Governance & Management Of

Complex Multi-Supplier Value Streams

Executive Summary

Managing the 21st Century IT organization is a highly complex task. Information

Technology has become deeply entrenched as a critical dependency for many, if not

most business processes across a broad span of industries.

Additionally technology, whether managed directly by the formal IT group or by

technical staff within specialized business units, underpins the critical revenue

streams for an enterprise.

Finally, as we have seen in the last decade or so, managing IT is not limited to

managing only the internal people, process and technologies under the direct control

of the firm. It also includes governance and management of integrated technology

suppliers, which has expanded externally through outsourcing arrangements

including, the extended XaaS (all sorts of things-as-a-service) technology base.

Right now, the IT sector is struggling with complex multi-supplier value streams. This

paper is one of the series that came out of the Pink Think Tank at the 18th Annual

International IT Service Management Conference & Exhibition in February 2014

(“Pink14”).

In support of Pink Elephant’s mission to research, document and promote IT best

practices, Pink14 hosted and sponsored the assembly of a group of thought leaders

to discuss a growing trend and challenge in the IT industry: the Pink Think Tank

(www.linkedin.com/groups?home=&gid=7473572).

The specific challenge that was addressed at Pink14 was the fact that there is an

observable increase in the use of third-party suppliers in the IT value system. The

assembled Think Tank addressed the problem statement: “How do you manage the

current and growing challenge of multi supplier integration?”

There will be discussion of the governance implications of these findings at the 3rd

Annual IT Service Management Leadership Forum, “PinkFORUM14”, in

August 2014 (www.pinkelephant.com/PinkFORUM14) and will feed into another Pink

Think Tank that will convene in 2015 at the 19th Annual International IT Service

Management Conference & Exhibition, “Pink15”, in February 2015

(www.pinkelephant.com/Pink15).

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Executive Summary

Refer to the original white paper, “Managing Complex IT Value Streams” summarizing

the outcomes of the Pink Think Tank, and the second paper, “Integrating Suppliers:

Current State Assessment” which discusses our current challenges.

The purpose of this paper is to look at how we address these challenges: through the

definition of an end-to-end operating model which enables a value stream approach

to IT governance. One critical benefit of this operating model is that it enables the

goals of supplier management and integration.

Jack Probst – Principal Consultant, Pink Elephant

Troy DuMoulin – VP, Research, Innovation & Product

Development, Pink Elephant

Rob England – ITSM Consultant & Commentator

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Table Of Contents

1 Operating Model…………………………..……………................…. 5

2 Value Stream…………………………..……………………….......….. 7

3 Governance………………...……….……………….....................….. 8

4 Suppliers……………………………………..……………….......……. 9

4.1 Strategic Partner…….………………….......……….…………... 9

4.2 Standard……………………...…………………………………….. 9

4.3 Commodity…………..…………………………………………….. 10

5 Supplier Management….…………………………………………….. 11

6 Sourcing.………………….…………………………………………….. 13

7 Operations………………………………………………………..…….. 14

8 Conclusion…...…………………………………………………..…….. 17

9 About Pink Elephant...….…………………………………………….. 18

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1. Operating Model

Effective governance and orchestration of the broader (plan, build, run) IT context

has become increasingly critical to strategic business success. As an organization

considers how to direct and govern this new complex reality, two leadership

challenges come to mind. The first is how will we operate effectively in this new world

and the second is how will we govern those arenas that aren’t directly under direct

control of a firm’s IT management.

Let’s address the first question – how does (or should) IT operate?

Today many IT shops still organize and work based on the hierarchical tradition of

technology specialization within two key domains – applications and infrastructure.

That vertically orientated organizational construct has worked well in the past,

especially in the days of “data processing”. But considering that in today’s business

climate there is a need for an agile and flexible approach to IT, a different construct is

in order, which focuses on the flow of work between practice areas and suppliers.

