If you receive errors when attempting to view this white paper, please install the latest version of
Adobe Reader.
" EquaTerra advisors have been involved in hundreds of human resources (HR) transformation and
outsourcing initiatives, delivering sustainable value for organizations of all sizes."
Source : EquaTerra
Why and How Outsourcing Management and Governance is Critical to Outsourcing Success
Outsourcing is also known as :
Outsourcing,
Outsourcing Management,
Outsourcing Governance,
Outsourcing Agreement,
Outsourcing Management Governance,
Business Process Outsourcing,
Outsourcing Service,
Outsourcing Toolkit,
Management Outsourcing,
Outsourcing Deal,
Outsourcing Contracts,
Recruitment Process Outsourcing,
Outsourcing Offshoring,
Outsourcing Vendor Management,
Business Transformation Outsourcing,
Outsourcing Cost Savings,
Consulting Outsourcing Management,
Outsourcing Success,
Project Portfolio Management,
Technology Outsourcing,
Information Outsourcing,
Outsourcing Relationship Management,
Outsourcing Engagement,
Outsourcing Governance Software,
Outsourcing Management Practice,
Outsourcing Consulting,
Outsourcing Lifecycle,
Outsourcing Advice,
Performance Indicator Outsourcing,
Alternatives Outsourcing,
Enabling Outsourcing,
Intelligence Outsourcing,
Critical Outsourcing,
Foundation Outsourcing,
Ongoing Outsourcing,
Comprehensive Outsourcing,
Organizations undertaking information technology
and business process outsourcing (ITO/BPO)
typically are very focused on ...doing the deal." This
involves finding and assessing service providers,
determining geographies from which to source
services, developing contracts, defining service
levels, and a myriad of other tasks. Yet, arguably the
hardest part of outsourcing occurs after the deal is
done: undertaking the transition and performing
ongoing outsourcing management and governance
(OM/G). OM/G is a critical and fundamental - but
often misunderstood and sometimes neglected -
component of any ITO or BPO effort. Outsourcing
management and governance is a key element
through which organizations that have undertaken
outsourcing efforts can strive to maintain the
...intent" of the deal. But what exactly is OM/G, what
does it do, and what does a good OM/G operating
model look like?
The Details
Why Outsourcing Mamagement and Governance?
Outsourcing management and governance (OM/G) is all
about preserving and enabling the ...intent" of an outsourcing
effort, the reason an organization chooses to outsource
selected processes. The overarching objective of the
outsourcing effort often is to reduce costs while also enabling
process improvement and transformation. The intent of the
deal impacts everything from the structure of the contract,
to the type of client-service provider relationship, to the
design of the governance operating model.
OM/G is manifested in the people, processes, supporting
tools, and third-party support services that collectively
enable an organization to achieve the intent of the
outsourcing deal. Through years of experience, EquaTerra
has identified six key capabilities that enable outsourcing
management and governance success. These capabilities
can be categorized further and mapped to the balance that
companies continue to manage - risk mitigation against
desires for value realization. These categories are
highlighted below:
Risk Migitation
- Finance and commercial management: The ability to
ensure contractual obligations are being met by both
parties and verifying the invoice reflects the service quality
received and provisioned
- Compliance management: Ensuring effective compliance
with regulatory, safety and privacy requirements
- Issue and problem management: Appropriate mitigation
of issues and resolution
Value Realization
- Change and program management: Manage demand for
services as well as leverage and focus service provider
capabilities
- Service quality management: Create optimization through
standardization, defined performance and satisfaction levels
- Communication management: Business requirements,
relationship alignment
Examples of activities:
- Ensure delivery of expected cost savings
- Ensure market pricing for services
- Institutionalize process improvement
Despite the importance of ongoing management and
benefits delivery to outsourcing success, many organizations
struggle to implement successful OM/G programs. There are
many reasons for this:
- Under-investing in OM/G resources. Many organizations
undertake outsourcing to reduce costs and are reticent
to adequately fund OM/G efforts.
- Not planning for OM/G early enough in the outsourcing
evaluation process.
- Underestimating the challenges, skills and resource
requirements for OM/G efforts.
- Assuming that existing staff possess the skills and
experience required to perform OM/G activities. This is
often not the case, at least initially, or without additional
training and education and possibly adding new staff
with more outsourcing experience.
- Assuming the service provider account team will provide
all the necessary governance to manage the agreement.
The impact of not implementing effective outsourcing
management and governance can become significant. As
indicated in Figure 1 below, there are many ways that the
value leaves the organization. Left unchecked, this can
approach 10-15 percent of the outsourcing contract value.
