Figure 2 -- Seven principles of sourcing relationship management.

Principle 1: Set Right Expectations from the Start

From the beginning, both parties (company and vendor) must stipulate what they expect from each other. Implementing this principle may include defining vision, goals, or objectives of the sourcing initiative. As part of this exercise, a company and its sourcing partner identify associated risks, critical success factors, and plans for mitigating the identified risks.

Primarily, this principle helps eliminate any possible confusion on the part of the sourcing vendor regarding delivery of its solutions or services on time and within budget. Both parties must identify and sign off on a recognized list of critical success factors, issues, and concerns they have identified and prioritized up to this point.

From a vendor's perspective, this principle facilitates the establishment of its level of involvement, interaction, and commitment to the company during the engagement. Successfully delivering business value to the entire enterprise is directly proportional to meeting and exceeding customer expectations.

Common mistakes many companies make concerning this principle include choosing a single sourcing partner or not looking for alternative measures or options. It is essential to identify alternative risk management and conflict resolution options to deal with such issues.

Principle 2: Institutionalize Ground Rules and Metrics for Successful Sourcing Delivery

When dealing with sourcing vendors, all initiatives across the organization must follow a common set of standards, best practices, and internal policies. This principle enables the enterprise to deal with all vendors pragmatically by having metrics that can be incorporated across the board by the program management or contracting office. Using a set of metrics for sourcing delivery allows the organization to employ multiple vendors in a consistent and cost-effective manner.

This means that the company must inventory all of its available or existing resources in terms of people, process, and technology, as well as industry standards, best practices, and corporate policies. From a PMO perspective, this means understanding dependencies and interfaces among various projects or initiatives and ascertaining that each project follows a consistent set of practices.

Most sourcing partners are usually enthusiastic about complying with the ground rules or metrics set forth by the clients. However, in order to follow and manage their resources in accordance with the institutionalization plan, vendors must assign the right resources, with the right expertise and experience, to follow the process.

Lack of close interaction between the sourcing partners and the company is a typical problem concerning this principle. This could become a critical issue at a later stage of the relationship lifecycle and may prove difficult to resolve at that point. One solution is to arrange periodic status reviews and meetings from the beginning of the relationship.

Principle 3: Establish Plans for Sourcing Delivery and Alternative Measures

Most sourcing activities span the system development or integration lifecycle and extend to the deployment and operational or maintenance stages. This principle emphasizes the risks and concerns involved in sourcing delivery; it also facilitates the creation of alternative measures based on the critical success factors identified while following the first principle.

In order to maximize their benefits from the delivery of business solutions or services, organizations must engage all sourcing partners in managing foreseeable risks. Appropriately engaged, vendors or sourcing partners can establish feasible plans to deliver solutions or services at desired levels. In the meantime, companies should make alternative arrangements to obtain solutions or services from a different vendor or vendors just in case.

Vendors or sourcing partners are usually selected based on their knowledge of or expertise in the client companies' business domains. However, it is important for sourcing partners to have ongoing training plans to educate all of their employees and associates to comply with clients' policies and procedures. This can help effectively deliver appropriate solutions or services.

Many companies do not develop plans for delivering business solutions early enough in the sourcing relationship, including a plan for information dissemination across the enterprise and sourcing vendors. To avoid this type of mistake, other companies employ a strategy that involves developing a plan that clearly defines the roles and responsibilities of the internal resources and sourcing vendors.

Principle 4: Adopt Open-Door Problem Resolution Policy to Optimize Sourcing Benefits

This principle promotes the prevention of sourcing problems rather than using a too-little-too-late, fact-finding analysis approach. This principle encourages vendors to be open about discussing possible barriers, glitches, or workarounds with the company.

While most companies promote high ethical standards in their workforce and business environments, it is important to emphasize open-door policies. This approach encourages employees as well as sourcing partners to exhibit the highest possible integrity, honesty, and accountability when resolving issues. By treating sourcing partners and employees equally, companies will reap the maximum benefits of sourcing.

Most vendors consider open-door problem resolution policies as an invitation to disclose unforeseen conflicts or major risks as they occur during the sourcing engagement. This helps vendors demonstrate their value proposition and ultimately strengthens their partnerships.

Many companies fail to design problem resolution or corrective action plans to get their sourcing vendors on the right track. Training partners to be more effective in their delivery of business solutions or services is one way to mitigate such situations. An open-door policy encourages the sourcing partners to recognize their client's business goals and objectives.

Principle 5: Recognize Common Collaboration Channels, Protocols, and Governance

This principle helps in formalizing a contractual agreement between two parties. It prepares a set of management procedures to be followed by the vendor(s) in compliance with the service-level agreements (SLAs), statements of work (SOWs), or task orders. This principle also presents various aspects of collaborative initiatives.

Many companies consider proven methods or processes to establish a common set of collaboration channels, protocols, and governance mechanisms while managing a portfolio of sourcing initiatives. This approach allows organizations to encourage sourcing partners to assume more active roles and responsibilities.

This principle enables vendors to be more actively involved in establishing and extending their relationships with the client companies by demonstrating accountability. It allows them to offer inputs to their clients in improving delivery processes, corporate IT governance, and risk management plans.