We are finding that more and more IT organizations are beginning to organize based

on a defined IT Operating Model. And it is the Operating Model that defines not only

internal organizational structures but also how external parties such as suppliers are

engaged and integrated into the overall value stream.

An Operating Model is a logical representation or blueprint of the IT value chain

process architecture, agnostic to existing organizational structure and sourcing

strategies. And the Operating Model provides a strategic process architecture to

support the goals of the IT Governance activities of evaluate, direct and monitor.

An IT Operating Model enables governance objectives through the definition of a

reference model that identifies and defines the major activities, capabilities, process

dependencies and critical success factors required to directly or indirectly convert

customer requirements or requests, into the expected service outcomes and

deliverables.

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An example of a generic IT Operating Model is shown in Figure 1:

Figure 1

This IT Operating Model consists of five integrated domains that address two

concepts that are critical to managing and leading an ITSM organization.

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Customer Engagement

Design/Build/

Test/Deploy

Operations Excellence

Governance

Continual Improvement

Monitoring Reporting

Service/Process Improvement – Efficiency/Effectiveness

Common Process Ownership Priorities/Scheduling

Strategy/Planning Process Governance

Architecture Compliance

Financial

Business Relationship Management Portfolio/Demand Management

Service Definition & Performance “Common Front Door”

Operational Goal: Manage service

operations to maximize customer

outcomes and minimize cost

Operational Goal: Manage the risk and

resources to deliver quality, cost

effective services and service

enhancements

Operational Goal: Understanding

and managing customer needs,

requirements and expectations to

solve business problems and

deliver value

Operational Goal: Provide the Direction

and Oversight for the Operating Model

exercised through plans, standards and

financial management

Manage Operations Eliminate Or Mitigate

Technical Debt “Keep the Lights On”

Operational Goal: Design, Build, Test and

Deploy services or service changes that

meet defined requirements

Service Design Package Release & Deploy

Testing

2. Value Stream

The first concept is the value stream. Value is created for the customer through a

logical sequence of activities that translate customer need into operational reality.

These activities are called value domains and they are:

• Customer Engagement (The Funnel) – Establishes a strong relationship with

the business and understanding the current and future business needs,

captures requirements that serve as an intake for IT “work” (business projects,

IT foundational projects, and changes or requests). This domain also sets

portfolio priorities for that work, and releases work into in the development or

project management capabilities of the value stream production capability or the

“Factory”

• Design/Build/Test/Deploy (Factory) – Funded and/or approved work is

transferred into the “Factory” where customer requirements are translated into

designs that are then built, tested and deployed into production in an efficient

manner. The key here is that deployed services meet customer expectations

and the deployed service does not add to the “technical debt” of the operating

environment

• Operations Excellence – It is only after services are deployed into the

operational environment that customer value is truly achieved. And considering

that more than 90% of a service’s life is spent in Operations, management of

Operations must be resource-efficient and requirements-effective

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3. Governance

The second Operating Model concept is the governance of the value stream.

Governance engages a number of critical decision-making practices all targeted at

directing, monitoring, and evaluating the capability of the current value stream, the

service portfolio and the dynamics of ongoing customer

demand to assure that corporate goals are met. Included

in governance are two domains:

• IT Governance – Provides a home for critical IT

management functions and processes such as

Strategy, Architecture, Security, PMO, Finance and

the like. These processes underpin the basic

governance tenets of direct, monitor, and evaluate.

• Continual Improvement – The efficacy of the value

stream is under continual stress due to changes in

customer service demand, changes in personnel,

technologies, development or operational

methodologies and so forth. Continual Improvement

provides the other domains with critical capabilities

focused on the Monitor and Evaluate governance

elements. Continual Improvement provides what

might be called the “disinterested” third-party reality

check of how well the rest of the organization is

working and delivering customer value.

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Governance engages a number of

critical decision-making practices

all targeted at directing,

monitoring, and evaluating the

capability of the current value

stream, the service portfolio and

the dynamics of ongoing customer

demand to assure that corporate

goals are met.

