The Short List Our recommendations. A look at the many stripes of the outsourcing players Criteria for sizing up an outsourcer Strategies for service-level agreements Horwitt is a freelance writer based in Waban, Mass. She can be reached via the Internet at 75244.1666 @compuserve. com.

By Elisabeth Horwitt
Network World, 11/11/96

Blue Cross/Blue Shield of Masschusetss and its outsouring vendor, EDS Corp., decided on major upgrades to the health insurer's systems pretty much the way a husband and wife decied whether to buy a new refrigerator. One partner will come to the other with an idea, then the two sides thrash out the pros and const. "It's a fair balance,'' says Dennis McIntosh, Blue Cross' vice president of operations and IS.

This may seem like a rather informal mode of negotiation between a major corporation and the outsourcing vendor in charge of its information technology (IT) operations. Appearances, however, can be misleading.

Blue Cross/Blue Shield's outsourcing relationship can be flexible and open precisely because it is rigorously structured by contract and assiduously managed by a committed team of in-house IT people.

''When EDS took over management of our systems back in 1991, a large number of our employees were outsourced to them,'' McIntosh recalls. However, the regional health insurer retained a small management group of about 20 to play three crucial roles: provide leadership within the company on matters involving EDS, plan technology strategy and act as ''brokers who bring together the business user and the right piece of technology.''

Blue Cross/Blue Shield's situation is far from unique among long-term IT outsourcing deals - particularly among ones that work well for the customer.

Indeed, outsourcing project managers were pretty much unanimous that, in order to do their jobs successfully, they need all of the following:

• Knowledge of what the outsourcing vendor is doing and should be doing.
• Power to get the vendor to listen and respond to the customer's needs.
• Effective communications channels to work through inevitable problems, differences and changes over time.

As is typical in the business and IT worlds, commitment comes down to dollars and cents. In the case of outsourcing management, companies need to cough up salaries for a team of project managers to take full-time responsibility for the outsourcing contract and the vendor relationship.

Unfortunately, only about 30% of outsourcing customers ''recognize the need to set up a group to work with and manage outsourcers,'' says Peter Bendor-Samuel, president of Everest Software Corp., a Dallas-based consulting and software company.

Blue Cross' McIntosh agrees. ''I think a lot of outsourcing arrangements all over the country are an over-the-fence type of situation'' in which the customer tosses far too much control to the outsourcer, he says.

Nor will it work to simply assign just anyone to the job, Bendor-Samuel emphasizes. ''Everybody has a contract manager, but that doesn't mean [that person] is empowered to do anything,'' he says. Too many companies make the mistake of ''assigning a junior clerk to manage a multimillion dollar contract. The outsourcer will just ignore [that person] and go around them.''

Meeting of the minds

• The vendor to deliver status reports on projects and performance reports on the systems it is operating.
• IT project managers to notify the contractors of changes in user needs and business directions.
• Both sides to propose technical changes, bring up problems and work out disagreements.

The frequency of project meetings should be tailored to the type of services the customer is receiving, says Randy Johnson, a principal at Coopers & Lybrand. ''If you have an extremely dynamic [IT] environment, meetings can be weekly, or even daily. Or if it's a mainframe data center - pretty standard with no surprises - they could be monthly.''

Amoco Canada's data center outsourcing relationship with MCI Systemhouse runs on a complex hier-archy of meetings. ''The change management people work together day to day when new systems are going in,'' says Wayne Bester, manager of IT for the Calgary, Alberta-based energy firm. In addition, a group of supervisors meets weekly ''to look at problems, outages and things that didn't run smoothly.'' And the companies' respective advisory boards get together once a year. Bester says this is down from three to four times a year when the project was initiated. This provides a vehicle for Amoco to keep the outsourcing vendor's high-level people apprised of Amoco's changing business strategy, and for the two sides to discuss opportunities for using technology to further that strategy.

At least some outsourcing project meetings should include the technical people who actually do the work, McIntosh says, ''if you want them to have the same urgency you have'' about meeting your needs.

Maintaining effective communication channels becomes exponentially more critical in outsourcing situations that involve two or more outsourcing vendors with overlapping responsibilities.