What is OM/G?
EquaTerra has developed a proven approach for ensuring
that companies achieve the intent and value of the
outsourcing transaction. EquaTerra created its OM/G
methodology based on years of managing outsourcing
relationships, understanding that the goals of the
organization and the service provider must remain aligned
for long-term success. The critical components of the
approach follow - relationship management, the operating
model and commercial management.
Relationship Management
Major ITO or BPO efforts are more akin to a joint venture (or
a marriage) than a procurement transaction or simply buying
external services. For this reason it is critical that buyers
focus on the overall relationship with the service provider
and not just the commercial (e.g., meeting service level and
contract T&Cs) aspects of deals, though the commercial
elements remain important. Buyers with weaker service
provider relationships may find, for example, that service
levels are being met but the original intent of the deal is not.
Additionally, much changes over the life of the contract,
including the buyer's needs, the outsourcing market, and
what defines best practices in terms of performance and
cost. It is critical, therefore, that both the buyer and service
provider can adapt and respond to these changes.
It is also important for organizations to understand the true
intent of the deal and the type of outsourcing relationship
they seek. The type of relationship (outlined in Figure 2) will
drive the OM/G commitment required to achieve the desired
outcome. Figure 2 below illustrates the continuum of
outsourcing relationship types between the organization and
the service provider, from transactional to partnership. As
you move right on the continuum, the complexity and OM/G
requirements increase. Therefore, the investment needed
increases. In addition, the skill set required expands from
simple commercial management to include joint planning
and more sophisticated change management.
Disappointment and dissatisfaction often occurs when a
buyer expects a more collaborative or innovative
relationship, yet does not make the investments to
support and enable that level of improvement or change.
Frustration can result when the parties are focused on a
partnership or transforming critical business processes, but
the underlying relationship is not built on trust or each
party is aligned with its own objectives. Understanding
the type of relationship sought and making sure the
requirements to achieve that type of relationship are
clearly understood by the provider and outsourcing
organization are critical to establish an operating model
that drives the value for all parties.
An outsourcing buyer often assumes the provider
relationship is working, basing that decision on interpersonal
relationships versus evaluating the six critical
elements that form the basis for developing trust and an
effective relationship model. As many outsourcing
transactions have a transformational component, we find
that most organizations often misunderstand these critical
components of an effective outsourcing relationship:
- Cultural compatibility
- Inter-dependence
- Performance
- Attitudes and assumptions
- Joint alignment
- Value
In evaluating your relationship, it is critical to measure
these components. It will test alignment between you and
your provider, create a framework for assessing your
relationship, and ultimately yield a more productive dialog
with your service provider. When evaluating an
outsourcing relationship, we often see organizations
limiting their assessment to what is in the contract. More
often, they need to perform a full relationship health
assessment to test and measure continued effectiveness of
the relationship.
Top Tip: Don't wait until the ink is dry to
evaluate the desired type of relationship with
your service provider. Use these six relationship
components as part of the evaluation process
and openly communicate your expectations.
OM/G Operating Model
Highlighting and emphasizing the importance of relationship
management in an outsourcing effort helps define and does
not diminish the importance of the operating model or
managing the commercial aspects of the transaction. In
designing its operating model, an organization needs to:
- Define the type of relationship desired (see Figure 2).
- Define the guiding principles of outsourcing management.
- Develop the processes, structure, staffing and funding
unique to its requirements to ensure sustainable value
through effective outsourcing management.
As guiding principles lay the foundation for effective OM/G,
an organization should develop these principles at the outset
of the relationship and then review them at least annually to
make sure they are relevant to current priorities and
objectives. These guiding principles, which should be shared
with the service provider, will help ensure collaboration and
alignment as circumstances change.
Common guiding principles might include:
- Foster a fair and productive relationship with your provider
- Empower the provider to provide the best service possible
- Leverage the provider's expertise wherever possible
- Oversee and manage the ...what" and not the ...how"
- Achieve cost savings first
- Don't duplicate the provider's responsibilities
It is critical that guiding principles should balance cost
savings with investments to improve efficiency, leverage the
provider's expertise, introduce innovation while maintaining
a steady-state operation, etc. And, it is never too late to
develop guiding principles. If these were not developed at
the outset of the relationship, a mid-point in the relationship
works for instituting a common framework within the
relationship.
Top Tip: Develop these guiding principles
collaboratively with the service provider team
during the negotiations process and commit to
incorporating them in the governance schedule.
As defined previously, the six key functions that serve as the
balance between risk mitigation and value realization are the
foundation for the OM/G operating model. Within each of
these functional areas is a set of related processes that
outline the day-to-day role of the OM/G team.