”

“

4. Suppliers

Managing the value stream can be a challenge if the IT shop is only engaging

internal or company resources. However given the realities of today’s business

climate, one must also consider how external parties such as suppliers or technology

service providers would be integrated into the overall Operating Model.

In order to address how they will be engaged, one first must understand that the level

and formality of supplier integration will be dictated based on a supplier classification

schema that is based on the nature of their relationship within the IT value stream.

There are three classes of suppliers defined by their status of their engagement to or

relationship with IT and IT leadership:

4.1 Strategic Partner

This is a unique class of supplier that is considered critical to the long-term success

of IT and participates in a quasi-leadership role. This category of supplier has an in-

depth understanding of the intricacies of their customer’s service portfolio and how

the portfolio is consumed by the business as well as the details of the IT Operating

Model. Strategic partners typically will provide advice and counsel across the value

stream, especially for customer engagement; but they also provide significant (or all

of the) resources for the Factory and/or Operations. Strategic partners play a

substantial role in governance, adding knowledge for strategy development, guidance

on architecture and security, and knowledge or resources to support continual

improvement. Although there is a contract in place that governs the terms and

conditions of the relationship, the deep and dynamic working relationship between

the supplier and IT leadership does more to define the engagement than the

contract. Terminating this level of relationship is not without considerable effort

especially as losing the supplier means losing a significant mindshare within the

organization.

4.2 Standard

This class of supplier is engaged to provide targeted resources or capabilities at

unique points throughout the Operating Model. The “rules of engagement” are

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defined exclusively by the contract. Standard suppliers will typically be associated

with work in the value stream specifically in the “Factory” and Operations. It is not

uncommon that entire elements or technologies of these domains may be contracted

to the standard supplier. This supplier class is judged on the basis of the contract and

defined performance levels. Contracts can typically be competitive in nature but it is

not uncommon that the lowest bid does not “win” a standard contract. Instead IT

leadership may take into consideration supplier experience and expertise when

assessing a supplier’s bid. The term of the supplier relationship is typically dictated

by the contract. The value of the supplier is judged on the

basis of contract performance. Terminating this

relationship is not without some challenges depending on

how deeply entrenched the supplier processes and

practices are within the value stream and whether the

client will face difficulty in transferring that skill set

internally or to another supplier.

4.3 Commodity

As is the case with standard suppliers, this class of

supplier is engaged for point solutions. However the basis

for this relationship is almost exclusively the price – the

skill, capabilities or talents provided by this class is ubiquitous

across the supplier “universe”. Typically these commodity

suppliers are engaged to provide unique capabilities that

may be of a short duration and can be focused on almost

any Operating Model domain. The relationship of the

supplier to the client is governed by the terms of the

contract, and commodity suppliers can be engaged and

terminated relatively easily and without significant hardship to IT.

Establishing a supplier classification schema and subsequent supplier integration

requirements is a key deliverable of the Supplier Management practice in support of

the overall IT governance policies and strategic objectives.

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Establishing a supplier

classification schema and

subsequent supplier integration

requirements is a key deliverable

of the Supplier Management

practice in support of the overall

IT governance policies and

strategic objectives.

”

“

5 Supplier Management

Supplier Management is a specific practice and function within the operating model

that deals with the sourcing, and management of relationships with external

suppliers: product vendors, service providers, outsourcers, contractors, and so on. It

should be understood that Supplier Management is both a planning and ongoing

management practice, which is separate and distinct from the financial procurement

and tender support processes.

It is not unusual for Supplier Management to be treated as a secondary process

within IT, an administrative activity of lesser importance than some of the other

processes.

However, as we have discussed the importance of

Supplier Management is increasing as we move to more

complex externally-sourced value-streams. It is essential

that this commonly undervalued practice area be treated

as a core competency of the service aggregator.

