By Pablo Velasco, Director, CIO Services, TPI
You don’t get exactly what you pay for in outsourcing relationships (see our earlier article on value leakage), but exactly what you will get depends on how you manage the relationship. Governance is the single-most important variable to the value anoutsourcing engagement will provide, and it is also one of the most challenging variables to manage.
Weak governance is the greatest threat to outsourcing success. The early effort you put into governing your outsourcing relationships will determine the value you get out of them.
Implementing good governance practices is challenging everywhere and can be particularly so in Latin America, where companies have high service expectations, are often accustomed to having long-term relationships with their business partners, and may not have a lot of outsourcing experience. Successful outsourcing requires both specific contract terms and a new management discipline that is different to other business relationships.
Good governance, and therefore good outsourcing results, requires more than managing a contract; it is managing a new business model. We have identified 30 core outsourcing management processes that must be actively governed to promote outsourcing success. These processes relate to making sure clients and service providers each understand the scope of their responsibilities, monitoring and maintaining service levels, communication, and organizational change management.
Customers and service providers each must put controls and processes in place to manage the relationship. Service providers have an advantage, because they have much more experience managing outsourcing relationships, so the customer must be informed about both process and what to expect in the new business relationship.
You will need commitment from a senior executive and from a team that is assembled to provide ongoing management of outsourcing activity. Simply signing a contract does not provide the level of commitment required inside your organization. Unfortunately, many companies who sign outsourcing contracts undermine their effectiveness by failing to commit the management resources needed for success.
Five Most Common Governance Mistakes
We are frequently called in to work with companies who are experiencing problems with their outsourcing relationships. There are many types of problems – e.g. expected cost savings are not being realized, service levels are not being met, there is frequent confusion over service provider and client responsibilities, etc. – but the problems could almost always have been prevented by better governance. We see five common governance mistakes, which are described below.
1. Understaffed Governance Teams
Governance is too large a task for any one individual. The most common mistake we see is for a company to designate someone as responsible for managing the outsourcing contract, but providing insufficient resources for the individual to succeed. Companies who excel at governance have strong teams that include subject matter experts (e.g. IT leaders for IT outsourcing, human resources, accounting or other functional leaders for business process outsourcing), business managers, financial analysts, customer service leaders and other stakeholders in the relationship.
2. Lack of Executive Sponsorship
The governance team does not need to be made up of senior executives, but does need representation and support from senior management. Companies need to understand that outsourcing does not eliminate the need to manage the function being outsourced; it only changes how it must be managed. Executives must commit to providing the staff and other resources needed to govern the outsourcing relationship and to support the team should disputes arise with the service provider.
3. Lack of Formal Training and Processes
Commitment includes taking the time and seeking the knowledge needed to develop appropriate governance processes and training the team how to follow them. While outsourcing contracts make provisions for knowledge transfer, that is not the same as developing the knowledge needed to manage the contract.
4. Insufficient Communication Between Clients and Service Providers
Communication should be consistent and scheduled, not initiated only when there is a question or problem. Clients and service provider should frequently share information and insight about how processes are going, potential obstacles to meeting commitments, and day-to-day issues. Regular communication is very effective for preventing small issues from escalating into big problems.
5. Governance Blind Spots
Clients are often unaware of the governance problems they are experiencing. Companies tend to focus on service levels, pricing questions and day-to-day developments, but do not make the link between those issues and potential governance shortcomings that may have caused them. By focusing on governance, many of the problems that relate to it can be avoided.
Weak governance is the greatest threat to outsourcing success. The early effort you put into governing your outsourcing relationships will determine the value you get out of them. By putting strong teams in place at the beginning of the relationship, supporting them with the time, budget and executive attention needed for success, and committing to regular reviews, communication and training, you can be successful from your first outsourcing experience and with all those that follow.
Pablo Velasco, a director with TPI, has more than 35 years of experience in outsourcing and the IT services industry. He has helped numerous clients throughout Latin America to develop outsourcing strategy, assess operations, develop statements of work, create and negotiate contracts, assess performance and develop governance processes. For more information on maximizing the value of sourcing for your company, contact [email protected]. To learn more about TPI, visit www.tpi.net.