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

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.

Harry Potter and the Outsourcing Industry

The last couple of blogs have been about Business Value creation. Specifically Business Value being a function of both capability and usage (BV = C x U). The last blog concluded that capability merely represented potential until and unless that potential was put to consistently good use. If we take this logic to the ultimate conclusion, maximum usage of not a lot of value will still not be worth much.

This is a particular issue for outsourcing. Should companies only outsource activities at the margin or should they be brave and go for areas where outsourcing could add real value ? Accepted wisdom suggests that only non core activities should be outsourced. The industry had its roots in catering and security services being "offloaded" ( ...rather than outsourced) to 3rd party service providers - clearly non core. Since ITO and BPO have been gaining ground the real debate about core vs non core has assumed a real relevance. My view is that companies need to be really brave. Outsourcing peripheral activities smacks of abdication rather than strategic decison making. If companies want to generate real value, then real exploitation of areas of genuine value should be considered for outsourcing.

A good example of this is the Hollywood film industry. Now I hesitate slightly about using La La Land as a good role model for anything, but the facts deserve consideration. In the film industry, the "core" item is the Intellectual Property of the story, whilst the unit of business is "the Film". Everything is outsourced. The studios put up the cash and handle the distribution ; the actors are all freelance ; the Production companies deal with finance, sets, make up, electrical contractors etc, but all on a bought in service basis. The flip side of this is that all those concerned are " Multi client Service Providers" that come together for a particular film and then disperse to different films on completion. In some cases these are merely projects that barely get off the ground. Others start small but become enormous undertakings in their own right (Titanic was just that in film terms as well as the size of the ship). Others become a long running "franchise". There are some good examples immediately to hand this summer - Spiderman 3 and Shrek 3 have already been released, and of course the film of the moment - Harry Potter and the Order of the Phoenix. This is film 5 in the series - and with the 7th book due for publication on 20 July, then it is not beyond the wit of man to believe that there are another 2 films coming. And as for the James Bond franchise......The point here is that certain film activites, and hence these associations of service providers have a lifetime as long as as many "real" companies.

Moving away from films, the Phamaceutical industry is an interesting example of brave outsourcing. The core value generation activity in this industry is research - yet this is outsourced. The big Pharma companies see their real core skill not as doing the research itself but as managing a portfolio of research activities. In another case, the story of the Xerox patents running out a number of years ago and then the company being surprised when the Japanese camera companies moved into the photocoying business and nearly putting them out of business is well known. The point ? Xerox saw their core skill as "copying" - the camera companies saw theirs as "imaging".

With the growth in multi sourcing, companies that rely on IT and see it as their prime area for business advantage may wish to take another look. Banks and Retailers come to mind. Banks would wish to keep control of the development of new products, whilst in retail, buying goods for resale and till operations are vital. However, outsourcing desktops, networks and basic server infrastructure should not be a cause for concern.

So, my recommendations are:

Clients: Be brave - have look, a really good look at what you can outsource.

Service Providers: Look at your "sweet spot" and see how it can be applied to other industries and client types.

For me personally ? Before I hang up my calculator and shuffle off onto that great golf course in the sky I am determined to run a business that genuinely understands its core capability and is brave enough to outsource the rest, all done out of leased office space of course. Any takers out there with a good business idea that needs a creative business operator ?

Business Value Revisited:



My last post ( Business Value: Use it or lose it ) was all about Business Value creation (BV = C x U )and about how the usage element was at least as important as the capability. I recently gave a presentation to a group of Finance Directors based around this material and I was challenged quite hard by one participant about my insistence that unwillingness to comply with process or persistent use of work arounds should result in "sanctions".



I thought about this quite hard, and subsequently tested the ideas with another presentation group. The conclusion is that I still believe in sanctions, but I would like to emphasise that balance is the key. Sanctions need to be balanced with rewards for doing it right. In addition, doing it right should be easy.



The logical consequence of frequent exceptions (actual or attempted) must be for the Process Owner to re-examine the process concerned in order to determine if the process is easy to use. If not, change it , if it is - then keep up the good work. As Bruce Willis was heard to say in response to a question about the prospect of his eldest daughter starting to date boys getting hurt - "If one of the SoB's upsets her, then I'll just deal with him and trust that word gets around".



So - if anyone messes with your pet process - just deal with 'em !