Whilst it is highly likely that the wider business

organization has a Supplier Management function

responsible for overseeing business process and service

outsourcing, the outsourced IT elements often fall outside

of the governance of the parent function. As is the case

of Business Continuity Planning (BCP) and its IT

counterpart of IT Service Continuity Management

(ITSCM) the practices and function of IT Supplier

Management should operate as a specialist subset of the

overall business function, dealing only with the

peculiarities of IT suppliers and leaving as much as

possible to be performed by the organizational function.

In this paper, we only address some of the core points of Supplier Management as

they relate to the topic of governance of value streams. Supplier Management is

described in the ITIL® 2011 Service Design book, and described in more detail in the

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Supplier Management is a specific

practice and function within the

operating model that deals with

the sourcing, and management of

relationships with external

suppliers.

”

“

COBIT® book Vendor Management Using COBIT 5. There is also a significant

amount of information in ITIL Service Strategy which is often overlooked, under “3.3

Service providers”, “3.6 Service economics”, and “3.7 Sourcing strategy”.

Enthusiastic readers may like to also seek out the original ITIL book Managing

Supplier Relationships: you will be amazed at how little has changed since 1993.

There is even a body of knowledge intended specifically to describe the practices of

service providers and their customers, called e-SCM. There are two works: e-SCM-

SP for the suppliers and e-SCM-CL for their “clients” www.itsqc.org/models/escm-sp.

e-SCM is a product of Carnegie Mellon University (as is the Capability Maturity

Model, CMMI).

As a planning practice area Supplier Management should take a strategic approach

to supporting the full lifecycle of identifying, assessing, procuring and managing

suppliers according to an organizational policy in alignment with the organizational

strategy and plans. Suppliers should be profiled and prioritized so that effort is

focused on those suppliers where:

• Supplier’s role is important

• Supplier is embedded, difficult to shift to another

• Impact is high (positive and negative)

• Data is important

• Cost is high

• Interaction is frequent or complex

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6. Sourcing

The decision to source a capability externally is a complex one, with a number of

non-obvious considerations. For example, immediate costs savings may not yield

any benefit to the sourcing organization if competitive pressures force all the savings

to be passed on to the customer, i.e. if there is no “value capture” from the

outsourcing. A great deal of consideration, research, governance, due diligence, and

expertise should go into sourcing decisions.

Successful external sourcing depends on clear definition of requirements, and that is

only possible with a clear understanding of how the service currently works. In

addition, many believe that you should not outsource anything to a supplier which

doesn’t already work properly ‒ that outsourcing a mess won’t fix it. For others, this is

precisely the intent of outsourcing; to get it fixed by a supplier expert in that area.

Service Level Agreements (SLAs) with suppliers are called Underpinning Contracts

(UCs) by ITIL, when seen from the aggregator’s point of

view. From the supplier’s point of view they are simply an

SLA. One of the fundamental principles of SLAs is that

your SLAs to your customers should align with your UCs

with your suppliers: don’t commit to a service to your

customers that your suppliers aren’t committed to deliver.

There is an anti-SLA school of thought, but it is generally

advisable that SLAs be formalized and that they form part

of the legal contract to make them enforceable.

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Successful external sourcing

depends on clear definition of

requirements, and that is only

possible with a clear

understanding of how the service

currently works.

”

“

7. Operations

Operationally there are several main activities of Supplier Management once a

relationship is in place:

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Governance • Accepting direction from governance

functions; providing monitoring information to

governors; and offering decisions and

proposals for evaluation

• Classification of suppliers is based on value

and risk to determine integration requirements

with enterprise management practices and

other service providers

Relationship Management Guide the outcomes towards the planned goals

Service Level Management Reporting service performance against agreed

SLAs, and taking action to deal with deviations

Contract Management • Working with internal Service Owners to

establish requirements and supplier

measurement

• Ongoing tracking, negotiation and

modification of the contract to meet the needs

of the relationship

Financial Management Dealing with payments, penalties/credits, and

cost tracking/control

Risk Management Compliance and audit; problem management;

continuity planning; and other risk monitoring

and mitigation

An effective relationship interface (engagement model) is essential to successful