''Vendors that end up with different pieces [of an outsourcing contract] often are competitive since, by nature, they all want to grow their piece of the business,'' said Gerard Cunningham, a partner at Deloitte & Touche Consulting Group, which helps set up outsourcing agreements. ''So you need to define the rules of the road: your responsibilities vs. each of the vendors, as well as your interfaces with each of theirs and their interfaces with each other.

''Generally, it's a good idea [for the customer] to have the vendors communicate with each other on a day-to-day basis,'' in a well-defined way, Cunningham says, rather than acting as a regular go-between yourself. ''You may want to inject yourself [into a dispute] if things fall apart. Some dispute resolution clauses written into agreements involve third parties; but if it's defined from the beginning how the process changes over time, you shouldn't need that.''

The EPA, for example, ran into ''difficulties the first year or so'' getting its two telecom operations contractors, DynCorp and Lockheed Martin Corp., to work effectively with each other, Rodgers says.

During a major LAN installation several years ago, problems arose when the two contractors didn't communicate enough to ensure that their installation schedules were in sync.

''We told them several times, 'You aren't cooperating enough,' '' Rodgers recalls. ''We worked hard to get them to do joint meetings.'' For example, representatives from both outsourcing vendors were brought in on meetings between the supervisor of operations at EPA headquarters and the facilities division responsible for ''allocating space to users and the actual timing of moves,'' Rodgers says.

Furthermore, Rodgers himself, as project officer for the DynCorp contract, acts as a bridge between the two vendors, attending two weekly meetings with DynCorp and one with Lockheed, each lasting about an hour. ''They go over the work they are doing for us and we provide technical direction,'' as well as scheduling updates.

All of this has helped the EPA keep its contractors working together in double harness. However, ''we'll need to be on our toes during the next year or so, because we are getting into the contract recompeting period,'' Rodgers says. This time, due to government restructuring, DynCorp and Lockheed will be competing for one overall headquarters service contract.

Knowledge is power

While the meetings themselves, and the vendor's formal reports, can be valuable sources of information, project managers also need to do some homework if they don't want to lose control of the project.

That means tracking and keeping formal records of key aspects of an outsourcing arrangement, such as software, hardware and people provided by the vendor; ''what the customer is being charged for,'' and how the terms of the contract alter over time, says Coopers & Lybrand's Johnson. His company is testing an outsourcing management package from Everest that can automatically document much of the above and ''give you at least a foundation'' from which to work.

Having this knowledge on record can help a company avoid disaster when it wants to resume control of the contract at the end of a multiyear deal. ''In some contracts, if you choose to decouple [from the vendor], you have to buy everything, including software, hardware and people assets,'' Johnson says. In such cases, the customer doesn't want to depend on the vendor to supply key pieces of data such as ''what the labor assets look like, how many people are on the job and how many hours are billed per month.''

Long before the contract terminates, however, situations will arise with the vendor in which the outsourcing project managers will need to leverage large chunks of detailed knowledge, such as exactly what the installation looks like, what the vendor has been doing and what the vendor was supposed to be doing.

To prepare for such contingencies, you need to bone up on the technologies the vendor is introducing, as well as emerging technologies that could prove useful down the road, Bendor-Samuel says. Maintaining this level of expertise in-house can be tough when most of your IT department has moved over to the outsourcing vendor's staff. Without such knowledge, however, an in-house IT group will have to trust the outsourcing vendor's word that a wholesale migration to ATM, for example, is the only cure for lagging networking response time.

Determined to stay in control of its outsourcing strategy, Bester says Amoco Canada has implemented a policy to ''only outsource mature functions we understand and where we know what direction we're going.'' The firm's data center operation fell into that category, but he says, ''our business units felt that [the company] didn't understand client/server well enough to outsource it.''

Measuring sticks

Commonly implemented performance metrics range from the average number of rings before an outsourced help desk operator picks up the phone to classic response-time and uptime parameters.

When Camino Health Care turned over its systems operations to IBM's Integrated Systems Solutions Corp. (ISSC), for example, it set up ''a number of fairly standard objective measures in terms of response time and uptime for applications, batch turnaround time and windows for maintenance,'' says Mikelle Streicher, Camino's chief information officer.

