Sourcing Governance Seeds Success

December 12th, 2007 at 06:41am David Bush - Iasta

A recent white paper by Morgan Chambers, Sourcing Governance: The Difference Between Success and Failure, notes that despite the relative maturity of the Outsourcing marketplace, there still seems to be a gap between the Sourcing activity and creation of the in-house capability necessary to manage these Sourcing relationships. The reality is that you cannot just negotiate an outsource agreement and then sit back and relax. The real key to success is in the way the relationship is managed and the governance that surrounds the relationship.

According to the white paper, the governance organization must ensure that there is strategic alignment between the business and its service providers. It must possess the skills and experience to leverage service capability and take advantage of economies of scale. It should do this using a “best practice” approach that recognizes the following four key areas of the governance model:

• Strategy Management that ensures that the services remain aligned to corporate and business strategies, goals, and plans
• Demand Management that ensures that change is delivered into the organization in time to meet business requirements and that planned benefits are realized
• Cost and Contract Management that enables the organization to take advantage of economies of scale while leveraging the capabilities of the suppliers to support business plans and priorities
• Service Management that ensures that service providers comply with their obligations and deliver the value proposition

This was a decent paper, but it needed to spend more time emphasizing the need to manage an outsourcing relationship effectively and what could happen if you don’t. The governance model suggested is good, but if you want a model to be adopted, you need to emphasize why the model is needed, what it addresses, and more importantly, what you stand to lose by failing to adopt a model.

Specifically, when it comes to outsourcing, if you think you can just outsource service a category and save money, and you haven’t taken any time to understand what the category is about or how it needs to be managed, you’ll not only lose the investment you made in selecting the firm and paying them to to manage the category, but you’ll also lose efficiency, customers, and ultimately profit. For example, if you think it’s their job to do dispute resolution and they think it’s yours and your customers’ and suppliers’ concerns don’t get addressed in a timely manner, and both your customers and suppliers have other companies they can buy from and other buyers they can sell to, guess what’s going to happen? That’s right, they’re going to leave. And instead of saving the 10% you hoped to save by outsourcing, your costs go up 30% and you start losing sales and profits.

If you need help with a category, the best place to start is often with your e-Sourcing software and services provider. If they’ve sourced the category before, they can help you understand the ins and outs and help you figure out whether it’s something you should be managing or outsourcing to a third party.

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Entry Filed under: Analysts/Research, General