- Service Quality Management - Ensures all aspects of
service quality are met, problems are resolved, and
business stakeholders are satisfied with the performance
and quality of the service.
- Issue Management - Ensures issues impacting the service
(regardless of cause) or the relationship are effective and
expediently resolved.
- Change Management - Facilitates anticipated business
change with the service provider, including new services
and transformational programs.
- Commercial Management - Ensures the agreement is
managed and the financial benefits are both tracked and
realized.
- Compliance - Ensures all applicable compliance
requirements are met, internally and externally driven.
- Communication Management - Focuses on management
of key stakeholders involved or impacted by the
relationship, including the service provider and other
affected third-party providers.
The processes outlined in Figure 3 below complement the
account management processes your service provider likely
will implement. However, the focus of all these processes is
what an OM/G organization needs to do and has
accountability for.
Top Tip: Review our sample prioritization against
the needs of your organization. Discuss the
priorities, commit to a timeline for joint
development and review with your service provider.
The operating model is the enabling glue that pulls together
the people, processes and best practices of OM/G. It enables
the six elements of OM/G, and defines the following points:
- The make-up and structure of the OM/G group, their
authority and accountabilities
- The roles within the OM/G group and how they interface
with other parts of the business (retained operations and
business users)
- The roles and responsibilities of members of these groups
relative to the service provider
Service Quality
Management |
Issue
Management |
Change
Management |
Commercial
Management |
Compliance
Management |
Communication
Management |
Service Performance
Management |
Escalated Operations
Management |
Strategic Change
Management |
Contract Change
Management |
Regulatory
Compliance |
Customer Relationship
Management |
Stakeholder Satisfaction
Management |
Critical Issues
Management |
Project Approval
and Initiation |
Invoice ??erification and
Payments Management |
Internal and
External Audit |
Management
Reporting |
| Service Knowledge Sharing |
Emergency
Management |
Program Management
/Transition |
Service Cost
Allocation Management |
Safety and
Security |
Business Requirements
Identification and Liaison |
Root Cause
Analysis |
|
Demand and
Consumption
Management |
Financial Benefits
Realization Tra cking
and Lockdown |
Data Privacy |
Corporate Communications
Management |
|
|
|
Financial Performance
Reporting |
Other (Client) Policies and
Procedures |
Relationship
Alignment Review |
|
|
|
Benchmarking |
Business Continuity |
Third-party Supplier
Communications |
|
|
|
Asset Management |
|
|
Figure 4 below illustrates the model for an engagement and
the relationships between the OM/G and other parties when
outsourcing arrangement(s) are put in place. In this
instance, a large, multi-tower outsourcing arrangement was
established.
Many retained organizations often create centers of
redundancy. These can be small or large, but regardless of
size, they greatly diminish the value achieved in the
outsourcing relationship. Organizations struggle with this
issue more than any other. Pointing back to the guiding
principles, they remain focused on the ...how" element of the
work being performed and revert to how the work was done
in the past.
Figure 5 shows a hypothetical structure of an outsourcing
management team. This diagram outlines the functional
roles that make up the OM/G executive in charge of the
relationship. This person may report directly to the executive
in charge of the business process being outsourced - in IT,
for example, this person often reports to the CIO.
The governance executive mentioned above will likely be
leading a team of OM/G executives with a combination of
skills and roles including commercial managers - financial,
contract, compliance; relationship managers; service quality
managers (likely a critical liaison to the service provider); and
the program management office (potentially the PMO lead,
specialists and project coordinators).
The OM/G function works early in the relationship to align
the new roles within the organization to the service provider
and the retained organization. Critical tools include the
responsibility matrix and decision rights that clearly outline
authority and accountability. This detailed exercise may
seem simplistic but requires careful analysis and assigns
critical accountability for the OM/G and the service provider
teams. These organizational alignment tools serve each
party well during day-to-day operations, and more
importantly, when critical issues arise.
Top Tip: The skills and competencies required for
OM/G may not exist within the organization.
Companies often seek external hires to boost the
OM/G experience of the team. Alternatively,
consider team training or mentoring / coaching for
specific individuals.
Commercial Management
The areas of greatest focus and scrutiny - the commercial
elements of the transaction - are often over analyzed and
managed as a traditional procurement versus a complex
operating relationship. Commercial management is a core
function within the operating model, one of the six functions
mentioned previously. When managed effectively, it drives
quantifiable value for the relationship.
