razor has it - keep it simple stupid !
Yes, I had surgery on my left knee a couple of days ago - not too serious in the grand scheme of things, but serious enough for me. I have run since I was 11 years old, but infortunately I have not been able to get out for a few months now. The Doctor recommended surgery to repair the damage and promised that I would be out running again in pretty short order. However, the thing that was troubling me when I went into the hospital was "would they cut into the correct knee ?" You hear about people having the wrong kidney removed, and I was anxious that all concerned knew which one was the correct one because I would not be able to remind them if they went after the right (wrong !) one when I was out cold under a general anastheitic.
Initially things went well and I was pleased when the Receptionist, the Ward Clerk, the Charge Nurse and the Anaesthetist all checked their notes and confirmed that the operation was to take place on my left knee. My wife, who had some medical training many years ago, surprised me by asking each of them to ensure that they meant MY left knee, rather than the left knee as they looked at the patient from the end of the bed. This disturbed me because this potential problem of perspective had not even occurred to me ! I became more nervous than I had been before. However, they all took it in their stride and understood the point she was making - apparently left and right in hospitals do get referred to in this way (my Wife claims this is why to this day she is awful at giving directions when we are out driving) - and they each confirmed that it was my left knee that they would be dealing with. At each point, the staff wrote notes in their files, and I even had to confirm it in writing myself on the consent form. Good for "Traceability" I thought.
Finally, not long before the operation, the Surgeon himself came in to see me. He once again specifically confirmed that it was my left knee that was the problem, but then he asked me to roll up my trouser leg, and promptly got out a Permanent Marker Pen from his pocket and drew a big arrow on my left shin bone pointing to the left knee. " We cannot get it wrong this way " he said - adding "I have never got it wrong yet, and I do not intend to start now". How simple - after all the talking, paperwork, sign offs and traceability documentation, a simple black arrow and a marker pen were to provide a much more effective fail safe in the heat of the operating room, and became the cause of my peace of mind as I drifted off under the effects of the anaesthetic.
How on earth does this relate to Outsourcing ? Well I got to think about how well Service Providers ensure that mission critical tasks get done correctly - and just how useful ITIL and ISO processes and related documentation really is - or do they just help to demonstrate in the eventual root cause analysis project that the problem caused by a cock up was just an isolated exception. I did not want my knee to be "an isolated exception", and I suppose Customers do not want their systems outages to be one either. I wondered how many "Black Arrows" or "simple Marker Pen solutions" could be adopted in order to bolster up the fancy processes that are in place in many outsourced IT shops ?
My conclusions for pragmatic outsourcing are:
For Service Providers: Understand where the potential "left knee / right knee" issues are for your clients - and then address them in a way makes them comfortable and confident
For Customers: Are your Service Provider's answers to your sensitive issues all based on process and paperwork ? ..... are there enough "Black Arrow and Marker Pen" fail safe solutions out there as well ?
As the somewhat simplified version of Okam's Razor has it - keep it simple stupid !
Monday 7 January 2008
Outsourcing Predictions for 2008
At the start for the year it is traditional to make predictions for the year ahead. Accordingly, I have reviewed a number of outsourcing blogs and articles and I note that the same themes come up regularly:
- the rising cost of Indian resources
- there will be consolidation within the Service Provider sector
- BPO will finally come of age
This is pretty familiar stuff and very much internally focussed on the industry itself. I will not discuss these further here.
A couple of other predictions caught my eye though, being more outward looking, and are worthy of comment.
- Will the US elections have an impact on the industry ?
- Will the predictions of an economic downturn have an impact on the industry ?
Dealing with the US election first, it is noteworthy that there has been little or no comment by the candidates of either party on outsourcing or offshoring. This is contrast to the 2004 elections when there was rather more noise. A number of commentators have predicted that outsourcing is a dead issue but have promised to keep an eye out for any future comments. Personally, I am not sure it is a dead issue - in my view there are some embers there waiting to be fanned into flames. I have dealt with a number of US companies within the last year and there is still a nervousness about outsourcing, and a real fear of offshoring. The US politicians may not be talking about it, but companies are definitely taking account of the politics of outsourcing in their decision making.
Turnng to the potential for an economic downturn, a number of commentators suggest that this will support the continued growth of the industry as companies are forced to chase cost savings. However, one commentator suggests that an economic downturn could increase the TCV of deals being done because companies will have to bundle services in order to achieve costs savings quickly – whereas in the recent past they have had the luxury of being able to outsource piecemeal because cost pressures have not been so acute. I disagree.
