By John Pirtle, Partner, TPI
Outsourcing governance is the business of ensuring that all of the potential value of an outsourcing contract is actually achieved. During our 20 years of helping companies maximize the value of their outsourcing contracts, we have identified these Top 5 observations related to the mission-critical governance function:
- Outsourcing governance is still maturing, and companies continue to have significant difficulty harvesting the value from their contracts. Outsourcing as an industry is mature, yet clients worldwide are still struggling to effectively manage their outsourcing agreements. In a study of companies that had recently outsourced to multiple service providers, 84 percent of respondents stated that they did not have what they regard as a mature governance model (Financial Times, July 2009). Additional research by the International Association of Outsourcing Professionals (IAOP) cites that, “. . . 63 percent of companies surveyed believe they lose an average of 25 percent of contract value due to poor governance.” And TPI’s own research indicates that between 5 and 30 percent of the expected value of outsourcing transactions is lost through ineffective governance. In a typical outsourcing agreement this equates to roughly US$600,000 per year of lost value for every US$10 million in annual contract value under management.
- Early, comprehensive governance planning and design is critical to long-term success. Implementing an outsourcing governance organization takes time, and the first 18 months of any outsourcing agreement is critical. Without an effective outsourcing governance group in place early to guide the relationship, value leakage is inevitable. Most companies begin this process too late, thus their ability to manage the contract in those critical first few months is compromised.
- Outsourcing takes more than evaluating service provider performance to be successful. In the early days of outsourcing governance, clients limited their activities to reviewing service level data generated by the service provider and checking their invoices for accuracy. Today’s best run outsourcing governance groups understand the interdependencies between all of the governance processes across four key disciplines – performance, financial, contract and relationship management. They constantly measure the effectiveness of the key governance processes and identify opportunities for continuous improvement.
- Separating decision making and relationship activities from supporting governance tasks unlocks new levels of efficiency. As is the case with most back-office functions, there are aspects of outsourcing governance that can be performed by a third party more effectively and efficiently than can be accomplished in-house. TPI advocates that clients never abdicate responsibility for decision making and that they should maintain the relationship with their service providers. However, there are many support functions that can be considered for outsourcing (i.e., performance analysis, invoice verification, and contract administration [including management of the governance library]). TPI is delivering these services to clients today through a combination of onsite and offshore support models.
- Technology enablement is becoming a necessity for efficient outsourcing governance. What started out as a set of executive dashboards summarizing performance and financial data has evolved into the need for higher-order management tools. Today’s outsourcing governance organizations require integrated tools that go beyond dashboards to detailed reporting capabilities; automated workflows for key governance processes; automated data feeds from service providers and a comprehensive governance library.
While many aspects of the outsourcing industry are quite mature, for many reasons clients’ abilities to effectively manage their service provider relationships remains an area where significant opportunity exists to reduce value leakage and maximize beneficial results.