Outsourcing relationship management
Encyclopedia
Outsourcing relationship management (ORM) is the business discipline widely adopted by companies and public institutions to manage one or more external service providers as part of an outsourcing strategy. ORM is a broadly used term that encompasses elements of organizational structure, management strategy and information technology infrastructure.
gained prominence as a business strategy in the early/mid 1980's and was originally driven by the desire to reduce costs in labor-intensive business processes. The benefits of this labor arbitrage are still possible, but in the most recent five years companies are increasingly seeking innovation, flexibility and scalability in their business operations through outsourcing.
Outsourcing relationship management appeared as a specific management discipline in 1999 after an industry consortium, the Sourcing Interests Group, began developing guidelines for its member companies. Following this introduction, the theories of outsourcing relationship management
have been developed by numerous global industry groups, universities, consulting/advisory firms and software companies. The term is in wide usage today and the practice of outsourcing relationship management is becoming increasingly important to companies that are using external service providers as part of their organizational strategy.
ORM is complementary to other established enterprise management strategies in its relationship to established enterprise resource planning
(ERP) tools and the linkage to important business constituents.
A challenge in implementing ORM strategies lies in the nature of the outsourcing relationship itself. In his 2004 book "The Outsourcing Revolution"., author Michael Corbett discusses the challenges of integrating two separate business entities (the client and the external service provider) across the different organizational boundaries and differing motivations and objectives. This book was one of the earliest works to focus on outsourcing relationship management as one of the keys to successful outsourcing strategies. More recently, Gartner
has launched an outsourcing specialty which has conducted significant research in this area.
The importance of ORM will only increase as companies continue to pursue "Extended Enterprise" or "Corporation 2.0" strategies to take advantage of the skills, resources and global footprint of external service providers. In the 2006 Global CEO Study, IBM has identified business model innovation as the most important success factor cited by the 765 global CEOs surveyed. The survey noted that "fully 65 percent of chief executives and other leaders say they will have to make fundamental changes in their businesses over the next two years. New products and services remain a priority, but they’re placing increasing emphasis
on differentiating themselves through innovation in the basics of their business models. They believe that external collaboration across their business ecosystems will yield a multitude of innovative ideas."
One often unexpected demand of implementing an outsourcing strategy is the requirement for new management techniques and specialized skills among the client-side management team. Over the last five years or so, this need has become more generally known but companies are still struggling to address the requirements adequately. For example, a 2002 Computerworld article documents the need for managers skilled in ORM for managing IT outsourcing. A more recent article in DM Review points out that there is still a need for specialized outsourcing relationship managers and cites this as a career opportunity.
University researchers are also studying the requirements and developing models and methodologies around this phenomenon. For example, Carnegie Mellon University
has developed a detailed Sourcing Capability Model to measure the maturity and skills required for effective outsourcing relationship management. The University of Michigan
sponsors research and events focused on the challenges and management strategies for successful outsourcing.
Recent trends in outsourcing strategies find clients adopting a "multi-sourcing" strategy in order to better leverage and scale the outsourcing operations and find more specialized service providers. In early 2007, a CIO Magazine article explores this trend.
Unfortunately, companies usually think of formal organizational design for governance only after they are well into the implementation phase, if they think of it at all. There is growing recognition that effective governance is critical to success in outsourcing. Rather than deal with governance as an afterthought, the outsourcing enterprise should evaluate successful outsourcing governance models as they develop their outsourcing relationship management strategies.
or on-demand
and others offered as on-premises software.
One consequence of outsourcing is that the IT infrastructure of the organization is severed and must be reestablished in some way to the external service providers. There are significant compliance, security and technology barriers to accomplishing this, however. One important aspect of ORM is building the technology infrastructure and tools required. Here again, this is too often an afterthought, only being addressed after issues of communication, performance monitoring and reporting are discovered in the implementation phase of the outsourcing deal.
In the book, "Multisourcing," Gartner
analysts point out that successful outsourcing is built on "a network of relationships, not transactions," and outsourcing governance is the most important factor in determining the success of an outsourcing engagement. But many companies still haven’t realized the truth of this statement. Gartner found that fewer than 30 percent of enterprises have formal sourcing strategies and appropriate outsourcing governance mechanisms in place. In a 2004 survey of 130 CIOs, 42 percent said they were dissatisfied with their outsourcing relationships, according to outsourcing advisory company EquaTerra, primarily due to poorly developed, underbudgeted and undersourced governance models.
Origin
OutsourcingOutsourcing
Outsourcing is the process of contracting a business function to someone else.-Overview:The term outsourcing is used inconsistently but usually involves the contracting out of a business function - commonly one previously performed in-house - to an external provider...
gained prominence as a business strategy in the early/mid 1980's and was originally driven by the desire to reduce costs in labor-intensive business processes. The benefits of this labor arbitrage are still possible, but in the most recent five years companies are increasingly seeking innovation, flexibility and scalability in their business operations through outsourcing.
