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Table of Contents

The Art of Governance

When Outsourcing CRM, Total Business Value Eclipses Labor Arbitrage

Going for the Gold: What it Takes to Really Win in Outsourcing

Governments Join Private Sector in HRO Adoption

Harnessing the Full Power of Offshore Outsourcing: What Range of Cost Savings Should a Company Expect?

The Trouble with Equity-Stake and Shared-Services-Spinout Models in Outsourcing

How Does the Use of a Third-Party Advisor REALLY Impact Outsourcing Arrangements?

Studies Reveal Eight Buyer-Provider Disconnect Areas Likely to Cause Outsourcing Failures

Missing Link--Study Confirms Failed Outsourcing Arrangements Lack One Crucial Component

What's Wrong with This Picture?-Is Your Outsourcing Logic Flawed?

Experiences in Multi-Bank Collaboration: The Lessons from Payments

Driving High-Performance Outsourcing: Best Practices from the Masters

Outsourcing to India: Key Legal and Tax Considerations for U.S. Financial Institutions

When Agility Outweighs Efficiency: BPO Viewpoint

Everest Voice

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Companies face a business challenge. They struggle to solve it. Should they outsource? Who should they outsource to? Management makes these decisions carefully, thoughtfully, cautiously. They decide to outsource and let someone else take on the headache.

But all too often they assume they don't have to devote any more time or energy to the problem because now it's the outsourcer's challenge. In my opinion, this is a major mistake. That's because the majority of value capture in an outsourcing relationship comes from the execution, not the contract design, pricing, or upstream activities. An outsourcing relationship is like a marriage -- the romance of the courtship or the airtight codicils of the prenuptial agreement do not contribute to the on-going strength of the relationship.

Unfortunately, governance is a term that everyone thinks they understand but most can't define. Attorneys insist governance is nothing more than the legal contract which defines the responsibilities of both parties. If only governance were that simple!

The Definition of Governance

Here's my definition of governance: it is the art of getting an outsourcing provider to always provide what you need and hopefully want.

There are 3 major functions that a governance function must accomplish.

1. Make sure the outsourced function supports the mission of the enterprise as that mission evolves.
2. Look for new technologies, processes, and ideas that will provide a radical change to the process that has been outsourced and insure the outsourcer fairly and completely evaluates how to take advantage of those.
3. Operate the contract taking care of the following:
   • In-Scope changes
   • Out-of-Scope Changes
   • Incidents
   • Escalated Issues

Buyers have to learn how to nicely nudge, cajole, and insist. Then they have to learn how to listen to the advice and insights their suppliers provide to accomplish their corporate goals.

And that's just the beginning. Governance is a way of getting the most out of the supplier. Good governance leverages every part of the supplier's organization. If you are going to do this successfully, you'll need to retain an internal group that will keep current on process and technology and envision new methods to accomplish the mission and processes of your organization.

Balancing the Different Agendas

Buyers have to pay attention to governance issues because each player has a different agenda yet everyone has to work together. The supplier has to satisfy the buyer, avoid as much risk as possible, and make a profit at the same time. (Sometimes a supplier will confuse delivering on the contract with satisfying the customer.) Buyers have changing business objectives and conditions, which can lead to different expectations. The end-users, who are not concerned with an enterprise view, typically want additional services or more responsiveness. Each party presses for its own interests.

The governance process has to manage these natural conflicts of interest. The governance team must become the center point of this community of interest. It also serves as ombudsman between the end-users, who demand new and better ways to accomplish their tasks, and the supplier. It becomes the pragmatic focal point between the buying organization and the supplier.

Buyers should start designing their governance structure months before the ink is dry on the outsourcing contract. Ask to see the supplier's governance structure so yours will mesh with theirs. This is more than a "2 in the box" concept. You must recognize what motivates and what terrifies the supplier and always insure you motivate and terrify only when absolutely necessary.

Note that successful governance requires different skills to deal with the new and different demands. In addition to having process knowledge, the governance team needs to be able to make business judgments since now they will have to make sure they align the technology to solve their business's changing needs. Since they have to be arbiters, they must have exceptional communication skills.

Buyers who do a good job of governance certainly monitor the service level agreements (SLAs) written in the contract. But the job just starts there. Buyers must also stay aware of technological and process advances so they know to ask their suppliers to provide these services before they develop a standard service offering that's not exactly what they need. Suppliers should appreciate this information because the input helps define its offering.

Focusing on Value Creation

Over time, the relationship should place more focus on value beyond the cost savings. These include higher level corporate goals like process improvements or strategic initiatives. Changing the focus of outsourcing's role is crucial to prevent management from asking the supplier, "What have you done for me lately?"

These larger goals will stop them from discounting the initial cost savings, which are big news only at the outset. Everyone gets into an outsourcing relationship expecting some identifiable cost savings. However, deep into the relationship, most buyers think they did bank the expected savings; however, most of the relationship's value came from other, sometimes unexpected, sources. Buyers who have done a credible job of vetting their suppliers select experienced suppliers who have deep insight into their particular problem and a tested, proven world-class solution. The suppliers, since they do this for a living, have tested the various alternatives, selected the most efficient one, and implemented best practice processes.

An outsourcing supplier is expected to be a world-class expert at the process you are outsourcing. You need to use this knowledge and carefully understand the advice. Ask them to explain, give examples, whatever you need to make yourself comfortable. It is a professional service and you need to use it as such.

Buyers then benefit from these improvements. For example, buyers who outsource benefits administration may discover the supplier's self-serve system is simpler and far easier to use than their antiquated "call the HR department" system. Employee satisfaction rises since they are less frustrated with the system. Productivity also improves because employees spend less time getting their HR problems handled.

Or, buyers outsource HR to bring their general administration expenses in line with a downturn in revenue. When the market returns, the supplier has the capacity to ramp up smoothly. The buyer would have felt a bigger impact if it had to hire the additional staff on short notice.

A successful governance organization is not "business as usual." It requires new skills, behaviors, processes, and measurements to support complex sourcing strategies that map the new business requirements. Figure out how to do this and your outsourcing will succeed beautifully. Just like your marriage.

Publish Date: November 2004

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Copyright © 2004 - Everest Partners, L.P.

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