Collaboration is often misinterpreted as just another medium to communicate across the enterprise. This thought process usually creates major confusion among practitioners in identifying a specific set of technologies that can enable them to stay connected. In reality, collaboration must help practitioners perform activities to deliver solutions and services effectively while meeting common business goals.

A common practitioner mistake is getting entangled in the complexities of collaboration technologies and limiting the processes and protocols to support only internal associates within the enterprise. A way to avoid such pitfalls is to consider a set of tools, techniques, and principles for collaboration and governance of IT resources that can support a wide spectrum of users. Many companies prefer using open industry-based standard technologies to integrate the enterprise so that internal and external resources can take equal advantage of the collaboration process.

Principle 6: Review the Relationship Periodically to Evaluate and Monitor Progress

This principle promotes regular collaboration for review, inspection, and walkthroughs to evaluate performance and quality measures of the service or solution delivery. In addition, it establishes the need for corrective measures performed in the seventh principle.

Following this principle, the company should conduct periodic sessions to evaluate its relationship with the sourcing partner and to assess the health of the association. It also supports both parties in establishing a stronger collaboration model.

This principle enables vendors to seize opportunities and to resolve client issues and concerns on time, before situations escalate and reach extreme legal consequences. This principle encourages a proactive approach to remedy conflicts.

Frequently, many companies and their partners wait too long to address their differences in terms of expectations and delivery results. These kinds of situations often then end up in litigation and potential separations. By arranging periodic reviews and inspections of action items or delivery issues and discrepancies, companies and their sourcing partners can more successfully manage their relationships.

Principle 7: Execute Measures to Refine, Revise, and Improve Sourcing Relationships

This is one of the most essential principles in managing sourcing relationships. Most companies that unsuccessfully manage their sourcing relationships usually fail to implement this principle. Like any other type of relationship management, vendor relationship management requires occasional corrective measures to avoid conflicts in sourcing delivery. This principle builds a common ground upon which both parties can improve and renew their relationship.

This principle enables most organizations to revise or modify contractual agreements. In order to achieve the maximum benefits of sourcing, companies must revisit their contractual agreements and rectify any issues that have emerged due to change in financial factors or resource constraints.

From the vendor's perspective, this principle offers the most crucial opportunity for actions to be taken quickly to save the relationship. In most cases, periodic status meetings can help vendors detect problematic situations. Vendors then can employ their executives to negotiate with client executives and resolve situations accordingly.

Many companies often fail to plan for the necessary time and resources to study industry trends and/or to compare their vendor's quality of performance with others available on the market. This lack of planning often leads to client dissatisfaction with the quality of services or solutions provided by their sourcing partners. In practice, many companies use multiple performance-based incentive plans such as periodic renewal of contractual agreements, recognitions, and award fees for exceeding customer satisfaction in each area of services or solutions.

THE SOURCING RELATIONSHIP MANAGEMENT LIFECYCLE

It is imperative to have a consistent approach in delivering effective sourcing results. This approach must consider relationship management an integral part along with proactive IT governance, a flexible roadmap, well-thought-out logistics, and an in-depth understanding of roles and responsibilities of all members participating in the sourcing initiative. In other words, who, when, and how to manage the lifecycle of sourcing relationships must be clearly defined prior to embarking upon the initiatives.

In its simplest form, the lifecycle involves three distinct phases in addition to pre- and post-relationship activities, as shown in Figure 3. Most companies either already have or are in the process of pursuing a corporate IT governance model. In pre-relationship activities, the CIO, the PMO, and the governance board, along with other stakeholders, must concur on a strategy for sourcing that includes (1) a set of selection criteria; (2) a process for sourcing partner evaluation; (3) a master contracting procedure; and (4) a roadmap that details a blueprint of steps for the entire relationship lifecycle. A business case for sourcing is usually developed and approved during this pre-relationship period.

Figure 3 -- Common phases in the sourcing relationship management lifecycle.

During phase I, the project team and the PMO initiate a sourcing relationship after an initial screening based on the prioritized business and functional requirements (i.e., part of selection criteria). Once the initial screening is complete, a request for information (RFI), request for proposal (RFP), or request for quotation (RFQ) is sent to the selected vendors or sourcing partners. The intended level of detail depends on the urgency involved and on the comfort level of the decision makers. Once the evaluation is conducted and due diligence is performed based on preset criteria, a recommendation is made to the CIO and other stakeholders via the governance board for selection approval. Meanwhile, contracting activities begin, and the legal bindings are put in place concurrently. The contract office usually maintains the power of legal counseling throughout the rest of the lifecycle and incorporates adjustments with the consent of partners and the CIO.

Phase II establishes and maintains the sourcing relationship. Activities in this phase include a periodic review of the sourcing status; delivery of solutions and services (from vendors or sourcing partners) as part of the overall project goals; management of sourcing issues (strategic or tactical), risks, and concerns as well as contractual realignments; and an assessment of sourcing performance, industry trends, and comparative studies, among other specific tasks an enterprise may have.

In phase III, plans are generally directed toward phasing out the sourcing partner's engagement. Unless the phaseout is due to an unforeseen reason, companies work together with their sourcing partners to transfer knowledge to internal resources, including training and hands-on guidance; to terminate the contractual agreements; and finally to transition the roles and responsibilities to either internal resources or to third-party operations' support teams.