The basics of commercial management include three types
of management - contract, demand and consumption, and
financial. Contract management addresses contract-related
questions and requests, ensures obligations are met by both
parties, and manages any contractual changes. Demand and
consumption management monitors enterprise consumption
reporting and demand forecasting. The financial
management component validates accuracy of all invoices,
facilitates payment approval and control processes, determines
cost allocations, standardizes the development of the business
case and monitors and reports on financial performance.
Change management is a constant within outsourcing, yet
companies often don't ensure the proper frameworks to
manage change. Ideally, contract change management will
become a standardized process that outlines the protocols
for elements, such as who, what, where, when and how, of
potential contract changes. The OM/G organization will
establish how an amendment and/or agreement will be
incorporated into the master agreement and will ensure the
master agreement is consistent with the services being
delivered. An organization should have a clear process map
of the contract change lifecycle - with each suggested
change documented and stored for ongoing reference.
Top Tip: Contracts are often required before the
ink is dry and the agreement is put into use, points
of clarification are required for language and
service, etc. Ensuring this process is in place day
one will help provide clarity for both parties.
Another critical component of commercial management is
demand and consumption management, which is the
mechanism the outsourcing organization should utilize to
make sure consumption and pricing are aligned with the
original agreement. Clearly, the service provider is motivated
to provide additional services to meet increased demand,
thus driving up total cost. It is incumbent upon the client to
independently validate actual consumption and make
certain the invoice is correct. That review should take a dual
view - historical, making sure services have been validated by
the business units, and future, identifying trends based on
historical service consumption.
Top Tip: Establish regular meetings with
functional operations/stakeholders to review
consumption trends along with the associated
impact on cost and discuss future requirements.
The service provider invoice often contains volumes of
information requiring independent verification, which speaks
to the need for robust financial management processes.
This process enables the client to independently confirm the
invoice amounts and compare them to a variety of inputs,
such as contract volumes, actual volumes, unit rates, service
bands, pricing components, service level credits and
earnbacks, business unit charge outs, etc. It ensures the
service provider invoice is accurate and consistent with the
contracted services, facilitates the payment approval process,
and enables the client to pay the provider in a timely fashion.
Is the relationship delivering the financial benefit sought at
the outset of the transaction? Have costs gone down, were
expenditures avoided? The finance manager assigned to the
relationship often is responsible for measuring and tracking
savings from outsourcing. Contributing factors that must be
analyzed come from the controller's organization - the
budget (actual and forecast), the business units, and other
governance processes such as service cost allocation,
financial performance reporting, etc.
In order to encapsulate all these critical components
(demand and consumption management, invoice verification
and payment, service cost allocation, financial benefits
tracking and service performance management), each must
roll up for OM/G financial performance reporting and analysis,
evaluation, and communication of the financial status of the
relationship and the agreement. This reporting serves the
needs of the executives, process leaders and business unit
leads. Other fees that might be included are any severance,
transition or service taxes. These are presented so all teams
can view total service provider-related charges.
How are Outsourcing Buyers Responding?
Developing and deploying the above process and
organizational models is no trivial exercise. Outsourcing
buyers, particularly those with an eye toward maximizing
cost savings, will ask for proof that the investment is worth it
and OM/G can truly preserve the intent of the deal.
EquaTerra research, coupled with extensive hands-on buyer
experience through its outsourcing management and
governance practice, has consistently shown that OM/G
investments pay off.
An EquaTerra market research study conducted Q2, 2006
found a direct correlation - up to a point - between OM/G
investments and outsourcing satisfaction. Buyers that spent
4-7 percent of the annual contract value on OM/G efforts,
for example, were more satisfied than those that spent just
1-4 percent. Additionally, outsourcing satisfaction rose once
buyers had completed the difficult transition process and
OM/G organizations and operations were up and running
smoothly (see Figure 6). Finally, buyers that undertook
outsourcing to access external skills and resources or to
improve process performance were more satisfied than
those that were just seeking cost savings or had not clearly
defined why they were outsourcing.
How are Outsourcing Service Providers Responding?
More progressive outsourcing service providers and those
supporting larger and more complex deals are recognizing
the value of OM/G and the importance of their client's OM/G
capabilities to the success of outsourcing efforts. While
service providers themselves tend to focus, and in some
cases overly fixate, on the commercial aspects of OM/G, they
also are increasingly sensitive to the value of relationship
management. The issue for service providers relative to
relationship management is its often subjective nature and
the challenges associated with measuring and tracking
relationship management ...performance." Service providers
naturally are loath to be held accountable for something
difficult to measure.