Business Value - use it or lose it

I’ve been working with a lot of my American colleagues recently and they have a colloquial phrase “…..you do the Math”. Despite the missing “s” on the end which may grate against the ear of the English language purist, it is pretty self evident that it means – “work it out yourself”, or more bluntly, “it’s obvious, stupid”

My own favourite Math(s) formula is simple but effective: BV = C x U.

This translates as Business Value is Capability multiplied by Usage.

Business Value is an often used term which is easily misinterpreted as something quite sophisticated. However as a simple (former) Accountant, to me it is quite straight forward. Business Value is measured by a Credit in the P/L account going up, or a Debit to P/L going down. Ultimately it results in more cash being retained within the business than would otherwise have been the case. Sitting on Investment Boards of various companies I have heard many other attempts to define business value, none of which have been convincing. Project Sponsors using terms like “…strategic investment” , “…brand enhancing” “…market entry requirement” are usually precursors to an explanation that this project or activity would actually lose money or drain the cash resources of the company, but that somehow this was a good thing. Call me old fashioned, but to me, business has always been about selling “it” (whatever it is) for more than it cost you, and never running out of cash, ever. The alternatives were exhaustively explored during the dot com bubble and were, in my opinion, found wanting.

Capability is what the IT industry commonly calls functionality. However, at the enterprise level it includes the whole triumvirate of people, process and technology. It represents the capacity to create value (as defined above).

Usage is the extent to which the capability is actually put to use. It could be the volume of actual transactions, the proportion of possible transactions, the proportion of the total value of all transactions, the time spent, or whatever. In the end, it is something to denote how the capability is actually put to use.

This point of this formula is that it can be adapted by all areas of the business to the specific circumstances on hand. It is most obviously used for project business case analysis – to justify the effort for a possible future project or activity. Economists would call this the grandest question of all time – The Resource Allocation Decision. Katherine Tate, the well known UK comedienne, would put it more simply by just asking “Am I bovvered ?”

My experience of such decisions are that they taken more on emotional grounds than equations and analysis. One organisation I observed defaulted to accepting either of two winning arguments

1. Our main competitor already does it, therefore we must do it in order to retain parity
2. Our main competitor does not do it yet, therefore we must do it now in order to steal competitor advantage

Not very scientific, and it lead to a plethora of unrelated and badly managed projects, many of which either failed to live up to expectations or failed altogether.


But this blog is about Outsourcing, so how is BV = C x U relevant here ?

Well, Capability is derived from the Service Provider and their ability to deliver. In an ITO you would expect to see new capability as:

• New skills eg knowledge of new technology
• Additional capacity eg through use of their own facilities
• Flexibility eg through use of multi client service centres
• Discipline eg through use of SLA’s and Governance models

Usage ? …this should not be a problem because usage would be mandated, and there is likely to be a form of exclusivity for the given services in the contract. Hmmmm, but watch out for the following tell tale signs

• Shadow IT functions
  It will not be called that, but you might see “super users” who always seem to know how to get things done by themselves …and the Service provider is always complaining about them. (typically you see the following activities - Report writing; dBase set ups; a few system changes )
• High SLA’s achievement being reported, but low Customer Satisfaction Measures
  Thee will be a lot of g eneral comments about how it all takes too long; how it is all too expensive; how business operators can never get things done because the bureaucracy is getting in the way ; how the past was somehow the “Golden age of IT”
• IT being bought as “business services” from third parties
  Typically links to hosted websites offering services ranging from internal transactions (expenses, employee hiring etc) to actual products for customers.
  These are always only found by the IT function after they have gone live and the first call comes to the Service Desk asking for support, or when Finance try to re-classify the invoices as IT costs because there is a budget overrun in the commissioning department.

One organisation I knew examined certain outsourced IT processes and found that it could open a new retail outlet faster than it could order a laptop. Another trawled the Web and found 35 external facing sites that it did not know about.

Behaviour in organisations is like water running down a mountain side, it will always find a way, and it will take the path of least resistance. If your processes are not people friendly, those impacted will find a way round, through, over or under your arrangements. The faster the business cycle, the less patience that there will be – so retailers will simply break processes in order to get goods into their stores; but even a precision engineering company with a penchant for compliance and traceability will generate a well documented “exceptions work around” in time.

