Trends in Outsourcing Governance and Relationship Management
This article originally appeared in Outsource Magazine Issue #25 Autumn 2011
Organisations around the globe have increasingly realised the importance of a robust governance model as a critical component deciding the success or failure of outsourcing engagements. Despite the great promises, governance issues such as lack of clear alignment of personnel, lack of structure and discipline in processes, lack of common and clear definition of services, insufficient metrics to evaluate service provider performance and the health of a relationship occur frequently and have strained relationships. There is also a lack of conventional wisdom when it comes to managing procurement, defining the scope of services, relationship and expectations in a multivendor outsourcing arrangement.
Good governance and relationship management, widely adopted by buyers, are making way into the formal contract during negotiations of outsourcing arrangements. According to the Centre for Outsourcing Research & Education (CORE), there is a noticeable maturity amongst buyers of outsourcing services who increased focus on the health of the outsourcing relationships. Organisations are investing more time, resources and capital towards developing efficient sourcing strategies and governance models in order to realise maximum business value from an outsourcing engagement.
Evolution of a Robust Governance Model
In recent years, a three-tiered governance model consisting of Operational, Management and Executive committees has gained prominence and is a feature of most outsourcing arrangements. These levels are not distinct, but share both resources and data to be effective. For example, the Executive level will likely have the Management level lead attend in a support role. The Operational level, as the name implies, manages the day-to-day outsourcing activity. The Management level implies more of a management of the deal or contract in the context of the broader business terms and high level performance measurement.
An increasingly successful performance management technique which has been adopted as best practice has been the development of a Vendor Management Governance manual that encompasses key operational processes, providing a common framework by including key personnel at the three levels.
The interactions are based on a well-defined governance model that helps establish points of contacts between the key personnel on both the parties by engaging resources in an accountable manner. There is a central operational governance team that is not only responsible for formal and consistent management of service providers, but also reports the health of the relationship to higher management levels.
A documented and published governance manual enables effective communication and integration across the organisation. Each operational process serves a particular purpose and is developed with carefully constructed guiding principles engaging key personnel in clearly defined activities for each process.
The framework institutes reporting mechanisms to not only acquire and assess all stakeholders’ requirements but also constructs a set of activities and metrics for assessing customer satisfaction with the service quality and capabilities provided by the service providers. Emphasis is given towards:
- identification of roles that own the data collection process and act as a single point of contact for the coordination and maintenance of service provider performance;
- ensuring up-front that the expectations are within the scope of the service provider’s service portfolio.
The governance manual also establishes a standard approach to address, resolve or escalate service provider issues and ensure minimal service delivery impact. Unresolved issues are handled within a dispute-management framework, typically laid out in the contract to make sure both parties agree to it, in order to resolve issues fairly within an agreed time frame.
The key is to engage service providers and impacted stakeholders in a meaningful manner. Service provider-related issues that need the attention of higher levels in management must be escalated through a defined and structured manner. It is important to ensure that persons responsible for resolving disputes have the authority to make decisions and fairly represent interests of their respective sides.
Apart from these, the governance manual also handles the following critical facets of an outsourcing arrangement:
- coordination and fulfilment of ongoing business requests including IT service requests;
- maintenance of the library of knowledge and associated documents;
- monitoring/reporting compliance and resolving deviations from the agreed “commitments” in the contract and related documents;
- managing the financial aspects of the outsourcing arrangement including financial estimates, reporting variances and monitoring performances against contracted milestones;
- annually aligning the agreement with the business strategy, improving service delivery performance over the course of the agreement including quality, timeliness, service as well as cost. Any changes to services due to changed business or technical requirements are rolled out into production in an efficient manner.
Together, the processes in the governance manual constitute a robust governance mechanism that covers all the aspects of an outsourcing arrangement. Merit has already helped clients across different industries to implement this governance model tailored to their needs and derive maximum reward from an outsourcing relationship.
While the industry is maturing in its approach to outsourcing governance, with its adaption of a consistent three-tier process model, the mere adoption of the model by itself does not ensure outsourcing success. It is imperative that people with excellent collaboration skills, listening skills, presentation skills, negotiation skills and conflict resolution skills lead outsourcing initiatives (CORE in partnership with IDC, 2010).
As outsourcing has matured, buyers are looking to gain more value from their suppliers. The CORE IDC research highlights an increased focus on innovation, beyond the traditional cost and process effectiveness. Collaboration, trust and a solid understanding of each other are important prerequisites to innovation.