More than just a procurement programme, outsourcing
arrangements need close management from the outset in order to
achieve optimum performance.
The decision to outsource is not something to be taken lightly -
it is fundamental to an organisation's strategy and business
model.
The outsourcing event should not be viewed as simply another
procurement programme to be executed by a purchasing department
rather the purchasing department needs to work closely with the
business, IT, the legal team, HR, tax and commercial departments
and staff representatives to maximise the potential benefits.
With so many parties playing crucial roles, governance is
critical at each stage of the process.
In the next two years, outsourcing contracts worth many billions
of pounds will either be coming to the end of their tenure or being
terminated early.
With users facing a wide range of options including termination,
renegotiation, transition back in-house and re-tendering, this is
an ideal opportunity to go back to first principles.
Users must be clear about why they are outsourcing, what is core
and non-core, and then review what should be outsourced, along with
a fresh business case. Often the true objectives are lost in the
details of the deal's construction and the subsequent contract.
Any decision to change the delivery of services should be fully
considered before taking action. Moving an outsourced service that
is failing, or simply coming to an end, from one outsourcing
supplier to another will not necessarily fix a problem and
introduces a new level of risk.
Despite this there is a tendency for users to try to simply
"lift and drop" existing arrangements - to take what they currently
have and source it from elsewhere.
Conversely, as the market tightens, outsourcing suppliers will
prefer to extend existing contracts rather than renew them
obviously this will result in tension as a result of differing
views and strategies.
If, having reviewed the outsourcing decision from first
principles, the decision is to continue outsourcing, then lessons
need to be learned from what happened the first time around.
Many users will have reached a point in their arrangements where
relationships have broken down and they may have been tempted to
look for termination or arbitration of the contract as a last
resort.
Now is the time to review what worked and what did not, and what
steps need to be put in place to ensure that the second generation
contract benefits from the experience gained in the first.
When it comes to outsourcing, users committed to achieving
optimal performance from the deal should consider quality,
relationship, capability and flexibility, as well as price, when
selecting an outsourcing supplier and documenting an agreement.
To ensure real success there must also be a focus on a cultural
match between the two parties that allows for a governance
structure with which both are comfortable.
Good governance is critical to the success of an outsourcing
arrangement and should be considered at the outset of any
discussion.
If there are conversations about issues such as litigation or
arbitration in the termination of a contract, arguably the contract
has already failed. It is essential that provisions for such
discussions are built into arrangements at the outset.
Shared vision and goals, sound management practices, respect,
understanding the needs of both parties, mitigation of risk and a
focus on ensuring that results are meeting the mutual expectations
of both the user and the supplier - operationally and financially -
are typically the key factors that lead to success.
Too often, the focus on governance stops with the completion of
transition, but the real success of the deal will come from work
carried out during the ongoing management and transformation
stages.
Getting this right is about:
● Ensuring a detailed handover from the procurement team to the
relationship management team, covering all non-standard mechanisms
in the arrangements in particular.
● Managing and monitoring the contract against service levels,
getting feedback not only from the relationship management team,
but from retained departments who are impacted by and dealing with
the supplier.
● Identifying concerns early and resolving disputes quickly but
amicably.
● Transforming or optimising the business, both retained and
transferred, to ensure the benefits of outsourcing are
achieved.
● Reassessing the relationship on a periodic basis to identify
changes that are necessary in management or contractual
details.
● Actively managing the delivery of the business case and
realising the benefits.
In many cases, the value of outsourcing is not maximised because
senior executives critically underestimate the level of management
resource needed to both implement and sustain a successful
outsourcing initiative over time.
And if the level of management required is understood, senior
executives may not have the specialist resources and necessary
visibility of IT costs and service performance.
Executives may also assume erroneously that management of the
outsourced services is the outsourcing supplier's responsibility -
a responsibility that executives assume can be tactically managed
through the constraints, benchmarks and penalties for poor
compliance typically prescribed in service level agreements.
For many users undertaking outsourcing initiatives, governance
is an area that is frequently underestimated in terms of time and
investment, as well as the structural architecture necessary to
manage accountability.
Those who commit to an outsourcing project without a strong
governance capability do not have appropriate means of controlling
performance.
In fact, because the processes, roles, responsibilities and
incentives that determine project management are now spread across
two entirely different organisations, the need for a clear
governance structure becomes even more critical.
In far too many outsourcing projects, oversight in the approach
to governance prevents optimal performance in the long-term and can
lead to false diagnoses of bad contracting or poor supplier
performance, preventing users from learning from their
mistakes.
Many organisations do not have a clear understanding of what
governance is in relation to outsourcing - and even fewer will know
what best practice in this area looks like.
Communicating, agreeing and managing the various aspects of
governance - establishing the mechanics of a deal over its lifespan
- requires finding the right balance of leadership, policy,
methodologies, tools, skills, personnel and measurements for both
parties.
Treating outsourcing as a procurement issue rather than a
relationship issue encourages an adversarial approach to
contracting and a dogged focus on securing the lowest price above
all else, which may not be in the best long-term interests of the
business.