During the post-relationship phase, most companies organize lessons-learned sessions to review the outcome of the sourcing engagement. They recognize sourcing partners for present and future prospects and capture any difficulties or complexities experienced during the relationship lifecycle. For many companies, the governance board, PMO, CIO, and sourcing partners as well as associated practitioners play predefined roles throughout the lifecycle. A roadmap, including major deliverables and milestones, offers a consistent blueprint for successful sourcing. For most companies, logistics for successfully managing sourcing relationships are based on how well the collaborative activities (connect, communicate, coordinate, and commit) [2] are performed in conjunction with vendors or sourcing partners. Last but not the least significant factor is the client's understanding of the vendor's goals and objectives.

READYING YOUR ORGANIZATION FOR EFFECTIVE RELATIONSHIP MANAGEMENT

Effective sourcing relationship management in an enterprise requires continuous nurturing from senior management down through individual project members. In reality, we can draw a lot of similarities between a sourcing relationship and a romantic relationship. For the sake of simplicity, events such as courtship, engagement, marriage, and divorce are used literally in this discussion. Readying an organization for sourcing relationship management should be treated differently (with humor!) in the following three fundamental tenets of a relationship:

1. Court your sourcing partner(s) without being a hostage. In many cases, clients depend too heavily on their sourcing partners. This can happen in both single and multiple sourcing situations. In the early stages of a partnership, it is extremely important to recognize the primary objectives of the sourcing relationship. It is imperative to present up front a clear view of the big picture and of the objectives to internal resources as well as to sourcing partners and their associates. Many companies also spell out their enterprise-level exit strategies when formalizing contractual agreements. However, proprietary solutions or services provided as an integrated package can lock in many companies to a vendor or vendors. This type of situation can be avoided by employing a consistent set of industry standards, frameworks, reference models, best practices, and policies during the early stages of the relationship. Hostage situations can be avoided by putting change management, SLAs, sourcing restructuring, and transition plans in place.

2. Marry your partner without being a soul mate. As the relationship grows, sourcing partners establish closer client intimacies. Ultimately, the client feels comfortable sharing responsibilities, accountabilities, and, specifically, commitments. However, it is important to make sure that the internal resources as well as senior management are fully cognizant and capable of protecting confidential proprietary company information. This may include contractual agreements, financial information, and relevant legal information. For many companies, multiple functional organizations share sourcing relationship management responsibilities. For example, the CIO and governance boards together may decide on renewing strategic relationships, whereas the PMO may regulate or control individual work orders or purchase orders. Many companies prepare their enterprise resources to deal with sourcing by controlling their access to confidential information. Hence, the integrity of the company is never compromised.

3. If it is not working, think about divorce. Finally, this is about managing risks while building a sourcing relationship. This thought process parallels the activities involved in establishing a trusted partnership over the relationship lifecycle. In order to build trust, both the client and partner must recognize and agree upon the client's modus operandi. Both parties must define how discrepancies of a relationship can be fixed, adjusted, or escalated to higher authorities during the lifecycle of a sourcing initiative. These guidelines also lay out plans for extreme measures, such as failure to deliver services or solutions on time and within budget, and for situations that may lead to the termination of the relationship.

Many companies utilize their governance boards or steering committees to define and monitor strategic sourcing relationships and allow the PMO to manage day-to-day tactical measures. In some companies, the PMO assumes a more active role in enterprise-wide rollouts of sourcing, in addition to the continuous tracking of delivery and performance improvements.

A model plan for preparing the enterprise for a successful sourcing relationship must include consistent processes and must urge practitioners, internal or external, toward delivering effective results. In practice, readying organizations for an effective relationship can be achieved only by establishing a viable collaborative work environment across the enterprise while also maintaining ethical standards, policies, and overall professional integrities.

AVOIDING SOURCING CONFLICTS

A significant aspect of sourcing relationship management concerns avoiding conflicts between organizations and their sourcing partners. In many ways, this aspect of relationship management is similar to that of IT support networks and help desks. If nothing goes wrong, nobody takes note of it; but if something does go wrong, someone is unhappy. Sourcing conflicts stem from the following two major reasons:

1. Lack of client satisfaction

2. Lack of vendor or sourcing partner satisfaction

In general, conflicts arise due to uncertainties or to falling short of expectations on either the client or the partner side. In most cases, these problems occur because of sudden, unpredictable changes regarding goals, a decision to switch direction, or simply because of the changing organizational position. In some instances, mergers and acquisitions are responsible for the changing scenario. Regardless of the specific situation, lack of prompt collaboration between the client and partner is the most common cause of conflict.

Specifically, the lack of client satisfaction usually relates to the partner frequently missing delivery dates and milestones; inconsistent or poor quality of services or solutions; or late or delayed response from the vendor or sourcing partners. In rare occasions, clients also encounter situations where negative comments publicized by a disgruntled vendor result in a bad reputation for the client. For many companies I have worked with, attempts at blending internal organizational cultures led to tension between the internal (client) and external (vendor or sourcing partner) resources. Most importantly, issues that lead to severe time and cost problems or that jeopardize the state of critical projects are major root causes for client dissatisfaction.

