Ask 10 people what constitutes a successful long-term outsourcing relationship and you will get 10 different answers. But everyone will say governance is a key driver in every outsourcing relationship, no matter the flavor, and will continue to be as long as buyers and their service providers have to work together.
But governance has been undergoing a constant metamorphosis since the days when Ross Perot took over some mainframe functions. “Governance has grown some teeth and the teeth are in the shape of dollar signs,” says Michael Alfonsi, managing director, Financial Transactions Portfolio, Americas for BancTec. “Governance, which started out as a service level agreement (SLA) development and management committee, has now become a true management metrics oversight body that assigns penalties or provides incentives (in more enlightened relationships) as it monitors the performance of the entire relationship.”
We asked a panel of experts what forces will change this bedrock function in 2014 and beyond. Here are their sage predictions.
The move to an outcomes-based model
Traditionally, governance “built confidence that service providers could meet their contracted SLAs,” explains Nithya Ramkumar, head, Business Platforms, Wipro BPO.
This view of governance is changing because the outsourcing model itself is moving up the value chain. “Metrics are the legacy, but tangible business value and the competitive advantage created by supplier relationships are the future,” observes Kevin Jones, chief customer and sales officer and vice president for Dell.
One of the big changes, historically, is a new emphasis on business outcomes instead of just metrics. “As the outsourcing shifts to a more outcomes-based model, the nature of governance will change, going from report-centric to response-centric,” observes Ramkumar of Wipro.
She says governance is now “evolving to include collective larger goals of the customer organization, such as regulatory compliance and business risk mitigation, especially in finance and accounting organizations.”
Jones of Dell says “the goal of business alignment is to make sure the services provided by the corporate IT function and the outsourcer more closely reflect the requirements and desires of the business users.”
Tom Fisher, Cloud Service CIO at Oracle, says today a service provider has to understand its outsourcing buyer’s business “intimately.” That means “truly understanding their critical business processes and the transactions that support them.” He says this intimate knowledge “enables us to measure what’s really important to them and optimize around that.”
In addition, Fisher adds that “in-depth knowledge of a customer’s business and environment allows its service provider to be able to be the bridge from technology to business.”
For example, Fisher says customer intimacy with a pharmaceutical delivery business was knowing their trucks must leave by 2:30 in the morning. “We can then measure all the steps that make this possible,” he explains.
Governance becomes a source of innovation
Alfonsi of BancTec observes governance “is moving from the passive voice to the active voice.” Instead of just producing rear-view-mirror reporting and red-yellow-green status stoplights with variance analysis, Alfonsi says “governance members are thinking and creating innovation.”
Jones of Dell adds that it is “important that both the customer and the provider have a clear plan on how they will innovate together.” Together is the key word here because he says some buyers “may not understand that this type of relationship requires an investment on their part as well as the provider.”
Provider changes in an outsourcing relationship
In light of the move to an outcomes-based outsourcing model, Ramkumar at Wipro believes the provider organization needs to foster “a tighter integration with the business goals of the customer organization.” For example, the service provider needs to dovetail the operational metrics with those of the customer organization.
Fisher says today customers “prefer to talk directly to the team delivering the service.” He says this is a “relatively new phenomenon and beneficial development because it provides instant credibility to the governance team.”
The new model also necessitates a second change: Ramkumar believes the supplier organization “has to be flexible in changing the operational metrics that are linked to the changing priorities of the customer organization.” She says this newly required metrics flexibility has a “significant impact on how both parties conceive and roll out the governance mechanism.”
Finally, she notes customer organizations have to deploy a governance organization that can work with multiple service providers and seamlessly link their performance to the business goal.
The need for different talent
Today excelling at “short-term tactical execution” is no longer good enough, according to Jones of Dell. Instead, Fisher at Oracle believes “the blending of strong technical talent with business skills is a new, emerging reality for governance.”
That’s why service organizations are strengthening the depth of their domain expertise, according to Ramkumar at Wipro. This is also a byproduct of the shifting outsourcing model. She says providers are becoming subject matter experts in two ways:
• Bringing in experts
• Creating a technology framework for knowledge capture to build domain repositories
In addition, the Wipro executive sees a growing talent trend: experts from shared services or functional units within service provider organizations are moving to lead customer accounts so they can better understand the customers’ needs.
Dell’s Jones believes the new governance manager of today “must be strategic, see the big picture and be able to capitalize on industry trends.”