Supplier Management. The service aggregator organization must interface ‒

“interlock” processes ‒ with a supplier on the following levels:

Supplier Management interfaces with a number of other stakeholders within the

organization as well:

• Executive management and governors

• Business service owners

• IT leadership

• IT service owners

• Risk, compliance and audit

• Legal

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Executive Agreeing the formation of the relationship;

strategy, policy and governance

Account Financial, contractual, and performance

management of the relationship, with a

supplier’s Account Manager

Operational Day-to-day management of activities and

processes by the Service Owner and

process owners, with the supplier’s

Service Manager

Support Interfacing with the supplier’s Service

Desk, usually on a desk-to-desk model;

as well as incident, request, access, and

problem process interlocks

Change Change process interlocks for supplier

changes, service customer changes, and

changes requested by the service

aggregator. This includes establishment

transition of the supplier; operational

changes; and project change

• Security

• Personnel/HR

• Procurement

The interaction between Supplier Management and procurement is sometimes

problematic. Many organizations with a lower maturity of understanding of this

practice confuse Supplier Management with IT Procurement which is a financial

practice focused primarily on the acquisition and contracting element of the supplier

relationship lifecycle. This lack of understanding frequently fails to address many of

the critical success factors listed in the above table causing issues related to

requirements definition, communication, operating model integration and failed

delivery of the proposed value proposition.

A confusion of Supplier Management with Financial Procurement and contracting

processes has frequently been seen in IT organizations which have a high degree of

focus on project and development practices, but struggle with effective IT Service

Management process execution. This is often due to the fact that external

tenders/requests for proposal processes resulting in the selection of a supplier are

handled as transactional projects. Little thought is given to integrating the supplier

into the existing management practices and how the suppliers will be measured for

success beyond basic SLAs.

As we have identified in our findings from the Pink Think Tank on the complexities of

multi-supplier value streams, Supplier Management is becoming an ever-more

important practice within IT management. Not only does its priority rise, but it must

play a more integral part in the overall operating model. It must be better linked in

with the other “moving parts” of IT management.

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8. Conclusion

When we gain an understanding of the organizational Operating Model ‒ how we

govern it, how it manages the value stream, and specifically how we manage

suppliers through the Supplier Management practice ‒ we gain control over the

complexity of the multi-supplier value stream. We are then able to continually

improve it to protect the organization’s services and optimize the value returned from

our Information Technology.

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Pink Elephant – World Leaders In Transforming IT Services www.pinkelephant.com © Pink Elephant Inc., 2014. The contents of this case study are licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License. Content must be attributed to "© Copyright Pink Elephant Inc.". Pink Elephant and its logo, PinkVERIFY, PinkSCAN, PinkATLAS, and PinkREADY are either trade marks or registered trademarks of Pink Elephant Inc.. ITIL® is a registered trade mark of AXELOS Limited. COBIT® 5 is a registered trademark of ISACA®.

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9. ABOUT PINK ELEPHANT Pink Elephant is proud to be celebrating 20 years of ITIL experience – more than any other

supplier. Operating through many offices across the globe, the company is the world’s #1

supplier of ITIL and ITSM conferences, education and consulting services. To date, more than

350,000 IT professionals have benefited from Pink Elephant’s expertise. Pink Elephant has

been championing the growth of ITIL worldwide since its inception in 1989, and was selected

as an international expert to contribute to the ITIL V3 project as authors of V3’s Continual

Service Improvement book and through representation on the International Exam Panel. For

more information, please visit www.pinkelephant.com.

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Pink Elephant’s service lines each provide different, but complementary business solutions:

PinkCONSULTING: Using the ITIL best practices approach as a springboard, Pink Elephant

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training, and leads the way with education based ITIL V3’s service lifecycle approach. Pink is

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