For decades outsourcing has been growing with double-digit percentages. Different types of outsourcing have emerged, including Business Process Outsourcing and Global Sourcing, and the focus of IT outsourcing partnerships is slowly shifting from efficiency to innovation.
Key to achieving this, and making outsourcing a success for both parties, is governance. Weill and Ross, in their 2004 book “IT governance”, define it as “specifying the decision rights and accountability framework to encourage desirable behaviour in the use of IT”.
A large number of IT outsourcing relationships still lack a proper governance structure and mechanisms and this hinders achieving business goals and smooth service provisioning. A lack of IT governance also hinders transparency for which the mutual obligations of both the service recipient and service provider have to be sparkling clear.
The need for proper governance structures is stronger than ever and in this respect the key questions that have to be answered are: What are the responsibilities for both the service recipient and the service provider in IT outsourcing partnerships? - and How to make Demand Supply management work?
While adequate IT governance needs to be applied by any service recipient, it is unthinkable having a governance structure in place in which external service providers do not play a role. Here, in the absence of hierarchal structures, and the transformation of internal agreements to external legally binding contracts, the need for formalized communication structures increases resulting in a cooperation model, which we have called Demand Supply management.
In IT outsourcing relationships the implementation of Demand Supply management is a pre-requisite to managing the outsourcing relationship properly and ensuring the governance of the relationship. The implementation of an adequate governance model also contributes to the compliance to regulations such as the Sarbanes Oxley Act, IFRS or IAS.
The implementation of Demand Supply management is a mutual responsibility of the service recipient and the service provider, and goes beyond the implementation of Demand Management by the service recipient and Supply Management by the service provider. Demand Supply management is a structured and formalized way of maintaining an IT outsourcing partnership and results in a coherent set of interfaces at different interacting levels between the service recipient and the service provider.
To achieve optimal governance in IT outsourcing partnerships, and apart from adequate structures and processes, trust is essential. Both the service recipient and the service provider have to keep in mind that trust needs to be earned. The mutual keeping of promises and meeting expectations supports the process of gaining trust, while failures in the trust building process are less threatening if there is open communications within the cooperation model.
Finally, the need for smooth information exchange and trends such as Business Process Outsourcing and Global Sourcing result in an even stronger need for adequate governance. Implementing Demand Supply management ensures an alignment between today’s business dynamics and technological innovation opportunities resulting in practice in stable governance!
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