The most recent EquaTerra quarterly service provider Pulse
survey found service providers consistently citing governance
and change management as the biggest challenge buyers
face in their outsourcing efforts. Additionally, 55 percent of
service providers polled said change management problems
- a key element of transition that OM/G should address - are
one of the biggest threats to outsourcing efforts, exceeded
only by inadequate management support (cited by 59
percent of service providers).
The Advisor Perspective - Critical Points to Consider
Organizations undertaking increasingly large, multi-process
area outsourcing efforts will often experience difficult
transition periods and face complex and, in some cases,
daunting ongoing management and governance challenges.
Migrating processes and people, ramping up new
operational models, launching governance efforts, and
learning how to work successfully with the outsourcing
service provider are challenging tasks. Driving satisfaction in an
outsourcing effort is something that takes time and effort.
Buyers entering into outsourcing efforts need to keep these
points top of mind, from the standpoint of how to best address
the challenges of transition and the early stages of an
outsourcing effort, as well as not underestimating potential
early levels of dissatisfaction.
Outsourcing Satisfaction Levels
To this end, buyers must embrace the following positions
relative to OM/G when pursuing outsourcing efforts:
- Begin OM/G efforts during the sourcing process.
- Calibrate outsourcing goals sought with the OM/G
capabilities required to meet those goals and the
organization's appetite to invest in OM/G capabilities.
- Define the roles and responsibilities of the OM/G and
retained organization groups relative to transition and
ongoing outsourcing management and governance efforts.
- Infuse the ...best and brightest" into the OM/G organization
and recognize the strategic importance of these roles to
long-term outsourcing success.
Research indicates that almost all organizations either spend
money on external tools to monitor and manage their
outsourcing relationships, or develop them internally. However,
it is also true that those organizations do not usually have a
structured make/buy process. As described in the previous
section, outsourcing relationships are very complex and contain
a tremendous amount of detail. Sooner or later, OM/G
organizations need tools to help them do their jobs. The
question is whether they will spend six to eight months
developing spreadsheets and other applications for monitoring,
management and reporting. Focusing on building and
maintaining tools minimizes the time and attention governance
resources can spend making proactive, informed business
decisions relative to the relationship(s) they manage.
Additionally, much of the work of governance is transactional
and repetitive. Activities such as consolidating and
compiling performance and financial reports take a lot of
time, but do not provide much value as a standalone.
Automating many of these routine activities creates
significant efficiencies for the OM/G organization. It also
might mean that the relationship could be managed with
fewer resources, thereby reducing the overall cost of
governance and justifying the cost of a tool(s).
There are a growing number of Outsourcing Relationship
Management (ORM) tools available on the market. With very
few exceptions, these tools focus on providing functionality
around one or two of the six areas governance must address.
For example, service performance management and issue
management are the most mature tool markets. It is
important to think through what tools your governance
organization needs to effectively and efficiently manage
your relationships.
Conclusion
OM/G is the people, processes, supporting tools, and thirdparty
support services that collectively enable an
organization to achieve the intent of the outsourcing deal.
The intent of the deal represents the ultimate goals of the
original outsourcing effort as defined by key stakeholders in
the buyer organization. Organizations must begin to
address OM/G needs and requirements far in advance of
consummating the outsourcing deal. While OM/G costs can
reduce the total theoretical cost savings achieved in
outsourcing efforts, these investments consistently have
been shown critical to achieving any level of success in
meeting outsourcing goals, either cost reduction or process
improvement related. Finally, buyers must map the OM/G
models and investment to the overall goals of the
outsourcing effort and define a relationship model that can
realistically support these goals.
About EquaTerra
EquaTerra sourcing advisors help clients achieve sustainable
value in their business processes. With an average of more
than 20 years of experience in over 600 global
transformation and outsourcing projects, our advisors offer
unmatched industry expertise. EquaTerra has in-depth
functional knowledge in Finance and Accounting, HR, IT,
Procurement and other critical business processes with
advisors throughout North America, Europe and Asia Pacific.
Our people are passionate about providing objective,
conflict-free advice to our clients, which has fueled our
exponential growth over the past three years. We help
clients achieve significant cost savings and process
improvements with outsourcing, internal transformation and
shared services solutions. It is all we do.
If you have questions about this report or would like to learn
more about how EquaTerra can help your organization
address the points and opportunities discussed, please
contact Liz Campbell, Mike Beals or Stan Lepeak.
For additional information on EquaTerra, please contact Lee
Ann Moore at leeann.moore@equaterra.com or 713 669 9292.
by Stan Lepeak, Managing Director, Research
Mike Beals, Managing Director, Outsourcing Management Technologies
Liz Campbell, Managing Director, Outsourcing Management
Lee Ann Moore, Vice President, Marketing