Many will agree that a good part of the foundation for a
successful engagement is based on the legal and contractual due
diligence conducted before an outsourcing arrangement is
formalised.
Unless managerial controls are supported by a well-written
contract, the key intersections between management and operations
may be under-supervised, increasing the likelihood that key
processes, quality specifications, service delivery timing, and
most importantly outcomes, will be driven and/or dependent on the
outsourcing supplier.
Most successful outsourcing relationships have at their heart an
agreement that offers certainty on key issues, leaving no doubt as
to the extent of each party's obligations and risk allocations.
At the same time they allow sufficient flexibility through
effective governance and change management to keep the formal
documentation relevant to an inevitably fluid and sometimes
unpredictable arrangement.
Minimum performance benchmarks, or service levels, must be
established and supported by standards and metrics most appropriate
to the outsourcing objective - metrics, for example, that are
directly tied to operational indicators such as service quality,
system availability and response times.
One of the most important points of an outsourcing engagement
should be to protect the user's ability to reshape the outsourcing
contract, relationship and operating framework in order to adapt to
a changing business environment.
Critical to any organisation is contractually protected
flexibility to accommodate unanticipated changes in business growth
or shrinkage, changes in volumes or changes due to extraordinary
events such as mergers, acquisitions or sales.
A well written contract will ensure the user's right to be
informed of any significant event that could materially impact the
supplier's ability to meet its performance obligations.
Receiving timely notice, not just of impending events, but of
the likelihood of an impending event, enables low-cost contingency
planning with high cost-benefit payoffs should untimely events
occur.
Ongoing governance is a far wider consideration than managing
what is captured in the contract and service level agreement.
Who has responsibility for the ongoing governance internally?
What are they going to do? How are they going to monitor and
maintain performance? What is compelling staff to commit to
governance?
How does the organisation interface with the outsourcing
supplier and ensure the different parts of the project are working
together properly? Is there anyone within the organisation to be
the supplier's champion, to help the business gain an informed view
on performance?
Deal management and sourcing office capabilities are required to
manage and mitigate risks and help keep both parties aligned, but
being able to move beyond the contract and what is done on a daily
basis is critical.
Do you operate in a relationship where suppliers do things right
purely because of the contract, or is your relationship something
more than just the contract?
Few companies have a comprehensive view of what is required or
the skills within the organisation to do this effectively. When
outsourcing projects fail it is often because of the void left by
the absence of governance, and not necessarily the service
provider's fault alone.
The reality is that many users will be involved in multiple
contracts and are likely to continue doing so, but few will have
focused on how they might approach governing them collectively.
They need to bring a strategic focus to an often disconnected,
neglected, yet fundamentally important consideration.
The approach they choose will be bespoke to their situation.
However, users need to consider whether they take a uniform
approach to all contractual relationships, appoint a team to govern
across multiple contracts, or design a selection process for
potential service providers that considers their fit from a
governance perspective.
It is not uncommon nowadays for users to have a significant
proportion of their cost base - perhaps a quarter or a third -
committed to outsourcing arrangements, and yet to have no
functional or divisional head allocated to watch over it.
Too often, the failures of outsourcing contracts are attributed
to bad contracts, but the real issue is that the relationship has
been conducted solely within a contract that stifles the growth and
development of the arrangements.
Whatever the balance of leadership, policy, methodologies,
tools, skills and resources the user decides on, when governance is
right in the process everyone will benefit.
Effective governance improves the collective performance of
contracts over their lifespan, beyond the performance that managing
by contracts and SLAs would dictate.
When users acknowledge that the complexity of the results they
expect from their outsourcing arrangements needs to be met by a
sophisticated approach and a conscious commitment to governance,
they will improve the performance of those arrangements.
The outsourcing lifecycle
Strategy
- Validating the strategy
- Identifying the options
- Preparing the business model
- Agreeing the sponsorship and building the team
Termination/renegotiation
- Planning the termination
- Renegotiating the contract and bundling with others as
appropriate
- Decommissionion andre reallocating
Optimisation/transformation
- Managing and monitoring the contract and resolving
disputes
- Transforming the business
- Re-assessing the relationship
- Delivering the business case - realising the benefits
Feasability
- Building the business model and case
- Creating the baseline
- Understanding and testing the market
- Assessing and benchmarking the options
Transaction
- Structuring the deal
- Agreeing the scope, service levels and assets to transfer
- Negotiating the contract
- Delivering the deal and the business case
Transition
- Delivering the change
- Getting quick wins
- Establishing the culture
- Managing the people
The decision to outsource is not something to be taken lightly -
it is often fundamental to the organisation's strategy and business
model. It is not, therefore, just another procurement progrmme to
be executed by a purchasing department.
Those organisations tht get the benefits of outsourcing do so by
following a clear six-step lifecycle.
This lifecycle takes organisations from the initial strategic
decision, through the scoping and definition of requirements, the
selection of a service provider, the transformation of the
business, and then prepares the organisations for eventual
termination or renegotiation of the contract.
Successful outsourcing is about getting the process right at
each stage and the formation of sustainable partnerships.
David Muir is a partner at PricewaterhouseCoopers