Governance is an essential part of outsourcing. It enables your management to make decisions that increase the business value derived from the outsourcing relationships, while reducing the risk. Governance is the practice of monitoring and managing aspects of the outsourcing relationship so that you know how effective the outsourcing efforts are. Yet the idea of applying tools to the area of governance isn’t well understood. This article explores what tools you can use in different aspects of outsourcing, and how they can improve your decision making and support your operations.
Not all outsourcing relationships are strategic or will ever be so. But my focus here is on tools I consider applicable to strategic outsourcing relationships. These fall into four broad areas: relationship tools, operations tools, financial tools and compliance tools.
The over-arching tool — encompassing each of those areas — is the outsourcing plan. This is a dynamic document you initially create at the onset of the relationship to capture key business objectives, scope, growth assumptions, current and projected financials, operational details, roles and responsibilities, change management and other details that would typically be found in a business plan.
Strategy drives the outsourcing management or governance effort. Each category of tool feeds strategic initiatives and decision-making.
The outsourcing plan is an adjunct document to the outsourcing contract. While not a legal document, it’s important for answering several questions: Do we know what the business objectives of this relationship are? Are we realizing them? What needs to change to improve the business value and reduce the risk?
You would typically revise it quarterly, with a summary of the current reporting period for each major area: strategy, relationship, operations, finance and compliance. It would also provide objectives for the next period and vital changes going forward.
–> Tip #1: If the relationship is in steady state and not quite strategic, a review every six months would suffice.
While service level agreements (SLAs) and key performance indicators (KPIs) are concrete and important to measure and report, it’s often the “soft” parts of the relationship — such as communication, trust, honesty, openness and cultural awareness — that make a big impact “on the ground.” Also, the relationship involves more than how senior management in the provider and client organization interact; it’s also about how the other members of both organizations interact when delivering or consuming services.
Relationship Health Index
This is a questionnaire that should be filled out quarterly or twice a year by the business unit managers, relationship managers and key provider engagement/delivery managers. It covers areas such as communication effectiveness, missed expectations, trust, perception and other factors that can impact the health of the relationship. These weighted factors are used to compute an overall relationship health index (RHI). The stronger the RHI, the more likely problems will be resolved quickly and the goals of both parties realized.
–> Tip #2: Web-based tools, such as SurveyMonkey or Advanced Survey (produced by the company that publishes Sourcingmag.com), can be used to pull off this type of questionnaire and collect and report results.
Sourcing Communication Portal
Often, engagements use email as the primary mechanism of collaboration among the provider teams and stakeholders and employees in the client organization.
Having a Web-based engagement portal that is the single source of truth is important.
–> Tip #3: As important as it is to establish an engagement portal that tracks key documents, milestones and contacts for the relationship, it’s just as important to communicate internally within the client organization. Employees need to understand the services provided by vendors, the constraints on service demand, current and past performance, and how to request services or log issues.
Often enterprises have investments in point solutions for some of these areas. The value for effective governance is enhanced when these tools are integrated to provide a holistic view of the outsourcing operations.
This is a key tool that is required for any outsourced service. Managers in charge of operations must be able to monitor KPIs and correlate them to each other for root-cause analysis. For example, the response-time for requests may be trending higher due to increased volume or due to a lower number of FTEs assigned to the contract.
Performance dashboards should be real-time (with respect to the frequency of changes to service levels) and should support drill-down along multiple axes.
–> Tip #4: Static performance reports from providers are no substitute for real-time performance reporting; effective governance involves taking proactive steps to improve service levels and resolve problems. Biweekly or monthly reports can’t be easily analyzed for trends or root-cause analysis and may only report service level breaches that have already occurred vs. allowing for corrective action midstream.
User Satisfaction Index
While service levels may comply with your agreed-upon SLAs, that doesn’t mean the actual consumers of the service will be happy. This may be due to poorly crafted SLAs, changes in demand, visible impact of poor service, lack of communication or other factors.
Tools that enable users to be surveyed online for user satisfaction make it easier to compute the user satisfaction index periodically. Such tools collect user responses, apply weights based on defined categories, aggregate data and present summary reports.
–> Tip #5: It’s useful to have users take these surveys as close as possible to the time of actual delivery of service to avoid responses based on fuzzy recollections of service levels.
Demand Management Portal
There are three key reasons why capturing demand online is important. First, it enables you to prioritize and allocate work more effectively to providers. Second, it empowers managers to get visibility into and plan for future capacity. Third, it enables the streamlining and automation of processes such as work authorization, acceptance and rating of performance.
–> Tip #6: Most organizations use a combination of email, spreadsheets, requests for proposals and online applications to capture demand. In order to integrate with existing practices, the demand management portal should integrate with these.
The Program Management Office (PMO) is typically responsible for the management of programs and projects related to the outsourcing of services. Even before a new service is up and running under the new provider, you’ll need to make a significant effort to get through the transition, which typically involves several IT and business projects. The program management tool should provide a portfolio view of projects, support automated workflow processes for project initiation, requisition and the like.
–> Tip #7: While most organizations have invested in program management tools, it’s important for the tools you use to enable the client and provider organizations to have separate views and access-rights.
