Project Management

Decision Support: Outsourcing relationships don't stop at negotiations, part 2

Successful outsourcing relationships don't stop once the negotiations are over. Here's how to implement a governance process.


After entering into the blissful state of an outsourcing relationship, most buyers think their work is done. Actually this is where the partners begin the work needed to reap the benefits of the strong foundation they’ve established through alignment and the development of effective contracts and SLAs.

Experts agree that once negotiations are over and the agreements have been signed, the strength of the governance process put in place will determine the actual benefits derived from all the previous hard work. “Without effective governance, the focus of the supplier will in time diverge from the needs of the client’s business, ultimately resulting in failure,” states Jon Piot, COO of Impact Innovations, a Dallas-based IT consulting company. To this, Jim Leto, a 30-year industry veteran and president and CEO of Robbins-Gioia, LLC, a leading program management consulting firm, adds, “Just because you outsource something, it doesn’t mean you can abdicate responsibility for it. The quality of management provided by the client is one of the most important factors in whether the relationship succeeds or not.” Leto warns outsourcers that if they lack the ability to work with the supplier, then they need to find a way to acquire that capacity quickly, or as he puts it, “You’ll never see the benefits of outsourcing.”

First in this series
To learn what to include in an SLA, refer to the first part of this series, "Decision Support: Design outsourcing relationships that yield long-term ROI, part 1."

So what exactly is this governance process and how much will it cost you?

What does good governance look like and what does it cost?
When we talk about governance, we are referring to a set of processes run by a joint-committee, which includes members of the client and supplier’s team who are vertically aligned from the strategic level through to the tactical level. By governance, we are not referring to a team of micromanaging client representatives that become involved in “how” the supplier does its job. This is the quickest way to turn a potentially high-value outsourcing relationship into an overmanaged and costly staff augmentation deal. Good governance from the strategic top to the tactical bottom focuses on things that include:
  • Senior managers from the client and supplier teams reviewing the direction of the company’s strategy and how to best leverage the outsourcing relationship to support the company.
  • Middle-level managers from the client and supplier teams reviewing and discussing the metrics that demonstrate whether or not the agreed upon results are being produced and what interventions are needed to steer toward the targeted results.
  • At the lower levels,
    ——The collection of SLA performance data and preparation of reports for managers to review.
    ——The administrative process of matching supplier invoices to SLA performance and the stipulations in the contract.

Leto points out the importance of having the CIO directly involved at the upper levels of the governance committee. “The fact that she or he does not have to worry about the nuts and bolts of getting the work done does not mean that the CIO is no longer involved. It means that the CIO can and should be more results- and performance-focused,” according to Leto. To keep the finger on the pulse of performance that CIO, according to Leto, needs to be an active member of the governance committee.

One company in the financial services industry with whom I had the pleasure of working a few years ago provides an excellent picture of a well-designed, “vertically-aligned” governance partnership with its supplier. From the CIO who partnered with a Vice President of Services from the supplier company, down to the Accounts Payable Analyst who worked closely with the supplier's Accounts Receivable Representative, members from the two companies operated as a single team. Every month the CIO would host a meeting of the governance board, where they would review operational and financial performance as well as changes in the environment that required adjustments to the services. The result?—A supplier that remained totally in sync with the needs of the client and who continued to drive value that supported the business operationally and financially.

So how much does this vertically aligned governance cost you, the client? The rule of thumb is between 3-11% of the total program value. So using these figures, if you sign a $30 million dollar outsourcing contract, you should expect to spend between $900,000 and $3.3 million in governance across the life of the contract. Naturally, the higher your maturity level in managing outsourcing relationships, the more you will be able to contain these costs. If you are planning on having offshore components in your outsourcing strategy, note that the governance cost generally increases by 20-30 percent for offshore programs, according to Piot, due to geographical, communication, and language challenges.

The bottom line here is that, while outsourcing does cut down on the number of managers and the amount of manager bandwidth you will require to provide the outsourced services, you must still commit some time and money to ensure the right results.

The three things you must do to secure outsourcing success
So based on the advice of the experts in part one and two of this series, let’s sum up the things we can do to increase our chances for successful ROI-driving, outsourcing relationships. Here are the three things it boils down to:

Be clear on goals, metrics, and the future possibilities for your organization
Focus on clarifying, communicating, and securing agreement on the intent of the contract and what you will measure. Concentrate on building an open, honest relationship with your partner/supplier from the beginning as a foundation for the future relationship. Determine how your company might evolve for the foreseeable future and how this potential evolution can be “baked” into your agreement.

Develop appropriate SLAs and contracts
In your contracts be absolutely explicit on the roles and responsibilities of both parties and how success will be measured. Be equally explicit in terms of rewards, punishments, and the termination process. Make sure your SLA metrics are measuring things that indicate success in the areas most important to you. Build scalability and flexibility into your contract, and keep the term within a reasonable range of your ability to forecast the future. Also make sure that your agreements contain a clearly-defined change process that you can use, when necessary, to meet new business needs.

Invest in good governance
Maintain a governance system that vertically parallels the outsourcing team management. This keeps you engaged as a partner as well as in oversight from the strategic through the tactical levels of the relationship. Put a rigorous management infrastructure in place and work with it.

Summary
Outsourcing can be an incredible tool that enables you to do more with less and to more fully leverage your IT investments for optimal competitive advantage when done correctly. On the other hand, lack of expectation and measurement alignment and/or a weak governance process can dilute or eliminate these benefits. By following the advice above, you can forge outsourcing marriages that will stand the test of time and result in the delivery of the high expectations of both parties entering the relationship.

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