On the other hand, most dissatisfaction on the vendor or sourcing partner side is usually initiated by mismanagement of contractual agreements or by a "reactive versus proactive" approach by clients in terms of delegating responsibilities and accountabilities. Like clients, sourcing partners see the difficulty of blending cultures and the lack of cooperation from internal resources. In some cases, vendors claim the departure, removal, or replacement of client executives as the cause of their dissatisfaction or conflict. However, major conflicts for sourcing partners usually originate from the client changing direction to achieve a lower price and higher performance.

Most of these problems can be avoided or eliminated by following the seven principles presented earlier. When issues do arise, the following practices as part of the overall sourcing strategy are extremely useful for mitigating or minimizing possible conflicts:

• Building trust as an integral part of the relationship. As discussed throughout this report, it is essential that both parties understand each other's vision and objectives. Many companies conduct periodic meetings to determine how to improve their operational processes and enhance the synergies they have with their sourcing partners. These types of exercises reduce the probability of conflicts.
  
  
• Making an effort to produce predictable outcomes or results. This facilitates building the momentum for both internal and external resources. It helps make all involved feel like they are part of the team and empowers them to visualize the big picture at any given point. This also reduces the possibility of any surprise or any associated conflicts.
  
  
• Sharing responsibilities and accountabilities as appropriate. This idea fosters team spirit and encourages the partner to consider the incentives in making their client successful. This eliminates finger-pointing and alleviates the root causes of vendors feeling left out.
  
  
• Recognizing innovation and creativity by giving due credit to partners and employees alike. This is a common practice among equal opportunity employers; it promotes enthusiasm for new concepts or techniques that deliver better results across the enterprise.
  
  

Additionally, human resources is an essential factor in minimizing conflicts. Even in this time and age, companies should build their own team of core competencies in technology and business domains to attain competitive advantage. This team can ensure total quality management (TQM) of the services or solutions delivered by the partners.

FROM THE TRENCHES: CASE STUDIES AND LESSONS LEARNED

Every sourcing relationship management experience varies significantly depending on the situation; factors may include midstream business requirement changes, poor client intimacies, evolving technologies and techniques, or other unforeseen circumstances. In this section, I present case studies of two companies and consider the typical issues, problems, risks, and challenges encountered as well as how these companies and their sourcing partners worked collaboratively to manage their relationships.

The first case study looks at a US healthcare provider utilizing multiple sourcing partners to deliver IT solutions to its business operations. The second involves an initiative in which a professional service provider is delivering an offshore solution to a software leader. Specific thoughts and lessons learned regarding various corrective actions taken in managing and preserving sourcing relationships are shared. Hopefully these observations from the trenches will serve as recommendations and suggestions for practitioners engaged in ongoing sourcing relationships.

Case Study 1

In the past few years, a US healthcare provider experienced numerous challenges; some were strategic and had long-term or substantial impacts, while others were tactical and had short-term or small impacts with regard to delivering the business objectives of the company. The following are a few of the major challenges that project teams encountered either due to internal or external (i.e., experienced by the entire healthcare industry) factors:

• Reorganization of the company. A number of senior executives were either reassigned or brought in from outside the company to replace the existing team. The IT organization changed its structure drastically to align with its operational business counterpart. A completely new team was formed to act as a liaison between the business operations and the IT organization. This team was charged with the responsibility of incorporating a consistent approach in delivering new business solutions and improving existing business applications by bringing internal and external (business or IT) partners together. Figure 4 presents a snapshot of the new organizational structure.

  Figure 4 -- Liaison as an interface in business and IT partnership (simplified).

  
  
  

• Modernization of business processes and existing IT applications that support these business processes. The healthcare industry has been lagging behind in utilizing the advances of modern technologies for quite some time. In recent years, however, many healthcare companies have been modernizing their business processes in order to improve their organizational effectiveness. The ultimate goal of these companies is to improve their services to their customers. This healthcare company is no exception. In fact, a number of senior executives who were appointed to key positions during the reorganization are industry luminaries and business visionaries. They are big proponents of making changes for the right reasons. The executive team recognizes that the modernization of business processes is absolutely essential to help business operations make informed decisions. The team believes that modernization can lead the company toward satisfying customers with a higher quality of services. Subsequently, the company can gain competitive advantage by establishing a collaborative work environment.

• Introduction of a new process. A new and simple-to-understand system development lifecycle (SDLC) process was incorporated as an approach for delivering IT solutions for the entire company. One of the senior executives was cognizant of the vendor and its past performance in implementing this process. The process vendor (a company that sells an SDLC process) was retained as a partner while rolling out the process across the entire enterprise. For many IT teams, a major concern about this process was that it lacked robustness or compliance to industry standards. They feared that this process would fail to help them in delivering complex projects.

• Compliance with Health Insurance Portability and Accountability Act (HIPAA) and other government regulations. In 1996, then US President Bill Clinton and the US Congress approved HIPAA as a set of regulations to protect the privacy and security of personal health information (PHI). HIPAA regulations apply particularly to those enterprises involved in sharing, handling, and accessing PHI data. For this company, compliance with HIPAA meant setting up enterprise-wide policies for privacy and security protection of PHI data; educating and training business, legal, and healthcare practitioners involved; upgrading or modifying existing business applications or relevant systems; and physically securing the facilities, workplaces, and the environments in which PHI data is stored, accessed, or processed.