I think that the lessons of the early mega deals have been well and truly learned and the multi sourcing trend is here to stay. This driver (economic downturn – or at least the threat of one ) is real, but the response will be different than that predicted here. My view is that companies:
- Will continue to source from the recognised best in class providers
a. To maintain service quality / manage risk - Will continue to source through 3rd party advisors
a. To ensure deal acceptability and to enable timely internal sign off - Will move to complete deals more quickly
a. To be able to recognise the benefits more quickly - Will consider doing deals in parallel rather than in series
a. ie companies will (say) run a Desktop bid with one set of suppliers at the same time as doing a (say) network bid with a different set of suppliers
b. This will have the same effect as increasing TCV (more spend addressed at the same time), but, crucially
i. Spreads the performance risk (improved quality - the objective of multi sourcing)
ii. Ensures the best price for each element (reduced price - no cross subsidies between Service Towers)
iii. Allows each contract bundle to be closed out independently (increased timeliness – reduced interdependencies)
I also think that there will be other developments:
- Further demands demand for increased contract flexibility
a. Arising from companies contracting quickly, they will be looking for ways of making sure that they are not locked in to a bad contract
i. Ie, if they “act in haste”, how can they prevent being forced to “repent at leisure”
b. This will manifest itself in
i. No exclusivity
ii. Wider volume variations being asked for
iii. Partial termination clauses becoming more common
iv. Renewed interest in responsible Benchmarking - A greater willingness for companies to accept commodity services (vs bespoke)
a. It is quicker/easier/cheaper to agree to what service providers want to sell
b. There will be less notice taken of internal “naysayers”
c. Outsourcing will be used as one (of many) weapon(s) to drive internal change - An increased opportunity for Service Pproviders to develop the nascent market for service integration
- Alternatively to 3 above, there will be a boom in the recruitment of “hired guns” to manage deals
My message is therefore:
For Customers: Re-examine your business case - is it just about labour arbitrage or are you getting some quality improvements and risk reductions. How can you use the wider economic circumstances to your advantage ?
For Suppliers: Re-examine your contract terms. How can you make your organisation more easy to do business with ?
Predictions of the future will never be accurate, but having a point of view gives you something to measure the present against.
Happy New Year !
Friday 7 December 2007
Using a pyramid to decipher the legal hieroglyphics
Bit of a gap since the last post I'm afraid - but I have been busy. But as a result, there is now long article this time.
I have been working on a large contract for a few months now, and as ever, the Lawyers got involved. Every Lawyer seems to have a canny knack of making everything more complicated than it appeared to be without them. This then requires a second Lawyer to explain what the first one has just done and seems to extend the time taken to discuss the issues beyond that originally allowed. In the meantime, the fundamental business realities seem to get lost in a blizzard of “hereintofors”, “whereases” and “subject tos”. In order to help myself and my potential (now signed up) Customer to get the discussions back onto safer ground, I devised Palmer’s Pyramid – the guide to outsourcing contract trade offs.
I have often used the Project Manager’s “Eternal Triangle” as one of the constant reference points in the IT world of work.
Figure 1 – The Project Manager’s Eternal Triangle
This triangle demonstrates that there are trade offs to be made when carrying out any IT project. For example, if you want the project by a particular date, then you may have to compromise on either the functionality (or the degree of testing carried out), or else you may end up paying top dollar for lots of overtime and weekend working. There are many combinations, but what is certain is that you will never get a project to be delivered on time, in full and on the cheap. These trade offs exist regardless of whether a project is delivered in house or by a 3rd party systems integrator.
This model worked up to a point in an outsourcing deal whilst we discussed the Customer requirements, devised the statement of work, and considered the pricing schedules. All the usual issues about (for example) 4 hour Laptop fix times being an absolute necessity for all locations were ironed out when the Customer realised that this would be impractical for certain Key Executives who made a call to the HelpDesk on the way to an airport for a 6 hour flight; and that last on-site server in the back end of beyond with only a local address database on it probably did not need the same service level as the ERP servers in the North American data centre. However, it broke down as a useful tool as we moved into the realm of Representations & Warranties; Liabilities; Indemnities and HR obligations.
The Customer Lawyer was pressing for very strong T’s&C’s, and as this was a competitive bid, he kept using the fact that the other bidders were agreeing to his suggestions as a matter of course – so why wouldn’t I ? The Customer Representative was becoming more and more uncomfortable, and began to question whether having blind agreement to onerous T’s&C’s was really “a good thing”. In lawyerless conversations over a few cups of coffee, I developed some thinking and tested it on the Customer Representative. What emerged was Palmer’s Pyramid.
