Structuring IT Service Agreements – it may be time to upend some sacred cows

iStock_000005585720Large-smThe Statement of Work (SOW) is at the heart of every outsourcing agreement.  A good SOW will only cover the what and not the how.  At least that has been the industry gospel until now.

A good SOW, and by inference, those other 80 or so documents that crowd together to comprise the modern outsourcing agreement, are supposed to be about the effective and efficient transfer of service delivery obligations for a reasonable price.  For that reason a SOW is there to tell the Service Provider what to do, not to tell them how to do it.  In fact, telling a Service Provider how to do their job is considered very risky, likely unintentionally buying back the service delivery risk you just paid to outsource.

Life is rarely simple and neat, and the history of the evolution of the SOW is evidence of the tussle between good intentions and unintended consequences.

SOWs have evolved from tailored to uniform and from detailed to general and sweeping – features to be deduced, not explicit – leaving interpretations of obligations and accountability to multiple other documents – key clauses of the master services agreement, pricing exhibits, service level definitions, transition plans and transformation deliverables – enough places to ensure seeds of ambiguity.

Layers of language in negotiations, unresolved and rushed questions in due diligence, competitive pressure to price the unknown and mop it up through change control; all of this and the jarring contradictions of custom and practice in operations almost guarantee a never-ending wrestling match over scope.  All of this married to a “don’t ask, don’t tell policy” about how the proposed solution will answer the mail tomorrow, for better or worse.

In Information Technology there is a procurement ritual that has evolved.  The buyer looks to sweep as much uncertainty into the price as is feasible at the time of contracting.  The seller looks to preserve margin and gain through project “leakage” loosely defined transformation plans and the change consequences of known unknowns.

It is hard to imagine that this could be an efficient outcome for either party.  Assumptions are risky and expensive, and so is pricing uncertainty.  Add to this mix, multiple iterations for multiple service providers in a shared environment, and it is time to re-think some basic assumptions about the role and structure of the humble SOW and its supporting cast of documents.

What if the how were brought in from the cold?  What if the structure of the agreement truly contemplated change and its operational consequences?  What if the SOW were considered only the outline and the description of the how were a shared document between all parties who need to collaborate and cooperate?  What if the what and the how could be kept aligned, continuously contemporary with change and evolving objectives?

To achieve these “what ifs” is simpler than the last 20 years of outsourcing might lead us to suppose.

I am not suggesting the SOW should tell the Service Providers how to do their jobs, but I am suggesting that there needs to be a re-focus on the objective – a re-look at the way the documents and operations are weaved together, an honest attention to the dynamics of custom and practice and the need to constantly balance competing interests.  In an adaptive operating model the how is a shared set of accountabilities, and for that model to work there is little room for the ambiguities of the traditional inclusive approach to the SOW.  Bright lines are needed and wanted by all participants; the means of addressing change and the methods of reconciling competing interests are understood by all and well-tested.

How much value can be unlocked by this simple shift in the paradigm for constructing outsourced relationships?  How much waste and duplication could be removed?  How much more accountable might each of the parties be?

Our experience in rewiring the operational documents in an outsourcing agreement and our repurposing of the role of cross-functional services in a shared multi-party environment to facilitate a continuously lean focus on process and process alignment – reveal how much value is trapped by the traditional approach to the SOW.  There is significant value to be gained for both buyers and sellers of outsourced IT services in repositioning the SOW and revisiting the how as a shared question and a shared accountability.

I am not suggesting we throw the baby out with the bath water, but it is time to re-look at how IT deals are structured, priced and delivered: time for IT deals to be as reliable as the rest of the supply chain – and the key to unlocking that value is in the interplay between the what and the how.

– Les Druitt, 10-Dec-2013 – [bio]
Les Druitt