Taking a 10,000 foot up view, Alfonsi says today’s governance organizations need a different kind of leader. “A leader in governance is a unique talent. Unfortunately, that well-rounded talent is hard to find,” says the BancTec executive, with emphasis on well-rounded, not just someone “who has ops experience and a medium-to-large dose of Six Sigma or other process improvement methodology.” Governance leaders, in his view, need “a voracious appetite to seek innovation rather than perfected operationalization.”
Alfonsi believes there is no shortage of talent, instead there is a shortage of time to develop that talent. “Unfortunately, the focus for many since 2008 has been survival, not development.” Alfonsi says “they will pay a price when business picks up if they don’t regain a more talent-development approach.”
Jones of Dell adds if buyers intend to develop current employees, they must “secure training for them so they are prepared to manage and help achieve the greatest value from the outsourcing effort.”
The addition of analysis
BancTec’s Alfonsi predicts the providers of business process management tools will apply their SaaS models and back-end analytics to governance models. “We have become more data saturated and less analytical,” he observes. He predicts that is about to change.
Unfortunately, some companies are not even tracking the requisite data throughout the life cycle of the outsourcing relationship, according to Jones. The Dell executive says “very often, companies disregard the need to track this critical data” because they erroneously assume the service provider is responsible for it. “This is a flawed assumption,” he says. “Organizations need to utilize business intelligence tools that can support their organizations throughout their outsourcing journey.” He says these tools can provide:
- Improved knowledge management
- Audit-like validation of the provider’s performance
- Increased collaboration between the internal and external teams
Greater visibility
“The basic issues of what’s going on in the IT environments we manage are still there,” says Fisher of Oracle. “But we are attempting to advance the business model to a new level through transparency, automation and highly measureable deliverables.”
Ramkumar at Wipro agrees, predicting there will be “an increase in the level of transparency and visibility to enable more proactive action.” For instance, she says organizations wanting to improve their compliance need greater visibility into transactions and their workflows. “The technology platform becomes integral to report, trace and address gaps while the transaction is on, Ramkumar explains.
New technologies
“Outsourcing relationships are transforming along with the technology that delivers the solution,” observes Fisher at Oracle. He says service providers are employing new technologies to:
- Automate the deliverables
- Make the process more visible
“What’s new today is buyers can view the results at any time and any device,” he says. This ubiquity introduces new challenges to the governance model, leaving you with two choices, “you either lead or get left behind,” says Fisher.
Answering to the board of directors
Alfonsi of BancTec says today the governance organization is receiving more Board of Directors “demands for substantive reporting” on both shared services and outsourced activities. This means the governance organization must:
- Be attuned to sourcing the right data and presenting it in the way the Board prefers
- Be ready to dialogue with board members if they have insights or questions
What NOT to do
Dell’s Jones observes “countless organizations are still stuck in the old way of doing things,” which means they are not taking advantage of the benefits of governance’s metamorphosis. “These organizations remain focused on how the provider is performing the service. They are trying to fit the service into a historical model. This is a time-wasting exercise,” he says.
Jones also observes “clients often set the performance bar for their service provider higher than they set it for themselves.” He says it’s critical to set realistic goals for the outsourcing relationship. If not, “unexpected cost escalations and long-term client dissatisfaction” can result when the service provider “fails to realize the financial goals of the relationship.”
Instead, what is imperative “is the integration of new services to meet business demand today and in the future” and then making sure the buyer is actually achieving business results, in Jones’s view.
Great advice for the brave new world of governance.
Governance tips
We asked the experts what they suggest to make governance successful in 2014. Here are 18 suggestions.
The governance organization needs to:
- Be proactive in determining the potential risks, then craft specific clauses in the contract for procedures, standards and service level metrics
- Align the governance structure to the buyer’s business goals
- Build trust; governance doesn’t happen just because you formed the committee
- Create great working relationships
- Engage senior-level business leadership
- Share accountability
- Work together to build the governance structure instead of letting the service provider determine it alone
- Have both the customer and service organization review the statement of work and SLAs from time to time and update to reflect any business change
- Structure reviews to measure operational SLAs related to control and business-as-usual to ensure they align to the business goals
- Be transparent on all things measurable
- Make the metrics readily available on any device
- Benchmark
- Define clear roles and responsibilities for decision-making, issue escalation, dispute and demand management, and service delivery
- Create a platform for designing business interactions based on industry benchmarks
- Structure business interactions with a view to how the industry fixed similar situations in the past.
- Scope for future change
- Keep discussions iterative
- Build a repository of industry best practices and record past experiences to prompt next best actions in every role in the process to support last mile execution