• Change in organizational culture. A reduction of manpower in specific business areas and the formation of a new liaison team created a noticeable cultural change and affected the productivity of multiple business operations. This cultural change may have generated a resistance by many business operations to follow the adopted process and the liaison team directives. Some of the IT functional areas vehemently opposed the changes that required their teams to cooperate with the liaison team, and some expressed their reluctance to collaborate with the liaisons at all. In general, the diversity added a new dimension to the complexity of the change.

• Shortage of appropriate domain experts and experienced resources (both business and IT). During the reorganization, many employees decided to leave the company because of their fear of change, and some employees were let go. As the company prepared to outsource (both offshore and onshore) a number of IT functions, the lack of right resources to do the right things became apparent. This made it difficult to adopt the new process in its entirety all at once. The process vendor offered to support the IT and business teams to help them understand and capitalize on the new process to a certain extent. However, there was a lack of examples (from previous implementations) and a lack of experts possessing substantial knowledge of the process to help the teams in adopting the process.

Some of these challenges required strategic attention or decision making. The company's strategic objectives were to offer better response to existing customer needs, to capture new business segments such as claims processing and electronic customer information access, and to deliver care services at a lower price in comparison to other healthcare companies. In order to address most of these critical challenges, senior executives made certain conscious decisions to chart their IT strategic principles. To align the IT organization with the desired business objectives, the following principles were considered:

• Each project must develop a business case to justify funding (an absolute must for high-price tag initiatives).
  
  
• Each project must consider COTS packaged solutions to reduce the cost of development and time to market.
  
  
• Each project must follow a set of review processes to ensure continued funding and support.
  
  
• Each sourcing partner or vendor selected for providing solutions or services must be capable and experienced in incorporating industry standards and best practices in addition to being able to promote the company culture.
  
  

To gain a few quick successes that could propel the IT organization to achieve excellence, executives got actively involved in multiple initiatives. They planned to work closely with the liaison team and approve a number of sourcing initiatives that could deliver cost-effective business solutions. Some of these solutions required specific business domain knowledge such as claims handling, underwriting, and pricing. The company decided to seek sourcing partners to augment technical expertise in the areas of portals, Web services, and collaborative technologies.

The sections that follow offer a synopsis of activities performed by the company in managing the sourcing partner relationships according to each of the seven principles discussed earlier.

Principle 1: Set Right Expectations from the Start

For most projects, an assigned part of the liaison team started working with the business operations teams to develop a business case for funding the initiative. They defined the scope and resource needs as a part of this exercise. Once the funding for the projects was secured and the need for sourcing partners was determined, the joint team identified the criteria for choosing sourcing partners or vendors. As part of the selection process, the team prepared vision documents, created a list of goals or objective statements, and qualified the three most prospective partners. An extensive amount of due diligence was performed to assist in selecting the sourcing partners. Once the sourcing partners were selected, the liaison team formalized a solution delivery team. This team included associates from the solution or service partners, the quality assurance team, the financial management team, the PMO, and the internal development team as well as architects and any software or hardware tool vendors as appropriate. A large part of the kick-off or project initiation meetings focused on setting the right expectations for both the company and the sourcing partners. The team identified risks, critical success factors, issues, and concerns as well as any known constraints or assumptions for the project.

Principle 2: Institutionalize Ground Rules and Metrics

The members of the liaison team were responsible for ensuring the progress of a project from beginning to end. A number of standards, guidelines, principles, and basic ground rules, including review and walkthrough procedures, were shared across the project teams. Sourcing partners were briefed on the company policies and procedures for on-site or remote access to enterprise-level applications or systems. In general, the elements for the performance metrics remained the same for reporting purposes. The portfolio management team arranged weekly meetings to review the status of all the projects in the portfolio. A separate set of meetings was conducted to determine the financial status of various projects in the portfolio. Sourcing partners elected a member of their own to represent them in governance boards. In many cases, the liaison team arranged the governance board meetings and followed up on the action items with the rest of the team. Senior executives sponsored and chaired governance and other critical review meetings.

Principle 3: Establish Plans for Sourcing Delivery and Alternatives

The liaison team members and business operations teams arranged periodic project reviews to measure how their projects were progressing. Representatives (usually project leads or account relationship executives) from the sourcing partners participated in these meetings as appropriate. As part of the project teams, sourcing partners presented project milestones, deliverables, and action items for which they were responsible. The liaison team members worked closely with the project teams in defining alternative technical solutions and recommended modifications to business processes as necessary. During periodic review meetings, they obtained the executive sponsor's approval to pursue alternative measures for each project individually. The liaison team assigned resources to research the industry trends for alternative sourcing partners, pricing, and any competitive data available from recognized analysts. The liaison team encouraged all project teams and their individual members to expose potential risks related to their projects or other interrelated projects. The team considered reassigning personnel from one project to another as a possible alternative if necessary.

