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Governance is critical to avoiding the common root causes of strained customer-and-service provider relationships. Years of research and experience have shown that poor governance leads to a lack of trust between the two parties, a laissez-faire satisfaction with the status quo, and ineffective problem resolution which leads to meetings that always feel like negotiations.
And yet governance remains one of the weakest elements in outsourcing. Buyers of outsourced services continue to view the signing of the contract as the finish line, without appreciating that they are barely out the gate in of their relationship with the chosen provider.
To use some analogies: it is easy to get married but takes constant effort by both parties to make a marriage work; and the person you wed will not be the same person you’re married to several years down the road....
Top 5 Worst Practices in Outsourcing Governance
© 2010 StratForm
Allowing Governance to Become Management
The most common worst practice we’ve seen is allowing (or even expecting) governance of a service provider’s outputs to become management of how they’re running their operations.
This should be an unexpected occurrence, since many individuals assigned to become relationship managers or governance participants grew up in operational roles. Therefore, when problems occur, they want to investigate the root causes and get detailed progress reports, and pretty soon they’re building a shadow organization to monitor each step of their service provider’s activities. This is not just inefficient but harmful: when a company places itself in the position of making operational decisions on behalf of its service provider, it is removing accountability from the service provider from delivering their contracted outputs. The results are poor service levels and contentious governance meetings.
Management and Governance are different disciplines. Management deals with making decisions and executing processes. Governance only deals with sound decisions. It is the framework of decision rights that encourage desired behaviours in the sourcing and the sourced organization. When buyers confuse the two, they are focusing on execution at the expense of strategic decision-making.
When governance organizations are established, especially for the first time, they need training and hand-holding to prevent “old habits” from creeping into the process. They also need metrics and tools designed for governance, not operations tracking. Remember: by outsourcing you are transferring accountability for how the process will be managed and your focus is on what the outcomes are. Governance requires a new set of tools and behaviours to make this “mental shift” stick and work.
And of course, Governance is only possible if the outsourcing agreement actually transferred control of the process to the service provider, but that is a topic for a whole other article....
Lack of Single-Point Accountability
In most governance structures, there are multiple roles and committee levels defined. This often leads to an impression that groups are accountable for governance. Just because a process has been outsourced doesn’t mean that the basic principles of management accountability can be discarded; somebody must still ensure that the process outcomes are still being delivered and that both the service provider and the retained organization members are doing their jobs.
As an example of how far wrong some organizations can let this go, we recently advised a North American retailer who had over 15 outsourcing contracts with for hardware maintenance services. There was no “relationship manager” for hardware maintenance services or any of the providers; instead, management “responsibility” was spread throughout the IT service operations structure. The results? Change and problem management were handled reactively, and service levels and contract structures had evolved in completely different directions with each provider. Pricing was inconsistent. Document-keeping and performance tracking was scattered. And the situation had gotten so bad that one of the providers was even performing quality-control activities on itself and some of the others!
When a process is outsourced, leadership needs to assign someone (typically the manager of the retained portion of the service), as the service provider relationship manager as well. They don’t unilaterally make all decisions related to the outsourced service by themselves, but they are accountable for making sure that governance processes occur properly, controls are in place and standards are being adhered to by their service provider. If they aren’t getting the necessary support, then they can escalate issues back to the leadership that assigned them accountability.
Not Establishing Relationships at Multiple Levels
In cases where a single point of accountability has been assigned, the next most common mistake is assuming that all decisions and management of processes with the service provider are going to occur through a single person or committee. After the contract is signed, leaders abruptly say “Call me if there’s a problem” and staff don’t understand how to (or may not want to) interact with the service provider so all communications, no matter how trivial, are routed through the relationship manager.
An example of how ridiculous this can become, at a large consumer packaged goods company: reports from their IT services provider were routed through the buyer’s “governance” team, who distributed them to the end users. Not just service level reports, but all reports. The “governance” team was spending so much time on transactional communication activities that service level analysis and problem communications were being put aside, and the team gradually doubled in size from its initial setup. Why had this occurred? Because they were concerned that people would not know how to interact with the service provider properly or wouldn’t want to, and so they handled it centrally.
When a process is outsourced, imaginary but formidable “walls” need to be proactively torn down or stopped from being erected. Just because a third party is performing the process is not an excuse to interact with them any differently than another internal function or business unit. Leaders need to talk to leaders. Staff need to pick up the phone and get to know which staff to talk to for questions and day-to-day issues. And the governance team needs to remind everyone that day-to-day business still needs to occur at the operational level, just with different people working in person or remotely.
It takes time to re-build relationships with a third party, and that effort needs to occur at all levels of the organization, not just the formal relationship management one.
Underestimating the Level of Resources/Effort Required
A StratForm consultant recently had a conversation with a CIO about governance staff requirements for outsourcing about $10M in annual services to an IT provider. The CIO was adamant that the governance structure only needed to be one person since the processes being outsourced were relatively transactional and “he did not expect many issues”. At the heart of the matter was a concern that the business case would be impaired if too many governance costs were added in, but also a belief that the new outsourcing contract would be significantly better than the previous ones and therefore less management would be required even though other outsourcing relationships were strained at best.
Assuming that your governance organization is properly designed (i.e., it focuses on governing, not managing), it is important to remember that there are multiple processes and activities required to keep a relationship healthy from the buyer’s side. It isn’t all up to the provider to just “deliver, and everything will be fine”. Problem resolution, change management, metrics reporting, monitoring, controls review, communications and contract administration activities take time and effort to set up and run properly. And many issues are caused by the buyer as well as the service provider, so someone needs to handle those problems on their behalf or their ability to deliver will be impaired.
So how much effort is reasonable? One rule-of-thumb used by many advisors is that governance costs are about 3 - 5% of the annual contract value. This is a good starting point estimate, but determining true resource requirements requires a structural design effort as is the case for any new function. Processes need to be defined along with supporting tools and technology requirements, volumes of activities need to be estimated, and then a requisite structure and role responsibilities defined.
One other method worth exploring: ask the leaders of the current (to be outsourced) function what percentage of their and their staff members’ time is spent resolving issues actually caused by their internal customers (i.e., future clients of the outsourced service provider), and total up the full-time equivalent resources required. The results may be enlightening...
Letting a Service Provider Define Your Governance Process
As advisors to many first-time buyers, we often get an incredulous reaction when we counsel them against using a service provider’s proposed governance model. “Of course not!”, they say, “Why would we let a provider define how we should govern our services?” And yet many of those same people defer spending any time understanding what governance is all about until the contract is almost signed, and then panic when they start internalizing what their future role will be. And then they show up at the first governance meeting with their chosen provider who is, after all, an expert in outsourcing processes, and defer to them to provide them with “best practice” processes to use.
This scenario occurs more often than not, especially for organizations implementing their first true outsourcing (not out-tasking) deal. Governance appears deceptively simple and not tremendously exciting, models proposed by service providers tend to look and feel the same, and therefore it is very tempting to just adopt their proposed structures, terminologies, tools, templates, etc.
Just like negotiating a contract, buyers need to define to become educated on governance, decide what they need and how it should fit into their own constructs and norms. This is important for two reasons: one, a buyer may have multiple providers and does not want to end up with different governance process for each relationship; two, every service provider’s view on governance is naturally skewed towards reducing their own risk, not yours.
It is difficult to understand the subtle factors in a balanced governance model if you don’t have an objective understanding of what governance is all about, and what your organization truly needs, before aligning and integrating it with your service provider’s model and terminologies.