In a recent conversation over outsourcing at a conference, I was struck by the importance of governance to the ultimate success of an outsourcing. The individual I was speaking with (let’s call them the ‘customer’ for purposes of this article) described their situation as one in which their enterprise was late in the term of a BPO outsourcing involving the transfer of a certain business function to a service provider. As they drew nearer the end of the term and began to consider a renewal, this customer undertook a more detailed analysis of the health of the transaction with its service provider. And that’s when several questions arose.
Same Mess For Less, I Guess?
As the customer explains it, the original goal of the deal was to save money. To that end, the financial terms were structured such that the customer was to pay the service provider an amount less than the amount it cost itself to perform the same function for the same level of service – in other words, the “same mess for less”, in business parlance.
However, the customer’s operations were spread among divisions that operated with a certain amount of autonomy. At the same time, the customer’s stay-back team – the personnel who helped originally structure and negotiate the transaction – became dispersed to other areas within the enterprise relatively quickly after the closure of the transaction. As change orders began to be exchanged between customer and service provider, there were fewer and fewer people left to evaluate not just whether the technical change would be beneficial to the customer, but whether the cost for the technical change remained consistent with the customer’s original business goal. Inevitably, through multiple change orders, the service provider began to increase the scope of services being performed. It also steadily increased its charges to the customer over the term for those services. By the time of the customer’s reanalysis for renewal purposes, what the vendor was doing for the customer was significantly different than what it was originally retained to do, as were the fees being paid.
The business goal of “same mess for less” had effectively been subverted. The insidious element of this problem was that it arose not from a single change order, where frankly the customer’s corporate finance group might well have identified the problem arising. Instead, the business goal became unwound through the cumulative effect of multiple change orders over several years – a much more subtle process.
So how do you protect yourself against this kind of problem? I believe the answer lies in effective governance.
First, it is essential to have clearly articulated business objectives. Indeed, these objectives should first be formulated and articulated in the procurement process as part of an RFP, and then subsequently refined through the transaction negotiation process. By the time of closure of the deal’s negotiation, they should be well understood by both parties.
Best practices provide for the business objectives to be (i) communicated in writing to the vendor; (ii) measured, monitored and reported upon periodically; (iii) objective in nature (as opposed to being subjective). In the example at hand, the business objectives also need to be communicated through the customer’s own enterprise, across disparate departments and divisions. It falls to the customer though, and in particular the stay-back team (more about which, below), to be vigilant in determining whether change orders (whether proposed by the service provider or the customer itself) are consistent with the customer’s business objectives.
Stay-Back Team – the Customer’s Institutional Knowledge Base
A stay-back team is also a critical element of success. Think of this team as the customer’s institutional knowledge base for the outsourcing. The stay-back team represents a group of individuals retained by an outsourcing customer whose purpose is to take over the management of the business relationship with the new service provider. Best practices dictate that the stay-back team be comprised of individuals who were responsible for the original negotiation of the outsourcing transaction. In this way, they should be intimately familiar with the customer’s business objectives for entering into the outsourcing. At the same time, it is desirable that they represent different subject matter expertise within the customer’s enterprise (e.g. tax, corporate finance, technology, etc). This gives the team multiple perspectives from which to evaluate the success of the relationship and changes in the relationship that may arise from time to time (whether through change orders or otherwise under the contract). It goes without saying that the institutional knowledge of the stay-back team cannot be allowed to dissolve over the course of the outsourcing’s term. Certainly, individuals come and go from enterprises, and it is possible that the stay-back team members themselves may vary over the term. However, if members of the stay-back team are to be replaced, it is essential that their replacements be transitioned into their role in such a way as to preserve the institutional knowledge base pertaining to the outsourcing.
Communication, Command & Control
With the goals articulated and the stay-back team monitoring their success or failure, a final important element for success comes with communication. The service provider should be required to report on its achievement of the company’s objectives, and key objectives, in turn, should be the focus of periodic joint meetings with the service provider to assess whether the transaction is on track or not.
This is often done with specific service attributes or functions through the establishment of service level agreements, but there is no reason why the broader business level objectives of the customer cannot be measured, monitored and reported upon as well, provided they are themselves objective. Best practices in this area prescribe a monthly dashboard report from the service provider, attached to the monthly invoice, in which all key service levels and business objectives are identified, along with a description of whether or not they have been met. The assessment of this dashboard report should again fall within the purview of the stay-back team.
Assuming that key objectives are being missed, it is also important to consider a command and control element to the relationship with the vendor. Specifically, a well-structured relationship between the parties should provide for rights on the part of the customer to dictate (the command component) that the service provider initiate remedial actions (the control component). Notice that I am not saying that the customer should prescribe to the service provider how to correct the problem (although, if the answer to the customer is obvious in that respect, that information should be conveyed) but rather to communicate that the problem exists and have the service provider identify the means and timeframe to correct it. This regime should be include contract performance provisions which specify: (i) the circumstances in which the customer is entitled to seek adjustment to the service provider’s charges, and the formula for determining the extent of such adjustments; and (ii) the service levels which the service provider is responsible for meeting, and the remedies for the service provider’s failure to do so.
The combination of clearly articulated transaction goals, their ongoing assessment by a knowledgeable stay-back team, and the periodic communication of their achievement to the service provider (along with associated remedies for failure to meet those goals) are all key attributes to the more general concept of effective governance. In the end, a governance model that remains focused on outcomes strategically important to the customer remains a key ingredient to a successful outsourcing.