Principle 4: Adopt Open-Door Policies

The liaison team recognized that to succeed in the majority of its projects, it needed to establish teams with common goals. From the beginning, the liaison team members encouraged sourcing partners to be interactive with the employees. They realized that the cultural differences may pose barriers if they did not continue organizing team-building exercises across the board. In order to set a common standard for business ethics and work environments, they considered open-door policies. These policies empowered individuals as well as teams to raise their concerns, issues, or grievances to management and senior executives as appropriate in a systematic way. These open-door policies allowed respective teams and the executive sponsors to identify critical problems early enough to be resolved before jeopardizing the entire project. These policies were also a tremendous help to sourcing partners. Partners were able to build up the levels of their credibility, trust, and confidence with the liaison teams, executives, and the rest of the company by participating actively to resolve problems on time. In many cases, partners came forward willingly to express their concerns and informed their inabilities if they were unable to deliver promised services or solutions.

Principle 5: Recognize Common Collaboration Channels, Protocols, and Governance

Although no critical projects were outsourced to offshore locations, the company didn't have space to host all the onshore sourcing partners with their internal teams in one facility. As a result, it became extremely important to consider common collaboration mechanisms and to formalize common governance protocols and activities. Sourcing partners presented their corporate financial goals and objectives only to senior executive sponsors to maintain confidentiality. They reviewed any changes to SOWs or SLAs on a case-by-case basis with the sponsors, liaison team leads, and portfolio managements. The joint team managed collaborative activities using the Web and the latest communication technologies and reported the status of most projects in real time on scorecards for appropriate executives and the project personnel.

Principle 6: Review the Relationship Periodically

The members of the liaison team organized periodic sourcing relationship reviews to inform both the company and sourcing partner executives on the status of the relationship. In general, these reviews focused on three areas of the partnership: (1) financial reviews to determine company obligations and commitments as well as to determine any discrepancies or budgetary issues that must be reported to the sponsor executives; (2) project reviews at a high level to determine logistic issues in delivering the right solutions or services in a timely manner; and (3) resource conflict reviews to determine the need for capability, expertise, or relevant experience from the sourcing partners or to recommend sourcing partners with regard to making certain changes to maintain the progress of their project. These reviews were primarily attended by the account representatives and the project leads, unless specified otherwise. The findings of these reviews were then presented as recommendations to the senior executives.

Principle 7: Execute Measures to Improve the Relationship

The liaison teams identified a number of independent facilitators to conduct critical review sessions. In general, these sessions were held just in time to accommodate appropriate measures for resolving relationship-threatening matters. These meetings allowed senior executives to resolve or negotiate the outcomes on certain critical issues that could adversely impact the current or future relationship with the sourcing partner executives. They allowed both parties to review the recommendations offered by the liaison teams. The executives were able to express their concerns, issues, or challenges and guided the governance board to take appropriate preventive measures. In some cases, corrective measures or actions were identified, prioritized, recommended, and executed by the senior executives from the company and sourcing partners in conjunction with the portfolio management, liaison, and quality assurance teams. In some cases, the industry trends and other research data were used to make appropriate adjustments and reflected on the corrective measures.

During the first year or so, the company achieved mixed results in managing sourcing relationships, primarily due to the reorganization, the introduction of the new process, and the adjustment period for organizational culture changes. By the end of second year, however, the company formalized strategic partnerships with five major vendors, including a recruiting firm. Most of the results were made visible to the senior executives in order for them to make informed business decisions. These results included improvement in customer satisfaction, growth in annual revenues, decrease in employee attrition, and reduction in the cost of deployments. The company recognized two sourcing partners as best strategic partners, and both of these partners reported consistent growth in their quarterly financial reports. Meanwhile, the company penalized two sourcing partners for their delay in delivery, failure to meet the corrective measures, and the lack of responsiveness to assigned action items.

Today, the company continues to achieve its strategic goals and business objectives. According to the sourcing partners, the difficulties experienced in the early stages of their relationships helped them deliver better solutions during the next few engagements. Some of the lessons learned from the sourcing relationship management are as follows:

• Reorganizing the company created concerns among the potential sourcing partners as they feared lack of client intimacy and took longer to adjust their ability to collaborate with the new executives. The liaison teams faced difficulties in integrating the sourcing partners and the internal teams. A number of sourcing initiatives were already in progress prior to reorganization and required special attention to survive. Recently, some of these projects were either discontinued or merged with other projects based on their priorities and the ability of the project teams to optimize available resources.
  
  
• Failure to establish the ground rules due to cultural differences slowed down certain project teams and caused them to miss the scheduled date for reporting of the metrics. In some cases, even the liaison teams could not process the metrics data prior to making useful decisions on time. For some projects, maintaining the ground rules and the metrics became extremely difficult. The teams (both internal and external) got very frustrated in handling such situations.
  
  
• Adopting the new process hindered progress in a few sourcing projects, primarily because the sourcing partners were not always familiar with the adopted SDLC process and very little resources were available to educate the partners.
  
  
• Achieving HIPAA compliance required availability of specialized expertise as well as company-wide awareness of HIPAA compliance requirements. This initiative failed to draw the immediate executive attention it required and couldn't attain its commitments on time. In addition, the sourcing partners failed to provide adequate support as they had little or no prior experience in managing large and complex initiatives. The company selected the sourcing partners mainly based on their HIPAA expertise and wound up achieving its HIPAA compliance at a much higher price than anticipated.
  