Figure 2 – Palmer’s Pyramid
This clearly has the project managers eternal triangle in it’s DNA, but considers outsourcing contracts specifically. Solutions are used rather than quality and time. This is because in outsourcing there are various aspects of the services being delivered to be considered, namely fitness for purpose, timeliness and consistency through time. Price is used instead of cost because whilst it is the same as cost for the Customer, for the Service Provider there is also the margin element to be considered. Risk is used because outsourcing focuses on outcomes, and these outcomes can have a knock on effect into the host business. There is also risk of remediation for the Service Provider if these outcomes are not satisfactory.
We came up with a table of trade off’s
The surprising thing about this was that the perception of the trade offs was not always in conflict between the Customer and the Provider. The various combinations of Pricing/Solution and Risk resulted in different emphases, but not fundamentally different views. For example, a stronger solution requires a higher price (Service Provider view) – a Customer also accepts the correlation between a higher price and a stronger solution, but requires an improved return on investment (however this is measured internally) to justify paying more. Even the Risk / Price trade off was not too surprising. Both views agree that increased risk results in adverse consequences being more likely to occur. Both Service Provider and Customer need to retain more cash to pay for their share of these consequences – the Customer through a lower price; the Service Provider through a higher margin.
Introducing the impact of the T’s&C’s was interesting. The Customer views are generally obvious – stronger T’s& C’s are seen as a form of insurance – they can impact the solution through retaining control, and can mitigate the impact of risk by increasing the amount of redress. However, the Service Provider view is important. T’s&C’s that are perceived as too strong drive defensive behaviours. Strong T’s&C’s can provide opportunities for the Service Provider to abdicate responsibility by relying on the Customer to “sign off” on everything – this will also slow down responsiveness and leave the Customer wondering whether they have really outsourced at all. Strong T’s&C’s are also not free – the increased likelihood of redress payments (either through cost of remedial actions or penalty payments) means that this gets priced into the deal and the Customer just gets his own money back at a later date. This was the point that my Customer had reached intuitively but could not explicitly articulate.
In the end, my Customer Representative and I used this to control the Legal Eagles and retain the focus on the business fundamentals – did the proposed solution meet the Customer’s needs ? ; Was the solution Fit for Purpose or was it over engineered ? ; what were the sources of risk – for them and for us – and was at a reasonable level – and who should bear it ? If I as the Service Provider was to bear it, how would I price it, and at what cost ? In the end, the Customer Representative discounted our competition’s willingness to agree to everything now believing that whilst they might agree to a contract with onerous T’s&C’s now, if there was a problem in the future then they would not stick to them, but would try to find a way to wriggle out instead of looking for a solution to the problem itself.
So, my recommendations are:
For Customers : Which would you rather have – the contracted level of service performance or the redress ? Don’t push your Service Provider too far on T’s&C’s – you might just get what you wish for.
For Service providers: What risks are you actually taking on? Are you still an IT Service Provider or are you becoming a general insurer by accepting business and market risks previously taken by the Customer ?
Conclusion: Striking a balance became the common objective. An open dialogue around risks (source ; mitigation ; remedies ; valuations) is the route to doing so – and not being shy about agreeing where it should lie. Ignoring risk is the only sure fire way of it crystallising out into an issue – then you’ll have to talk about it.
I have been working on a large contract for a few months now, and as ever, the Lawyers got involved. Every Lawyer seems to have a canny knack of making everything more complicated than it appeared to be without them. This then requires a second Lawyer to explain what the first one has just done and seems to extend the time taken to discuss the issues beyond that originally allowed. In the meantime, the fundamental business realities seem to get lost in a blizzard of “hereintofors”, “whereases” and “subject tos”. In order to help myself and my potential (now signed up) Customer to get the discussions back onto safer ground, I devised Palmer’s Pyramid – the guide to outsourcing contract trade offs.
I have often used the Project Manager’s “Eternal Triangle” as one of the constant reference points in the IT world of work.
Figure 1 – The Project Manager’s Eternal TriangleThis triangle demonstrates that there are trade offs to be made when carrying out any IT project. For example, if you want the project by a particular date, then you may have to compromise on either the functionality (or the degree of testing carried out), or else you may end up paying top dollar for lots of overtime and weekend working. There are many combinations, but what is certain is that you will never get a project to be delivered on time, in full and on the cheap. These trade offs exist regardless of whether a project is delivered in house or by a 3rd party systems integrator.