Outsourcing relationship management appeared as a specific management discipline in 1999 after an industry consortium, the Sourcing Interests Group, began developing guidelines for its member companies. Following this introduction, the theories of outsourcing relationship management
have been developed by numerous global industry groups, universities, consulting/advisory firms and software companies. The term is in wide usage today and the practice of outsourcing relationship management is becoming increasingly important to companies that are using external service providers as part of their organizational strategy.
ORM in the Enterprise
Enterprise resource planning
Enterprise resource planning systems integrate internal and external management information across an entire organization, embracing finance/accounting, manufacturing, sales and service, customer relationship management, etc. ERP systems automate this activity with an integrated software application...
(ERP) tools and the linkage to important business constituents.
- Supply chain managementSupply chain managementSupply chain management is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers...
and procurementProcurementProcurement is the acquisition of goods or services. It is favourable that the goods/services are appropriate and that they are procured at the best possible cost to meet the needs of the purchaser in terms of quality and quantity, time, and location...
systems linking to suppliers, - Human resource managementHuman resource managementHuman Resource Management is the management of an organization's employees. While human resource management is sometimes referred to as a "soft" management skill, effective practice within an organization requires a strategic focus to ensure that people resources can facilitate the achievement of...
and payroll management systems linking to employees, - Customer relationship managementCustomer relationship managementCustomer relationship management is a widely implemented strategy for managing a company’s interactions with customers, clients and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing,...
and sales force automation linking to customers, and - Outsourcing relationship management linking to external service providers
A challenge in implementing ORM strategies lies in the nature of the outsourcing relationship itself. In his 2004 book "The Outsourcing Revolution"., author Michael Corbett discusses the challenges of integrating two separate business entities (the client and the external service provider) across the different organizational boundaries and differing motivations and objectives. This book was one of the earliest works to focus on outsourcing relationship management as one of the keys to successful outsourcing strategies. More recently, Gartner
Gartner
Gartner, Inc. is an information technology research and advisory firm headquartered in Stamford, Connecticut, United States. It was known as GartnerGroup until 2001....
has launched an outsourcing specialty which has conducted significant research in this area.
The importance of ORM will only increase as companies continue to pursue "Extended Enterprise" or "Corporation 2.0" strategies to take advantage of the skills, resources and global footprint of external service providers. In the 2006 Global CEO Study, IBM has identified business model innovation as the most important success factor cited by the 765 global CEOs surveyed. The survey noted that "fully 65 percent of chief executives and other leaders say they will have to make fundamental changes in their businesses over the next two years. New products and services remain a priority, but they’re placing increasing emphasis
on differentiating themselves through innovation in the basics of their business models. They believe that external collaboration across their business ecosystems will yield a multitude of innovative ideas."
Aspects of ORM
There are three aspects of ORM which companies typically pursue as part of their outsourcing strategy:- Management Strategy - determining the most appropriate combination of contractual terms (service level agreementService Level AgreementA service-level agreement is a part of a service contract where the level of service is formally defined. In practice, the term SLA is sometimes used to refer to the contracted delivery time or performance...
) and relationship management techniques - Organizational Structure - building the appropriate in-house management/oversight structure and mechanisms
- IT Infrastructure - the supporting infrastructure to enable the monitoring and management of a network of external service providers
Management strategy
Most major outsourcing initiatives are driven by top management. It's not unusual for a CEO to be directly involved in the early stages of the process.One often unexpected demand of implementing an outsourcing strategy is the requirement for new management techniques and specialized skills among the client-side management team. Over the last five years or so, this need has become more generally known but companies are still struggling to address the requirements adequately. For example, a 2002 Computerworld article documents the need for managers skilled in ORM for managing IT outsourcing. A more recent article in DM Review points out that there is still a need for specialized outsourcing relationship managers and cites this as a career opportunity.
University researchers are also studying the requirements and developing models and methodologies around this phenomenon. For example, Carnegie Mellon University
Carnegie Mellon University
Carnegie Mellon University is a private research university in Pittsburgh, Pennsylvania, United States....
has developed a detailed Sourcing Capability Model to measure the maturity and skills required for effective outsourcing relationship management. The University of Michigan
University of Michigan
The University of Michigan is a public research university located in Ann Arbor, Michigan in the United States. It is the state's oldest university and the flagship campus of the University of Michigan...
sponsors research and events focused on the challenges and management strategies for successful outsourcing.
Recent trends in outsourcing strategies find clients adopting a "multi-sourcing" strategy in order to better leverage and scale the outsourcing operations and find more specialized service providers. In early 2007, a CIO Magazine article explores this trend.
Organizational structure
By its very nature, outsourcing changes the client-side organization structure. Work that was once done by in-house groups is moved to specialized domestic or offshore service providers. Often, groups of employees are transitioned to the service provider company and others remain in-house to manage the outsourced function. This outsourcing governance function is an area where companies continue to struggle. A Computerworld article talks of the lack of adequate in-house governance as one of the "Seven Deadly Sins" of outsourcing.Unfortunately, companies usually think of formal organizational design for governance only after they are well into the implementation phase, if they think of it at all. There is growing recognition that effective governance is critical to success in outsourcing. Rather than deal with governance as an afterthought, the outsourcing enterprise should evaluate successful outsourcing governance models as they develop their outsourcing relationship management strategies.