  
• Attempting to change the business processes using sourcing partners had both advantages and disadvantages. The sourcing partners brought new perspectives to the table in terms of how the existing business functions are performed. Internal teams were able to add a set of independent and unbiased views to their business operations and influenced the implementation of the anticipated changes quickly. However, this approach also created resistance among certain team members as they feared for their own job security. In some cases, the initiative teams became more receptive toward working with their favorite sourcing partners and didn't connect well with other partners. These types of organizational behaviors created conflicts between sourcing partners and resulted in the loss of overall productivity.
  
  

Case Study 2

The second case study offers a different perspective on sourcing relationship management. A leading US-owned international software company wanted to market its enterprise-level portal software suite (the product and associated professional services) ahead of its competitors. The company decided to utilize the expertise of a small solutions provider to succeed in its "go to market" plan within a short period of time. The company wanted the sourcing partner to develop a set of relevant architectural frameworks and a comprehensive integration methodology that could help its customers deploy portals efficiently. Based on his previous experience, one senior executive recommended a small company as a prospective partner. Since time was of the essence, the decision makers for this initiative used trust as a primary factor in selecting the sourcing partner. They didn't spend much time on due diligence to determine the financial stability, related software development specific knowledge, or capabilities of this partner. The company approved the sourcing partner to utilize its offshore facility as a solution center for this project. As an R&D center, the offshore facility helped keep costs down and extend the daily working hours.

While establishing its relationship with the sourcing partner, the company experienced the following challenges:

• Integration of organizational cultures. Blending two companies' organizational cultures is a complicated task. Employees had difficulty understanding the socioeconomic differences of practitioners located at the offshore solution center. Though local members of the partner team stepped up to act as a liaison, the situation still required the integration of diverse cultures.
  
  
• Establishing the infrastructure to support collaboration between the client and partner teams. The client company has a number of facilities located in many countries. However, the infrastructure of the company is not efficient enough to support Web-based interactions between multiple teams located in remote places. Additionally, the team wanted to develop a dashboard for managing the offshore development efforts.
  
  
• Managing expectations of their own senior executives. The senior executive team used an analyst group to help research current industry trends on portals. Based on the research data supplied by the analyst group and the individual experiences of the executive team, a budget, schedule, and human resource needs were estimated. The project team found it extremely difficult to manage executives' expectations under the resource constraints laid out by the project plan.
  
  

• Delivering incremental value to justify funding over multiple phases. As the team started to learn more about the complexities involved in the project, the scope of the project began to creep. The assembled team had no prior experience applying an SDLC process in such a complex project environment. Under these circumstances, it became extremely difficult for the project managers to maintain the scope. They encountered problems in delivering measurable values incrementally during the initial phases, as well as in justifying further funding.
  
  

When the project started, it was estimated that it would take one year to complete. Senior executives decided to extend the project for another six months, since the initiative team experienced multiple challenges in the beginning. They also recommended that certain specific features be added with the previously defined solution. The project team performed the following activities along with the seven principles previously described to manage the sourcing relationship:

Principle 1: Set Right Expectations from the Start

The company didn't spend enough time selecting the sourcing partner. However, once the sourcing partner was selected, the client initiative team arranged a series of joint discussions. The team defined the project requirements and started to work closely with the sourcing partner. It established the right expectations for both the company and the sourcing partner. The joint project team identified a number of critical success factors and associated risks, and it helped the client executives be cognizant about such issues so that the executives could alleviate any concerns that either side might have.

Principle 2: Institutionalize Ground Rules and Metrics

As part of their contractual agreement, the two companies accepted a number of ground rules and metrics. The sourcing partner was eager to comply with these ground rules and collected almost all the metrics data on time. In some cases, the client company verified and validated the accuracy of the data on time. In other cases, the sourcing partner needed training to utilize the tools used by the company for collecting the metrics data.

Principle 3: Establish Plans for Sourcing Delivery and Alternatives

Initially, a central PMO managed all the sourcing activities. The team realized quickly though that the scope was changing rapidly. In some cases, many tasks or activities started to change before they were recorded in the central PMO repository. At this point, the project management team decided to divide the project management activities into respective focus areas. This approach helped the PMO control the project schedule, cost, and resource allocations more efficiently. However, the company failed to identify alternatives for the delivery of sourcing activities and experienced the usual consequence of single sourcing such as vendor lock-in.

Principle 4: Adopt Open-Door Policies

The client and the sourcing partner continue to establish a healthy relationship by organizing frequent meetings and, in most cases, working together to resolve issues. From the beginning, the client and the sourcing partner maintained open-door policies and succeed in addressing each others' concerns on time.

Principle 5: Recognize Common Collaboration Channels, Protocols, and Governance

This was the most difficult task in this sourcing relationship. Although governance activities were shared by the companies, common collaboration tools were not supported well by the existing infrastructure. Additionally, the offshore solution center was not well equipped to conduct either audio or video conferencing. Primarily, the team members used e-mail as the most effective communication medium. The client recently invested a large amount to build the desired infrastructure as well as a communication facility to support the offshore solution center.

Principle 6: Review the Relationship Periodically

Both companies agreed to review the relationship and address any outstanding issues. Their concerted efforts helped the companies maintain an amicable relationship. The executives from both companies reviewed critical issues together and resolved most issues on time.