This model worked up to a point in an outsourcing deal whilst we discussed the Customer requirements, devised the statement of work, and considered the pricing schedules. All the usual issues about (for example) 4 hour Laptop fix times being an absolute necessity for all locations were ironed out when the Customer realised that this would be impractical for certain Key Executives who made a call to the HelpDesk on the way to an airport for a 6 hour flight; and that last on-site server in the back end of beyond with only a local address database on it probably did not need the same service level as the ERP servers in the North American data centre. However, it broke down as a useful tool as we moved into the realm of Representations & Warranties; Liabilities; Indemnities and HR obligations.
The Customer Lawyer was pressing for very strong T’s&C’s, and as this was a competitive bid, he kept using the fact that the other bidders were agreeing to his suggestions as a matter of course – so why wouldn’t I ? The Customer Representative was becoming more and more uncomfortable, and began to question whether having blind agreement to onerous T’s&C’s was really “a good thing”. In lawyerless conversations over a few cups of coffee, I developed some thinking and tested it on the Customer Representative. What emerged was Palmer’s Pyramid.
Figure 2 – Palmer’s Pyramid
This clearly has the project managers eternal triangle in it’s DNA, but considers outsourcing contracts specifically. Solutions are used rather than quality and time. This is because in outsourcing there are various aspects of the services being delivered to be considered, namely fitness for purpose, timeliness and consistency through time. Price is used instead of cost because whilst it is the same as cost for the Customer, for the Service Provider there is also the margin element to be considered. Risk is used because outsourcing focuses on outcomes, and these outcomes can have a knock on effect into the host business. There is also risk of remediation for the Service Provider if these outcomes are not satisfactory.
We came up with a table of trade off’s
Figure 3 – Trade Offs arising from Palmer’s Pyramid
The surprising thing about this was that the perception of the trade offs was not always in conflict between the Customer and the Provider. The various combinations of Pricing/Solution and Risk resulted in different emphases, but not fundamentally different views. For example, a stronger solution requires a higher price (Service Provider view) – a Customer also accepts the correlation between a higher price and a stronger solution, but requires an improved return on investment (however this is measured internally) to justify paying more. Even the Risk / Price trade off was not too surprising. Both views agree that increased risk results in adverse consequences being more likely to occur. Both Service Provider and Customer need to retain more cash to pay for their share of these consequences – the Customer through a lower price; the Service Provider through a higher margin.
Introducing the impact of the T’s&C’s was interesting. The Customer views are generally obvious – stronger T’s& C’s are seen as a form of insurance – they can impact the solution through retaining control, and can mitigate the impact of risk by increasing the amount of redress. However, the Service Provider view is important. T’s&C’s that are perceived as too strong drive defensive behaviours. Strong T’s&C’s can provide opportunities for the Service Provider to abdicate responsibility by relying on the Customer to “sign off” on everything – this will also slow down responsiveness and leave the Customer wondering whether they have really outsourced at all. Strong T’s&C’s are also not free – the increased likelihood of redress payments (either through cost of remedial actions or penalty payments) means that this gets priced into the deal and the Customer just gets his own money back at a later date. This was the point that my Customer had reached intuitively but could not explicitly articulate.
In the end, my Customer Representative and I used this to control the Legal Eagles and retain the focus on the business fundamentals – did the proposed solution meet the Customer’s needs ? ; Was the solution Fit for Purpose or was it over engineered ? ; what were the sources of risk – for them and for us – and was at a reasonable level – and who should bear it ? If I as the Service Provider was to bear it, how would I price it, and at what cost ? In the end, the Customer Representative discounted our competition’s willingness to agree to everything now believing that whilst they might agree to a contract with onerous T’s&C’s now, if there was a problem in the future then they would not stick to them, but would try to find a way to wriggle out instead of looking for a solution to the problem itself.
So, my recommendations are:
For Customers : Which would you rather have – the contracted level of service performance or the redress ? Don’t push your Service Provider too far on T’s&C’s – you might just get what you wish for.
For Service providers: What risks are you actually taking on? Are you still an IT Service Provider or are you becoming a general insurer by accepting business and market risks previously taken by the Customer ?
Conclusion: Striking a balance became the common objective. An open dialogue around risks (source ; mitigation ; remedies ; valuations) is the route to doing so – and not being shy about agreeing where it should lie. Ignoring risk is the only sure fire way of it crystallising out into an issue – then you’ll have to talk about it.
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