Some companies have the vendor provide regular reports on its performance. Camino Health Care, for example, gets monthly reports from ISSC on direct access storage device use by gigabyte, CPU cycles employed, as well as response time and uptime, Streicher says. ''We also get a daily status report and a daily change report, which are reviewed in daily meetings, [as well as] by conference call with the Boulder, Colo., center and applications people here in California. So we have multiple opportunities to monitor and resolve issues.''

Other outsourcing customers use computer-based monitoring tools to look over the vendor's shoulder.

The EPA, for example, put up a computerized board in its Washington telecom and information center, which displayed tables with operational statistics such as the number of outstanding trouble tickets and service orders, recalls James Kobielus, a senior telecommunications analyst with LCC International, Inc., who previously worked for EPA outsourcing vendor DynCorp.

Also on the board were ''the number of work items we'd performed that were rated as satisfactory or unsatisfactory by the customer for a given month to date, as well as the average turnaround time for fulfilling service orders and responding to trouble calls,'' he says. ''So the first thing EPA employees saw when they walked in was how well we were performing.''

Rodgers' group is in the process of installing Remedy Corp.'s Action Request System trouble-ticketing software at the EPA to ''capture trouble-ticket and maintenance histories for both our nationwide and Washington systems,'' he says. ''So if we have LAN or telephone or cable trouble, the repair period is documented.'' The software is already being used by the EPA in Research Triangle Park, N.C., to monitor the work of Lockheed Martin.

If metrics provide project managers with knowledge of a vendor's performance, service-level agreements (SLA) in the contract provide the power to keep that performance up to the mark.

SLAs define minimal metrics that a vendor's performance must reach in order to be judged satisfactory. Camino Health Care, for example, set up SLAs that ''began at 98.5% availability for applications, and critical applications, like the health care module, had a screen response time of no more than .7 seconds,'' Streicher says.

While some companies use punitive SLAs that dock the vendor for poor performance, several managers say they prefer the carrot approach of offering rewards for better-than-acceptable performance.

It's also important to recognize that your needs and available technologies inevitably change. So another critical contract element is a mechanism for renegotiating SLAs and other terms of the relationship to keep up with those changes.

Companies whose contracts neglect to spell out ''how to manage incremental work,'' frequently end up suffering from an ugly phenomenon known as ''scope creep,'' Deloitte & Touche's Cunningham says. This is a situation where ''responsibilities not clearly put in the vendor's column creep back into the customer's column.''

Outsourcing vendors naturally point to the opposite scenario, saying scope creep also finds them being asked to do things outside the original agreement. R.V. Rao, portfolio manager with the Internet/intranet practice of Digital Equipment Corp.'s Digital Services Division, suggests that, along with language on how to renegotiate contracts, users also need to budget for inevitable changes.

For example, spend only 80% of your overall budget on the original deal, saving 20% to pay for changes.

Of course, situations will crop up during a multiyear outsourcing deal that even the most meticulously planned contract does not cover.

Amoco Canada, for example, has knocked heads with MCI Systemhouse over ''a number of gray areas - small items that they said weren't in the scope of the contract,'' Bester reports. This was in spite of the fact that the energy firm's data center outsourcing contract had ''a clearly spelled-out pricing agreement structure.

''My people finally came to me complaining that they were spending all their time putting together cost proposals for small pieces of work.'' Bester took the matter to MCI Systemhouse's data center managing director. ''I told him, 'This has got to stop, it's ridiculous,' '' Bester recalls. ''He agreed. We went out to dinner, and the next day that stuff quickly stopped.''

For his part, Bester ''volunteered to give them $5,000 to $10,000 a month [extra] if they would do everything we asked, instead of arguing over nits.''

What makes this kind of give and take possible, Bester emphasizes, is a very formal hierarchy that defines exactly who gets called in at what point in the escalation of a problem.

And, of course, the willingness of both sides to negotiate and compromise. ''We sit down and talk it out; I listen, go back, think through the process, talk about the spirit and intent of the relationship, then maybe end up backing away from my claim,'' Bester says. Or maybe MCI Systemhouse does.

''It's never a simple or easy process; you have to work at it,'' he says.