IT Governance Structure in Outsourcing

As good IT governance is very important for an effective IT environment and successful outsourcing relationship, during the stages of negotiation and signing the contract, IT governance should be given priority consideration and sufficient attention.

For more and more enterprises in different industries, whether doing IT outsourcing has become part of their strategic thoughts. Enterprises are more and more often to evaluate their core businesses and begin to weigh business functions which are non-core but very critical, such as the interests to the external partners from IT outsourcing. Obviously, the interest of outsourcing is conspicuous. Through outsourcing, organizations can get benefits from more expertise, lower cost and higher quality, at the same time, the management can focus more on the strategy.

Although outsourcing is an alternative project with high potential value in IT field, from the prospective of customer satisfaction, outsourcing still doesn’t have an overwhelming effect. One of the key reasons that outsourcing transactions cannot succeed is lacking of good IT governance.

The role of IT governance

IT governance exists in the logic of company governance; therefore, fundamentally speaking, the two principles are the same. IT governance is a responsibility framework and management process, it is helpful to define and continue to communicate with those tasks which must be done. IT governance can also promote interaction and provide a feedback mechanism in order to encourage communication and reasonable standards of behavior.

The responsibility structure is composed by role and responsibility, it reflects the decision-making power of various participants in the IT management process, and this power can be strengthened because of the effective reporting system. To ensure decision-making power can be clearly defined, it is very critical to solve those labyrinthic problems such as strategy, standard, control and transformation leading-in.

In an outsourcing environment, the definition and communication of decision-making power is the basic requirement. Otherwise, the two sides of outsourcing may make some assumptions of guidance conflicts. The typical one is that the outsourcer needs to own the power to decide the services providing structure and keep its authority on how to provide services.

When the user assumes that the outsourcer has all the decision-making powers and gives up its role of managing an effective IT environment, this seems too hasty. As trying to fill the blank role of user, the outsourcer runs a fortune. Just like the outsourcer makes an utmost effort to ensure its decision-making power of services providing, the user also has to make an utmost effort to maintain its authority on the key parts of IT strategy. On the decision-making on structure, security, standard, priority and communication, the outsourcer had better to play a role as a consultant.

Once the decision-making power is established, it should be implemented by some kind of administrative organization, the result is monitored by the reporting system. In an outsourcing environment, these two components are both pivotal. During the outsourcing transaction, the outsourcer will not become part of customer; therefore, the outsourcer should ensure there is one effective management and reporting framework has been formed, and this framework will not be changed along with the changeable requirements of customer, this can assure the long-term coherence with the customer’s expectation.

IT governance and outsourcing contract

As good IT governance is very important for an effective IT environment and successful outsourcing relationship, during the stages of negotiation and signing the contract, IT governance should be given priority consideration and sufficient attention. During the phase of negotiation, if the IT governance problems are emphasized, both two sides can define their responsibilities and roles; this will ensure the transaction will be successful. If the IT governance structure, responsibility and reporting mechanism can be combined into the contract, the possibility that IT governance mode can implement according to the necessary rules will be increased.

IT governance in outsourcing contract should include the following three aspects: 1. role and responsibility; 2. management structure; 3. reporting system.

Role and responsibility

A good IT governance mode involves the following four counterparts related to benefits: leadership in business department, leadership of business implementation, senior IT leadership, and IT providing leadership. Their decision-making powers should be defined clearly in the contract.

The decision-making of the leadership in business department or function department is to ensure what IT should do to meet the demands of business. If there is no clear explanation about the business ownership and what role IT plays, the outsourcer usually will not agree to cooperate. The contract should state that all the projects should have one business owner, which means the commercial interest from each project is the responsibility of the business owner.

The role of business implementation leadership is equally important, because in an organization, only the business implementation leadership can approve the IT investment behavior. The contract should clearly define that without the approval of implementation department, what kind of behavior can occur, what kind of behavior is forbidden. Those typical clauses, which need the implementation department to approve, include:

All the major projects
Changes of the key service levels
Changes of the major prices, contract conditions and items
Changes of the major IT directions
　　
The role of senior IT leadership must be clearly explained to avoid the conflicts between the outsourcer and the “reservations” of users. Strictly speaking, the contract should explain clearly about the expectation and the conditions for delivering and using of the senior IT leadership on IT plan, meanwhile, it also should explain the role of implementing plan approval and monitoring the outsourcing relationship. Only there have been clearly defined, it can be ensured that the senior IT leader has the right understanding of his/her role in a successful outsourcing transaction.

In an outsourcing contract, IT providing leadership is usually defined as the best, just as the contents of delivering and using have been clearly explained in the service level items of key process. However, the contract also needs to include the managing responsibility of IT providing leadership, for example, they have to take the responsibility to provide guidance for the changeable technologies in order to monitor performance and implement capacity plan.
　
Management structure

In an outsourcing contract, to define the management structure to support the implementation of role and responsibility is as important as to clearly define role and responsibility. There must be some kind of organization with forums. This kind of organization can assess and certify the demands; the implementing process can also be monitored. Ideally, this kind of institution has already existed in the organization. However, most situations are not as so. Well then, signing a contract is the best time to set up such institution.

In the contract, we can prescribe to establish the following institutions such as committees. These institutions can ensure the counterparts related to interest are able to participate and play their roles and responsibilities.
1. Users Committee
2. Operating Committee
3. Implementing Committee

The Users Committee is established by business sectors, technology organizations and business processes, it is an ideal organization with forums, in this organization, we can assess the business demands and services providing.

Operating Committee is generally composed by senior IT leadership and IT providing leadership. With gathering the outsourcers and uses’ IT leadership, Operating Committee is responsible for those suggestions approved after censoring and the provided services. In the contract, the members, agenda and timetable for meetings of this committee are the key elements, they are very important for a successful outsourcing transaction.

Implementing Committee is an institution to approve IT direction and propose, the contract should also prescribe clearly to the members, agenda and timetable for meetings of this committee.

The reporting system

The outsourcing contract requires some degree of service-level reporting system; the outsourcer is leading a kind of wider IT reporting system in, and it has advantageous position on the aspect of supporting to clearly explain the roles and responsibilities of both sides in the contract. User Committee usually will require the reports of the progress of the project, the reports of increasing procurement in order to control its position, and of course, the reports of the service level of key process. Operating Committee also requires such reports, and the reports of the additional financial information based on its responsibility of IT services implementation.

The reports of Implementation Committee need to be highly summarized and adopt the form of Balanced Scorecard Report; it involves four to five key dimensions, such as business contribution, service quality, budget, use’s (customer’s) satisfaction and strategic direction.

Conclusion

Although enterprises treat IT as the key element of businesses, they didn’t do enough on IT governance, particularly in IT outsourcing. If good IT governance can be regarded as an important point of outsourcing contract, the outsourcer and the user will have a clear understanding and expectation of the cooperation, so that the possibility of achieving a win-win situation will be greatly increased.