You may start your outsourcing initiative with a change-order, capturing the changes between the time the deal is initially negotiated, and the time the contract is actually signed (which could easily be a few months from the initial meetings). Change is simply an integral part of the relationship, whether it involve changes in management, business priorities, scope, financials, technology, corporate structure, demand, expectations, or marketplace. So having well-defined processes and tools that support those changes are important.
–> Tip #8: The change management process needs to be linked to contracts and should have a well-defined set of roles and responsibilities.
Issues and Exceptions Management
Outsourcing issues — problems — arise. These issues may be generated on either side of the relationship and could relate to performance, compliance, personnel, contracts, policies, scope, cultural differences or other factors. It’s essential to track issues and define and automate escalation processes. Also, if there are exceptions made to compliance breaches or breaches of policies, these too should be recorded as issues and tracked to resolution.
–> Tip #9: The integration of issues-management capabilities with other outsourcing management capabilities is important. For example, when a breach occurs, an issue “ticket” can be created automatically and linked to the breach. Furthermore, the issue management tool should support root-cause analysis.
For most financial analysts working with or in outsourcing governance teams, the spreadsheet (coupled with email) is the dominant tool. While that may suffice to compute the financials, the real challenges are to determine if the billing is correct (as per services delivered, with adjustments made based on compliance or performance) and to find areas in which further costs can be reduced (such as by renegotiating contracts, changing scope, etc.).
Vendor Invoice Portal
From an operational standpoint, a big challenge for the governance team and the financial analysts is to keep track of and verify the accuracy of vendor invoices. To complicate matters, there may be onshore/offshore rates, currency conversion rate fluctuations and performance-based incentives and earn-backs. Furthermore, the invoice periods and formats may be different for each service agreement.
Here’s where I recommend the use of a centralized tool for invoices to be entered and tracked against project deliverables, milestones and services utilization. This portal should integrate with the performance-driven billing adjustments (penalties and earnbacks) that are computed by the SLA capability.
In addition to making the invoices consistent and conforming to a standard format, the billing could then be verified real-time and online by business managers whose units are consuming the services.
–> Tip #10: While an enterprise resource planning (ERP) system may be the ultimate destination of the invoices and financials, the vendor invoice portal is an adjunct tool that understands the billing requirements for outsourced services agreements.
Spend Analysis Tool
A major factor in the decision to outsource is the “cost savings” that will result. Therefore, it’s not surprising that your executives will expect strong insight into past, current and projected spend, as well as savings.
A spend analysis tool enables expenditures to be analyzed by vendor, service category and location.
–> Tip #11: While an Excel spreadsheet may suffice for smaller outsourcing deals, for enterprise clients with multi-million-dollar contracts, having a Web-based tool that enables sophisticated drill-down across multiple dimensions is important.
The governance team is responsible to verify compliance to SLAs as well as regulatory and internal policies such as IT, human resources and privacy. For the most part, the non-compliant activities (or breaches) are determined after the fact and often missed altogether. This makes the governance team reactive.
SLA Compliance Portal
Tools can empower effective compliance monitoring by automating the work and then providing proactive alerts on potential non-compliance. For example, sustained utilization for a service that exceeds 98% or that is lower than 70% may be a warning sign of a service that has no capacity for additional demand or a service whose capacity needs to be reduced.
Policy Compliance Audit
While the impact of service level breaches is high, the impact of breaches of regulatory or privacy policies is higher. It’s important for the governance organization to track breaches against policies and have built-in notification mechanisms that alert the right stakeholders.
A policy compliance audit tool lets you maintain policies in a central repository and enable tracking of breaches against those policies. The tool should also enable scheduling and tracking of audits (external and internal) and corrective action-plans that result from non-compliance.
–> Tip #12: Classifying the different policies and assets (such as “data,” “applications,” or “intellectual-property”) and the external stakeholders who have access to these or whose work is affected by these is an important first step towards taking control of risks related to adherence to regulations and policies.
What’s It Going To Cost?
Wondering how much to allocate to the expense of tools? To a large extent, this depends on investment that has already been made, as well as the extent of outsourcing and how critical the outsourcing activities are to the business. There’s no one-size-fits-all. However, an allocation of 20%-30% of the governance budget is typical.
It’s also possible that your providers will bring tools to the relationship. That means the cost of the tools is often implicitly (or explicitly) buried in the price of the services provided.
However, there is one concern to keep in mind when tapping the service provider’s tools. Where you’re doing limited scope outsourcing to a single provider, using the reporting tools provided by the provider is fine. When you’re working with multiple providers or using a combination of internal teams and outsourced teams to deliver services, you’re better off with a dedicated tool owned by your organization.
–> Tip #13: Even when using a tool from the provider, add a provision in the contract that allows you to audit the correct functioning of the tool and the validity of the data fed as input to the tool. Likewise, once your contract with the provider is terminated, you’ll want access to the tool independent of the services themselves. Make sure that’s covered in the contract as well.
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Effective outsourcing governance can have a significant impact on the success of the organization to realize business value. (Some surveys have estimated a 10%-30% contract value impact.)
For every key management responsibility of the governance organization, tools can put stakeholders on the same page, automate routine tasks and provide a system of truth that transcends individual memories and perceptions.
While these might simply be smart spreadsheets, for enterprise-grade outsourcing, consider using emerging tools that support multiple services, multiple vendors and multiple facets of outsourcing management.