Outsourcing Management Trend – Focus on Governance

About a year ago, we at TBI began to hear potential clients express concerns about the effectiveness of their outsourcing program management (i.e., the care and feeding of the “deal” after it’s done) in a new manner. “Governance” was the term they began using to describe the area in which they wanted TBI’s assistance.

Examples of specific outsourcing “governance” concerns include:

• Gaining agreement on priorities for expenditure and appropriate allocation of resources across enterprise.
• On-going program evaluation (i.e., effectiveness and cost efficiency).
• Managing customer relationships to assure business needs are understood.
• Managing vendor relationships to assure coordinated activity and compliance with policy and contracts.
• On-going service delivery process review, maintenance and continuous improvement.
• Establishing clear roles and responsibilities for decision-making and service delivery.
• Communication and coordination across enterprise and service delivery partners.

While organizations typically have most of the underlying capabilities needed to establish effective outsourcing governance mechanisms, they do not always understand the importance of doing so. Additionally, we find that they often underestimate the resource requirements needed in order to manage the outsourcing relationship on an on-going basis, or fail to consider the full range of resources needed. The misconception is that, once services are outsourced, management requirements will be minimal. The truth is that to fully leverage the organizational investment, management structures and processes must be carefully designed to supplement day-to-day service management provided by the vendor, and to assure close linkage to enterprise objectives as they evolve.

Estimates of resources needed to manage outsourced services effectively range from 1%-7% of contract cost. In TBI’s experience, staffing requirements for effective outsourcing program management do vary, depending upon the ease with which outsourced service agreement support functions can be integrated into existing positions and the specific organizational structure that is chosen for program management.

In some cases, organizations’ current job and organizational structure for financial analysis, contract negotiation and management, service delivery management, performance analysis, and/or customer relationship management need only minor restructuring in order to support outsourced services. In other cases, more radical job and organizational structure change is needed. In some cases, a completely centralized outsourcing program management office, structured to manage a variety of outsourced services for a variety of customers is very feasible, offering optimal economies of scales. In other cases, “customer intimacy” goals or highly diverse service offerings or geography justify a more decentralized program management structure. Here, local resources should focus on operational activities and immediate business needs, while centralized resources drive strategic planning and tactics for global standards and enterprise-wide improvement initiatives.

Outsourcing governance has both strategic and tactical dimensions. Its objectives are to leverage the outsourcing investment and align service delivery processes with business need. This requires attention to both how the outsourced services are positioned for use in the organization and how they are managed to optimize the return to the organization. As in “corporate governance”, the more classic use of the term, outsourcing governance involves the following components:

• The systems by which activity is directed and controlled
• The distribution of rights and responsibilities among different participants in the organization (and their internal and external service providers)
• The rules and procedures for making corporate decisions
• A structure through which objectives are set
• The means of attaining objectives and monitoring performance
• The thought process for managing decision making on priorities for corporate investment

More tactically, there are a number of tools that can be identified that facilitate outsourcing governance. TBI’s approach to assisting organizations in implementing effective outsourcing governance varies, depending upon their starting position. Ideally, governance is a consideration at every step of the outsourcing life cycle and there are specific aspects of governance that should begin to be addressed as soon as outsourcing begins to come under consideration. Others are a natural part of the competitive bidding process or need to be addressed during contract negotiation. Finally, some are critical components of the implementation phase of the outsourcing life cycle and should include:

• Outsourcing Assessment
• Business Requirement
• Vendor Evaluation & Selection
• Contract Preparation & Negotiation
• Transition & Governance

When we work with clients who are conducting initial outsourcing investigations, TBI consulting support methodology addresses the governance issues at each stage of the outsourcing project. Where, however, the outsourcing deal has already been implemented, TBI can perform an assessment of the effectiveness of existing outsourcing governance, and then make and help implement recommendations for improvement. The value add proposition available from improved governance includes:

• Management actions aligned with common goals.
• Feedback to facilitate improvement of service value to the business.
• Improved business & vendor communications and relationship management.

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