It’s Not The Contract…
This article originally appeared in Outsource Magazine Issue #25 Autumn 2011
It’s not the contract: it’s the governance that will drive success, in that a well-defined, intelligent governance plan can prove to be a sturdy foundation for even the most complex outsourcing agreement – and can save those that appear to be heading for disaster…
The idea of “governance” goes way back. It is derived from a Greek verb [kubernáo] meaning “to steer”, and was first used as a figure of speech by Plato. And yet, the word “governance” did not start appearing in textbooks or business settings until the 21st century. What baffles me is that we were using terms like “performance metrics,” “key performance indicators” and “terms and conditions” long before “governance” even made an appearance. We had “scope documents,” “proof of concepts,” “statements of work” and many other contractual measures to ensure that we received the value we expected from our deals. Yet, a contract is, and has always been, simply a document. By its very nature, a contract is passive: oft-written, seldom read, and even more seldom reported on.
Although it is a noun by definition, the very idea of “governance” denotes action. When applied to outsourcing, governance is the insurance policy by which the actions of all parties involved are steered to achieve the intent of the contract. Hundreds of billions of dollars are at stake every day in outsourcing initiatives, yet lack of governance is given as the reason for failure in most instances. Too often, governance plans aren’t even considered until after the outsourcing initiative has already been launched with a service provider. And yet with so much on the line, companies would be wise to incorporate the creation of a governance plan into the early stages of an outsourcing relationship.
Ultimately, governance is about the management of an initiative – and more specifically, the management of the risks associated with it. But frequently the governance plan focuses on only a few aspects of a contract, such as the terms and conditions, and ends up missing the bigger picture, which is to make sure the intent – or in other words, the overall business goal – of the outsourcing initiative is achieved.
To develop a strong governance plan, the intent of the outsourcing initiative must be clear to all parties involved. The buyer needs to ask: Why are we outsourcing? Is it to reduce costs, increase efficiency, transform our delivery system or all the above? Starting at this fundamental level allows the buyer to better understand what the governance plan needs to contain. Once the vision is clear, an adequate strategy needs to be developed to deploy it. That requires collaboration between the buyer and service provider, as well as ensuring that it has the right stakeholders included, executive sponsorship, proper funding, and operations people involved. To take it even further, the buyer needs to consider the answers to some key questions:
- Have we ensured that the roles, responsibilities and management of risks for both the buyer and service provider are known?
- Have the performance measures been identified and the work products defined?
- Has a quality assurance process been established?
- Do we have an implementable communication plan in place?
- Have we created a clear plan of execution that identifies all the dependencies in the project plan?
If not, the buyer needs to start again. In my early days of executing large outsourcing initiatives (circa 1994), there was a general reluctance to utilise even basic tools like Microsoft Project to manage the rollout. Yet it is that level of detail which is required to align buy and sell side objectives, deliverables and expectations. The project plan alone can help identify failures in communication, and spending time developing it on the front end guarantees less potential heartache and frustration on the back end.
One of the key ingredients in a strong governance plan, yet one that makes many people uncomfortable, is the concept of transparency. In the early 1990s the phrase “open the kimono” was oft-used to encourage transparency and total sharing of data. In the sourcing and outsourcing space, it specifically applied to understanding all components of total cost. In the next cross-organisational/cross-functional meeting you attend, listen to the conversations around you. You are likely to hear people shade the truth, cast the conversation in the best light, and leave out details that may make them uncomfortable explaining. When it comes to outsourcing governance, none of us win by not speaking the truth in a precise manner. We need transparency of performance measures, goals, action plans and accountability. Keeping knowledge close to the vest in this type of initiative serves no one well. It is much more powerful for the masses to share the knowledge.
Needless to say, that means that communication is another important ingredient in a well-established governance plan. If a governance plan is, in essence, established to minimise risk, it must be well-communicated and understood by all parties. If there is no clear communication between the buyer and the service provider on who is accountable for which risk, then they are doomed to fail from the start. A contract simply can’t manage itself, nor be successful merely through its existence. It must be actively managed by people through a governance plan to have even a chance at succeeding. In a 2009 Outsourcing Center study, the primary reasons given for failed outsourcing agreements included misaligned interests, poor communication, unclear expectations, and poor performance. A well-communicated, well-defined and well-understood governance plan could have overcome each of these challenges.
The benefits of developing a governance plan at the onset of an outsourcing relationship should be clear. Not only does it provide a tool for ensuring that the intent of the outsourcing initiative is met, but it also offers an agreed-upon way to track the service provider’s success in meeting deadlines, and deal with issues as they arise.
A governance plan should never be an afterthought: it should be created in the earliest of the planning stages and revisited and revised throughout the lifecycle of the relationship. Success depends on dedicated committed resources from each side following a disciplined methodology. Even in cases where a governance plan wasn’t created at the onset of the relationship, deploying it later – but at least deploying it – can be the difference between success and failure. I have seen many deals go from bad to good without changing the contract, but simply by creating and implementing a well-thought-out governance plan with transparency and proper communication. Remember, it isn’t the contract, but rather the governance that will drive success.
About the Author
Dawn Evans is the CEO and President of the Sourcing Interests Group, a global membership organisation for sourcing and outsourcing professionals.