Governance: A Key to Outsourcing Success

April 29, 2008 on 7:45 am | In Uncategorized |

Buyers need to adopt best practices to effectively manage relationships with providers over the life of a contract

March 21, 2008
By Bob Violino

Outsourcing governance teams should include people with hands-on experience managing a service provider relationship.
Ideally, the group should also consist of people who understand the needs of the buyer organization within the context of
outsourcing. Other members of the governance team should include someone who is expert in the area being outsourced,
such as IT, and representatives from areas such as finance, legal and sourcing.

Increasingly, buyers are relying on attorneys specialized in outsourcing to be trusted and experienced advisors not only
on the legal aspects of the transaction, but on value of governance, Sak says. “Outsourcing attorneys have an active
role in the creation, change, renewal, and demise of many outsourcing relationships, and can share the lessons-learned with
clients,” he says.

Outsourcing governance teams must be able to deal with change, in terms of the organization’s needs and how its
changing needs apply to the outsourcing arrangement. Governance “is an acknowledgement that change is inevitable over a
three-, five- or seven-year contract term, and instead of a futile up-front effort to contractually prescribe the result for
unknown events and market developments, productive relationship management focuses not on outcomes, but on the process of how to deal with change,” Sak says. “That’s effective governance.”

Information technology, particularly software that helps to automate the governance processes, can help governance
teams cope with change and should be a part of any organization’s governance strategy, Lepeak says. “We see a real need
for it; at a minimum information technology can help to automate a lot of mundane administrative activities such as tracking
service levels and reporting,” he says.

Typical outsourcing deals involve a huge amount of paperwork, and software tools can help organizations make the most
efficient use of information they gather as part of the governance process. Using software tools, organizations can “capture
data, such as contract information, and efficiently pass it to the outsourcing governance group,” Lepeak says. “Today this is
often done manually or on spreadsheets, and it’s potentially very error prone and not the best way to support governance.
Automating a lot of these activities frees up time and also reduces error rates.”

Effective governance can lead to several key benefits for outsourcing buyers. One is the ability to see whether the service
provider is consistently delivering on promises over the lifetime of the agreement, and whether the buyer organization
is actually getting what it’s paying for.

Another is that governance provides a set of guidelines for the outsourcing relationship. It also offers a forum for
dealing with legal and service level issues, and creates ways for buyers to measure the success of the relationship as business
conditions change.

Governance has become such an important factor in ensuring outsourcing success that some service providers profile
prospective buyers to make sure they have governance capabilities in place before signing a contract. “They don’t want to get
into a situation where the buyer doesn’t know what it’s doing,” Lepeak says.

What are the risks of not putting in place a strong governance program? Transaction failure and lost opportunity, Sak
says. “There are plenty of examples from early [outsourcing] adopters that did not know that governance was necessary for
successful relationships,” he says. “Many early generation outsourcing relationships are marked with misaligned commercial objectives, disincentives for collaboration, over-reliance on the contract, and mutual distrust—all leading to transaction
value leakage or worse, transaction dissatisfaction.”