IT Infrastructure
The technology requirements of an ORM strategy can be complex and far reaching. Several commercial ORM software packages are available which vary in their approach and capabilities for supporting ORM requirements. The common functionality of software infrastructure includes managing contract documents, tracking metrics, providing dashboard views and alerts, issue tracking/management, and analytics/reporting. The technologies vary in their delivery model, some offered as SaaSSaas
SAAS is an abbreviation for* Social Accountability Accreditation Services* Software as a service * Student Awards Agency for Scotland* Seattle Academy of Arts and Sciences* South Australian Ambulance Service...
or on-demand
Software as a Service
Software as a service , sometimes referred to as "on-demand software," is a software delivery model in which software and its associated data are hosted centrally and are typically accessed by users using a thin client, normally using a web browser over the Internet.SaaS has become a common...
and others offered as on-premises software.
One consequence of outsourcing is that the IT infrastructure of the organization is severed and must be reestablished in some way to the external service providers. There are significant compliance, security and technology barriers to accomplishing this, however. One important aspect of ORM is building the technology infrastructure and tools required. Here again, this is too often an afterthought, only being addressed after issues of communication, performance monitoring and reporting are discovered in the implementation phase of the outsourcing deal.
Market structure
Given below is a list of top ORM advisors and technology vendors| Vendor | Focus |
|---|---|
| PA Consulting | Outsourcing consultancy |
| Alsbridge | Vendor Management Advisory |
| International Association of Outsourcing Professionals | Professional certification |
| EquaTerra EquaTerra EquaTerra was acquired by KPMG effective February 18, 2011. As a member of KPMG’s network of member firms, EquaTerra provides global sourcing advisory services in information technology , finance and accounting , human resources , supply chain management and other business processes... |
Outsourcing advisory |
| Vantage Partners | Negotiation and relationship management |
| PricewaterhouseCoopers (PwC) | Outsourcing advisory |
| Hiperos | Extended Enterprise Management |
| DigitalFuel | SLA management software |
| Enlighta | Outsourcing governance software |
| Janeeva | On-demand ORM software |
| CA Oblicore | ORM software |
Importance of ORM
The success or failure of an outsourcing engagement is not guaranteed on the day the contract is signed. Getting the contract right is necessary, but not sufficient for a successful outsourcing strategy. One study by Vantage Partners (Boston, MA) found that at least 15 percent of the total outsourcing contract value is at stake if outsourcing governance is not managed well. It's apparent that a cooperative partnership between the customer and service provider based on effective relationship management and trust can add value to an outsourcing deal. A strained relationship, however, can detract significant value from the expected benefits of the initiative. Value in terms of cost reduction, increased innovation and improved flexibility is degraded by the greater need for monitoring, auditing and issue management. In that environment, conflicts frequently turn to major, disruptive disagreements and important projects are stalled.In the book, "Multisourcing," Gartner
Gartner
Gartner, Inc. is an information technology research and advisory firm headquartered in Stamford, Connecticut, United States. It was known as GartnerGroup until 2001....
analysts point out that successful outsourcing is built on "a network of relationships, not transactions," and outsourcing governance is the most important factor in determining the success of an outsourcing engagement. But many companies still haven’t realized the truth of this statement. Gartner found that fewer than 30 percent of enterprises have formal sourcing strategies and appropriate outsourcing governance mechanisms in place. In a 2004 survey of 130 CIOs, 42 percent said they were dissatisfied with their outsourcing relationships, according to outsourcing advisory company EquaTerra, primarily due to poorly developed, underbudgeted and undersourced governance models.
See also
- Customer relationship managementCustomer relationship managementCustomer relationship management is a widely implemented strategy for managing a company’s interactions with customers, clients and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing,...
(CRM) - Enterprise resource planningEnterprise resource planningEnterprise resource planning systems integrate internal and external management information across an entire organization, embracing finance/accounting, manufacturing, sales and service, customer relationship management, etc. ERP systems automate this activity with an integrated software application...
(ERP) - Business intelligenceBusiness intelligenceBusiness intelligence mainly refers to computer-based techniques used in identifying, extracting, and analyzing business data, such as sales revenue by products and/or departments, or by associated costs and incomes....
(BI) - Business process outsourcingBusiness process outsourcingBusiness process outsourcing is a subset of outsourcing that involves the contracting of the operations and responsibilities of specific business functions to a third-party service provider. Originally, this was associated with manufacturing firms, such as Coca Cola that outsourced large segments...
(BPO) - Supply chain managementSupply chain managementSupply chain management is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers...
(SCM) - Vendor Relationship ManagementVendor Relationship ManagementVRM, or vendor relationship management is a category of business activity made possible by software tools that provide customers with both independence from vendors and better means for engaging with vendors...
and Vendor management office - SaaSSaasSAAS is an abbreviation for* Social Accountability Accreditation Services* Software as a service * Student Awards Agency for Scotland* Seattle Academy of Arts and Sciences* South Australian Ambulance Service...
and On-demand software delivery