So, my recommendations are:

Service Providers:

1. Understand your clients business case
   …and help them achieve it
2. Understand what your client thinks that they have bought
   This is not always what you think that you have sold
3. Look for the tell tale signs
   Ask yourself if you are easy to work with ….at the detailed level with Betty in bought ledger, not just with Dame Elizabeth the Boardroom

Clients:

1. Is your business case being realised ?
   When you look for “points of failure”, classify them as either “C” or “U”
2. Count the process “exceptions”…
   If these are, in fact, the norm, then U is probably low
3. Observe behaviours
   Listen to the excuses for non compliance

Conclusion: Without usage, capability is merely potential, not business value.

If BV = Massive capability x zero usage,

then BV is = zero

You do the Math(s) !

Substance over form; Outcomes, like size, matters

The recent Local Government elections caused me to reflect on just how alike Outsourcers and Politicians are:

• Politicians produce a manifesto; outsourcers produce a proposal
• Politicians get a term of office ; Outsourcers get a contract term, both are measured in years
• Politicians are expected to deliver on their promises; Outsourcers are expected to meet their SLA’s
• Politicians come up for re-election ; Outsourcers get contract renewals

We ultimately judge Politicians on the outcomes of their time in office. The newspapers often attempt to judge the feel good factor, …or otherwise, engendered by their actions. This impression is built up as a result of their actions over a period of time, and not, as Politicians would like to believe, by their activities in the 3 weeks of campaigning immediately prior to an election.

Councillors in Warwick and Stratford upon Avon were judged, amongst other things, on a planning decision to go ahead with the Barford village by pass. This is generally thought to be “a good thing”. This was weighed in the balance with the news that they are considering following the current fashion of moving to fortnightly refuse collections – this is not viewed favorably locally. The glossy pamphlets extolling their individual virtues and poking fun at (say) the green candidate who would have to drive halfway across the county for each meeting, were not hotly debated in the bar of the Black Horse pub in our village. Instead, it was the hard outcomes, the personal experiences of each individual affected that were the items that actually got discussed over a pint of Hooky.

In outsourcing, Clients judge Service Providers (SP’s) by the contribution made to their business over time. The governance process is interesting only in the amount of time it occupies in the diary, and as a mechanism to get things done. At decision time, the Client will ask themselves questions such as:

Did the SP contribute to developing my plans for launching my new product line ?

• …..or did they rub their hands and treat it as a distress purchase?
• ..…was it seen merely as a good opportunity to improve revenue and margins ?

Did the SP step up to the mark when we sold that other business division ?

• Did they make my life easy or hard ?
• Were they on the critical path all the time?
• Did the other side notice that we had outsourced X function?

In the event of poor outcomes at key business events - so called “moments of truth” - consistent, compliant, SLA performance will not be enough to balance these out, and the quality of governance processes or the degree of (say) ITIL compliance in IT service operations will count for even less. Palliative actions in the last weeks running up to a renewal decision will not suffice for an incumbent to overturn the impression built up over years.

My message can be summarised as:
Service Providers: If there was a snap election on your contract this Thursday, what are the business outcomes that would demonstrate your fitness for re-election ?
Hint – you will not find the answer in the service reporting section of the contract

Clients: Would you campaign for your Service Provider to be re-elected this Thursday ? If it was a free vote, how would your organisation’s employees vote ?


In Conclusion: Good outcomes deliver good incomes in the long run.

Kings, Castles, Cows and ……Computers ?

I live near Warwick Castle and at this time of the year the staff perform lots of pageants and battle re-enactments with Knights jousting, pig roasts and “ye olde country faire” type activities. All good fun. Seeing the Knights and watching the displays got me thinking about history and what happened back home when the Knights went off to fight. Where did they get the money to raise their armies? Who looked after their property whilst they were gone? The answer, I remembered from my O Level history, were the Stewards.

In order to respond to the call from the King to join him in battle, Knights used to appoint a Steward to look after their estates (the castles and the cows) whilst they went off to war. A Steward had a duty to manage the Knight’s estate to the best of his ability, and wherever possible, to better it for when the Knight returned (larger; more profitable; more productive). Often these duties would involve management of the whole household (the family, the household servants; the tenant farmers etc etc …) as well as the physical assets. There was, in effect, a duty of care that a Steward had to observe in carrying out his responsibilities. This would often go above and beyond simply “care and maintenance” but also require the Steward to balance the many, often competing, desires of different groups of people affected (arable vs livestock farmers; freeholders vs tenants; householders vs local villagers). In addition, the Steward was expected to do this for the benefit of the Knight’s estate alone, and not to take advantage of his position of trust by making a personal profit without the consent of his principal.