Principle 7: Execute Measures to Improve the Relationship

Today, the client team members work effectively with the local and offshore teams. Once the teams established a common set of collaboration protocols and practice, their ability to improve the relationship excelled. There has been no need for extreme measures, as there are no conflicts to be resolved between these two companies.

Although the project was delivered late and over budget, this sourcing relationship has been considered a success. The two companies agreed to continue their relationship and plan to pursue future projects or initiatives together. The client company also decided to utilize the offshore solution center as its R&D center.

In general, most of the lessons learned in this case are very similar to those of the first case study. The management aspect of the sourcing relationship is pretty simple here, since the project in this case is relatively small in size and complexity. Both companies (the client and the sourcing partner) put forward substantial efforts to understand each other's cultural differences, business goals, and objectives. They established common ground to utilize best practices, industry standards, and respective corporate policies. These two companies also invested in their relationship by developing a common knowledge base that can help them in future projects. The offshore development center enables the sourcing partner and the client companies to keep costs down and to balance any cost overruns caused by scope creep. The client recognizes the contribution of its sourcing partner in achieving its business goals.

It is evident from these two case studies that the seven principles presented in this report can be used to establish effective sourcing relationship management. I admit that there is no one-size-fits-all approach to correctly building and maintaining the relationship. However, it is essential to understand that common objectives, goals, and expectations are basic principles of relationship management. In general, it is important to resolve issues in the early stages of the relationship lifecycle in order to achieve the optimized benefits. Most companies fail to realize the importance of collaboration and open-door problem resolution policies. By establishing common collaboration channels and by encouraging the sourcing partners to share their visions and goals, companies can effectively realize the benefits of sourcing. Another key observation from these cases is that the client companies empowered their internal resources as well as sourcing partners to achieve desired business goals. Furthermore, this empowerment helped both companies reduce their cultural differences, improve overall productivity, and promote innovation for better quality of services or solutions.

CONCLUSION

As presented throughout this report, managing a sourcing relationship requires a consistent and flexible approach that preserves the business directives of both client and partners. In other words, the business models of both parties must be aligned to attain a synergy to share common goals and objectives in delivering a common set of business solutions or services.

My experience has shown me that there is a need to establish a separate organizational entity to manage the sourcing relationship. In most cases, this entity can be a virtual one as long as it has three basic areas of roles and responsibilities defined: financial management, program or portfolio management, and relationship governance (see Figure 5). In practice, these areas are part of specific operational or functional organizational units such as finance, the program or portfolio management office, and the corporate governance boards.

Figure 5 -- Roles and responsibilities for sourcing relationship management.

For financial management, the roles and responsibilities must focus on contracts or legal agreements and the financial well-being of the relationships. In practice, this means that the financial management component must be either related to or an integral part of legal, finance, and the program management offices. The basic roles and responsibilities may include:

• Preparing and managing legal contracts, starting with RFPs or RFQs to SLAs, and participating in the process of approving SOWs
  
  
• Conducting periodic financial reviews to maintain and take corrective actions on the health indicators of the ongoing sourcing initiatives
  
  
• Resolving financial elements of sourcing conflicts and other related issues in conjunction with the PMO and the governance boards
  
  

Additionally, the financial management component must report the financial parameters to senior management and the governance boards periodically via performance scorecards or the dashboards.

Delivering each and every project on time and within budget must be the primary responsibility of the PMO. However, the roles and responsibilities of this component may also require active interaction or participation of other organizational units. For example, solution delivery teams and quality assurance teams must be involved to attain the expected quality of services or solutions from the sourcing initiatives. Major roles and responsibilities for this component include:

• Organizing and monitoring periodic program progress reviews to ensure that the initiatives are moving forward smoothly and that discrepancies are reported to the senior executives via dashboards as appropriate
  
  
• Creating and executing relationship improvement plans based on executive direction to resolve strategic and tactical issues or challenges
  
  
• Reviewing lessons learned from various sourcing initiatives to determine the factors that must be considered in future sourcing partner selection processes as well as for improving ongoing relationships
  
  

Furthermore, the PMO must be actively involved in resource allocation and in collaborating with the technical solution teams.

Relationship governance must be involved primarily to act as liaison between company executives and the teams included in sourcing relationships. For most companies with existing corporate and IT governance boards, relationship governance will be the executive branch of the overall sourcing relationship management. Primary responsibilities of this component may include:

• Obtaining and maintaining executive sponsorship for sourcing initiatives by presenting the business cases prepared by the initiative teams and by reporting the overall progress of the initiatives periodically to the senior executives
  
  
• Monitoring compliance to technology and business standards as well as existing organizational best practices
  
  
• Institutionalizing corporate policies and procedures across the enterprise and incorporating the cultures of sourcing partners to empower the sourcing partners as appropriate
  
  

Finally, it must be noted that in upcoming years most companies will continue to scrutinize the abovementioned roles and responsibilities internally, while integrating a successful sourcing relationship with their organizational cultures. Virtual sourcing relationship management will be required to formalize the virtual relationship management team's charter and to serve as a liaison between the internal resources, sourcing partners, and the senior executives.