The role of governance in outsourcing contracts
Mike Friend, Managing Director, M3C Consulting
Mike Friend’s Biography
Mike Friend,
Managing Director, M3C Consulting
Mike is the Managing Director of M3C Consulting, an advisory and research firm providing independent analysis and commentary on the Human Resource (HR) services market for both service providers and buyers. Prior to founding M3C Consulting, Mike worked as a management consultant in Deloitte’s Human Capital practice where he helped to deliver major public and private sector HR transformation programmes. His 12 years experience in the IT services research industry includes six years as Research manager at IDC, where he established and led the European HR Management Service and Business Process Outsourcing research programmes. Mike brings with him experience spanning HR transformation, shared services, workforce and change management, learning and performance development, organisation design, HR outsourcing and sourcing advisory. He has published numerous reports and articles on the HR services industry, is widely quoted in the press and has spoken at major industry events. In both 2005 and 2006 Mike was ranked amongst the 14 advisors and opinion leaders named to HRO Europe’s Superstars. He can be contacted on: +44 (0) 779 888 4003.
The role of governance in outsourcing contracts Who or what is to blame when outsourcing contracts fail to deliver on their initial promises? Customer inexperience? Changing business strategy? Poor baselining and definition of success criteria? Vendor overambition or inexperience?
The following article looks at the role of governance in outsourcing contracts, how risk can be better managed and some key steps that customers and providers can take to better insure against failure.
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The role of governance in outsourcing contracts
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Living with a loss of control Customers entering into outsourcing agreements, knowingly choose to sacrifice direct control of their business processes in return for lower cost and/or better quality services. This is a sacrifice that is easier done where the outsourced HR processes are highly automated and transactional (eg payroll) but considerably harder to do when added layers of complexity are introduced such as the consolidation of multiple global processes and their migration to a shared service model. In order to combat this uncertainty, customers are rightly placing a greater degree of emphasis on governance. However, approaches to governance vary widely and whilst good governance structures can have a considerable bearing on contract performance and will often set the tone of the interaction between the two parties, they are no guarantor of success. So what are some of the key ingredients of successful governance?
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Whose risk is it anyway? When outsourcing contracts fail as they do from time to time, then the finger of blame is frequently pointed at the role of governance. This is perhaps understandable since governance is no more and no less than a risk management strategy. It describes a wide range of safeguards, processes and structures that the counterparties put in place to maximise the chance of contract success.
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Good governance requires the establishment of a joint contract management committee that meets regularly to monitor contract performance against defined SLA’s and address key issues from a strategic to an operational level. The role of the customers committee representatives is not to micro-manage the supplier or to dictate how the supplier should execute the contract. Such an approach would immediately endanger the relationship as well as limit the outsourcers ability to leverage its expertise in the market.
When contracts are said to have failed, then by definition it is the risk management and therefore governance processes and structures that have failed. For that very reason customers should spend a considerable amount of time identifying which risks will pass to the service provider, which risks the customer will own and which risks will be jointly owned.
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Start early with governance planning It is an old clichĂŠ, but it is not contracts that manage risk, it is people. Whilst a contract is the product of two organisations seeking a mutually beneficial arrangement, the success of that contract comes down to the dedication of a comparatively small number of people, how they interpret that contract and how they engage with one another. For that reason alone, customers should use the sometimes arduous request for information (RFI) and request for proposal (RFP) vendor selection process to identify the key vendor personnel who will participate in governance processes,
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and commit these people to the governance team. Customers who fail to dig deep in order to understand the providers approach to governance, will significantly limit their understanding of how both parties will engage with each other, measure success, approve and cost change requests or escalate issues. Customers and vendors alike should use the RFI and RFP process to challenge how the programme management office will be staffed, what the reporting lines will be and what the individual roles and responsibilities of staff within that structure will be.
Do not underestimate the impact of senior executive sponsorship Inevitably, the complexity of any contract will determine its risk profile, governance requirements and to a large degree its success. Where repeatable solutions are used, customers will likely benefit from the experience gained by the outsourcer and can operate a lighter touch governance model. That is not to say that customers should entrust everything to the outsourcer and stand back from their day to day contract management duties. All outsourcing relationships go through dips and troughs and strong leadership and hands
on management of the relationship from both sides is required to make a five year outsourcing contract successful for both parties. One of the greatest potential dangers to successful governance is the loss of senior executive sponsorship. As the key sponsors become diverted by other programmes and initiatives, so the drive and energy that comes from their close scrutiny and oversight can dissipate and timelines slip.
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How much does good governance cost? One of the hottest debating points concerning outsourcing contract management is the percentage of the overall contract value that should be set aside for governance. Once again, the scope and complexity of the outsourcing deal will influence the size of the governance team. The rule of thumb is however between 4-12% of total contract value, though upwards of 15% has been known. Given that this latter figure is approximately half of the cost savings that an organisation would hope to achieve over the lifetime of the contract, then the conclusion to be drawn from such
a disproportionately large investment is that valuable resources are being diverted from contract execution and service delivery. Rather than being overly fixated by such a headline number, customers should work with a bottom-up approach, firstly clarifying and agreeing on the strategy and goals of the outsourcing contract before clearly articulating how success will be measured and the relevant measures captured. Only then will a better idea be gained with regard to the number of customer representatives required to sit on the governance committee.
Wrap-up Whilst good governance structures and processes cannot ultimately eliminate failure from the equation, investment in good governance can significantly improve the chances of success. Key recommendations for customers include; • • • • • •
Be explicit about the purpose of the contract and how success will be measured. Agree on the SLA’s and determine how and when that data will be captured Take time to document which risks will pass to the service provider, which risks the customer will own and which risks will be jointly owned. Challenge suppliers about their governance models and approach during the RFP stage, identifying the key vendor personnel who might sit on the governance team. Gain senior executive sponsorship for the duration of the contract Take a bottom up approach to building governance teams, agreeing on the strategy and goals of the outsourcing contract before identifying and staffing the team.
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