In effect, the Knights “outsourced” estate management in its entirety, whilst they concentrated on their “core skill”, namely fighting battles. Whilst there were no measurable and regularly reported SLA’s in place for this type of arrangement, a Steward would very quickly get “feedback” on his performance from the Knight on his return – success was often rewarded by the grant of land or a share of the spoils of war; failure, however, would often result in summary execution. Perceptions would have been more important here than the number of sheep pens successfully repaired as shown in the accounts. The report by the Lady of the House or the gossip from the Local Innkeeper would often be the more crucial evidence – especially in the judgement of whether the Steward had acted fairly or for personal profit at the expense of the Knight’s dependents.

It strikes me that this concept of Stewardship could be adopted in outsourcing arrangements. A Service Provider becomes such an integral part of the Customer’s business, that they must accept that they have a similar sort of a duty of care to that business. I appreciate that this is something terribly difficult for the Lawyers to define, but I think that a legal definition would be irrelevant. The actual behaviours of a Service Provider matter more than any finely crafted words. I firmly believe that a Service Provider operating with the mindset of a “Steward”, regardless of the finer points of any legal contract, would serve both parties well. Such a mindset would trigger any number of conversations between Service Provider and CXO that would only serve to build up the good faith necessary for a successful outsourcing engagement. Improvement in the level of trust between the parties is likely to be rewarded with a higher degree of loyalty to the incumbent Service Provider at contract renewal time. Consistent and well meaning behaviours through time are crucially important at such moments of truth, and no amount of PowerPoint slides showing SLA targets met ever defuse perceptions of poor behaviour.

My message can be summarised as:
Service Providers: If the penalty for perceived failure to deliver value was the loss of your Senior Account Director’s head at the hands of an irate CxO, what would you be worried about as he/she rode up the driveway and past the gatehouse of the castle?
If you are not performing well, what should you do differently?
Even if you believe you are doing well, how is your performance perceived ?

Customers: Is your Service Provider acting as a Steward or as a Transactional Supplier ? Are you sharpening your sword ? ….or are you consulting the map for a nice little parcel of land with which to say “thank you” ?

In conclusion; Good Stewardship will keep you ahead

I used to be an Accountant, so why am I blogging on outsourcing ?

Outsourcing is still a young industry – we are still only at the 3rd or 4th iteration of ITO contracts and even fewer for BPO work. Accordingly, the body of knowledge is still evolving. Compare this to retailing which has been going as long as people have had surplus subsistence goods to sell, and the “personal services” industry that has been going as long as their have been people. As a result, the body of knowledge about outsourcing is thin on the ground and remains fragmented. One major source of information about outsourcing is the service providers in the form of case studies and other marketing material. An alternative source is provided by the usual market analysts and commentators. These sources are useful, but outsourcing has such a deep impact on an organisation that the personal, emotional and ethical impacts need an airing as well. Blogs from the growing body of people that have actually “done it” can be helpful here in a way that marketing and technical thought pieces cannot.

I have “done it” now for the last 10 years, and I am still involved in the industry, “shaping” deals and specialising in the financial and contractual elements of outsourcing agreements. In the past, I have worked for service providers and consultants as well as operating on the client side. I have bought and sold outsourcing. I have been through both insourcing and outsourcing transactions….from both sides of the fence. In short, I have been through the mill of outsourcing….and I still believe passionately that there is, and will continue to be, a healthy market for ITO and BPO services. I find that it is a fun place to work, simply because the market is immature and the body of knowledge continues to develop. I believe that my experiences give me a wide, and potentially balanced, perspective on developments as they arise. To date these have been shared within the Finance Director community through conferences and round table discussions. This blog, and your feedback comments, will determine whether they are useful and worth sharing across the wider business community.

What will I cover ? Well, I will blog as the fancy takes me, based on ideas that come to me as I mow the lawn or run down the country lanes of deepest Warwickshire, however, expect a few recurring themes to arise such as:

• Stewardship
• Outcomes
• Passion
• Business Value = capability x usage
• The eternal triangle of trades offs between time, cost and quality

The first one is about Stewardship – an old fashioned concept, but readily adapted to our time and industry.

Let me know what you think and together we can contribute to growing the knowledge base of this young and dynamic industry. All my views are, of course personal, and cannot be attributed to either my current employer, or any of my past employers, customers or clients. Nor can they be interpreted as criticism of any contracts or parties to those contracts that I have been involved in in the past. They are merely the musings of an Accountant who found an industry specialism and is thoroughly enjoying being involved in a developing field.