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Governance and relationship management

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Even with the maturity of outsourcing, one of the most important yet often overlooked or minimized aspect of an outsourcing transaction continues to be the relationship management and governance model. The objective of the relationship management model is to ensure the anticipated benefits of an outsourcing relationship are realized in the most efficient manner. It must be based on the terms of the agreement and link the management processes of the two parties in order to govern the working relationship and achieve results. This article highlights the governance and relationship management model developed and implemented to support a sourcing strategy is the single most important factor in the realization of success in an outsourcing relationship. It also shares WGroup’s experience in advising on the creation and management of outsourcing relationships and governance and guiding clients in the development and implementation of sourcing strategies for existing contracts.

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Governance and relationship management

  1. 1. Introduction Even with the maturity of outsourcing, one of the most important yet often overlooked or minimized aspect of an outsourcing transaction continues to be the relationship management and governance model.The objective of the relationship management model is to ensure the anticipated benefits of an outsourcing relationship are realized in the most efficient manner. It must be based on the terms of the agreement and link the management processes of the two parties in order to govern the working relationship and achieve results. Businesses often underestimate what is required to manage an outsourcing relationship and often compound the problem when multiple relationships are implemented. A myriad of missteps contribute to the situation including waiting too long in the transition process to consider what is required, under investing in the resources required and selecting personnel with the wrong skills.The following WGroup Strategy Brief will review the common reasons effective relationship management models are not developed and implemented, the keys to building workable models and WGroup’s recommendations for managing outsourcing relationships successfully. Relationship Management Models With the growth and maturity of outsourcing, the requirement for effective management of third party supplier relationships has gained increased visibility within the organization. As more functions are turned-over to third parties the ability to manage and coordinate activities among these parties and the internal organization has become critical to success. Further, WGroup is seeing a convergence of ITO and BPO contracting approaches and hence the subsequent convergence in relationship management approaches of these contracts is also occurring. Typically, the management model employed is influenced by the services outsourced, the outsourcers selected, the geographical spread of operations and the culture of the business. In addition, the management models and cultures of the supplier organizations must also be taken into consideration since an equal amount of energy will be devoted to working within their constructs. Drive Your Business Governance and Relationship Management The Most Important Part of an IT and Business Process Outsourcing Arrangement Strategy Brief | OUTSOURCING 1 “Businesses often underestimate what is required to manage an outsourcing relationship and often compound the problem when multiple relationships are implemented.” Denis Desjardins Principal, WGroup
  2. 2. Another important factor is the skill sets of the individuals selected to fill the supplier or relationship management positions. In the past, senior people who had operational responsibility for the outsourced functions typically filled relationship management positions. Their focus on “how the work gets done” as opposed to the achievement of desired results led to increased levels of conflict in the relationship. It has been found that a different set of skills—one with more of a focus on interpersonal and communication and negotiation skills—leads to a more effective management relationship.There is a move toward filling these positions with individuals possessing these specialized skills and even experience working with or for service provider organizations. Given the continued growth of outsourcing business functions, the number of outsourcing contracts within one company and the importance of maintaining an effective management relationship in order to ensure partner relationships deliver to expectations, many leading organizations are beginning to view relationship management of suppliers as a core competency within the organization. Common Challenges in Relationship Management Three challenges are often encountered when evaluating relationship management models: Challenge 1: the cost of relationship management is usually estimated at 5-10% of the total contract value. These estimates are often influenced by the service provider, and possibly the project sponsor, and may be intentionally under-estimated in order to: 1.) Help cost justify the outsourcing deal; and/or, 2.) Set the clients expectation that the service provider requires very little oversight and will act as a partner in the relationship.The fact that the importance and the complexity of a relationship management model is often under-estimated results in failure to fully realize the benefits of the relationship and, ultimately, in higher than anticipated management costs. WGroup’s experience has shown that proper relationship management more often runs in the 10-15% range of total contract value.This percentage can be reduced as management resources are leveraged across multiple contracts. Challenge 2: the design and implementation of the relationship management model does not begin until the transition phase of a relationship. At this point in time the parties are often reacting to the pressures of the situation and not working in a proactive mode. WGroup strongly recommends that the relationship management model implementation process should begin much earlier in the overall project so that effective control can be established prior to the start of transition. In fact if the key members of the relationship management team can play a role in the solution evaluation, provider selection and negotiation process they will have a solid foundation in understanding the contract and have built a good cultural understanding of the providers environment. Challenge 3: terms and conditions of in-scope contracts are often inconsistent requiring more management attention to coordinate. While it is important to consider the service providers needs in the contract it should not be at the expense of consistency. It is imperative that oversight related to contractual terms across multiple agreements being managed are consistent in order for the management model to operate efficiently. Considerations for Successful Relationship Management The components of a relationship management model consist of the management organization (people), the processes and procedures, management reporting processes and communications plans.The relationship management organization uses the contract terms and conditions, scope of services, service level agreements, pricing, etc. as a foundation against which to resolve issues, monitor progress and guide the relationship with the provider. Consideration of the following factors will lead to a more realistic assessment of cost and effort required to manage multiple relationships and will illustrate the need for consistency across contractual relationships.This list is not exhaustive. Please contact WGroup to learn more about our comprehensive Governance and Relationship Management Methodology and our client case study examples. 2 WGroup Given the continued growth of outsourcing business functions and the number of outsourcing contracts within one company, leading organizations are beginning to view relationship management of suppliers as a core competency within the organization.
  3. 3. 3The Importance of Governance and Relationship Management in Outsourcing Key Factors and Considerations in Relationship Management Enterprise Management Structure What is the relationship between the Corporate CxO and Business Unit CxO’s? Do the Business Unit CxO’s report to their respective CFO’s or CEO’s? Is the management reporting structure regional in nature e.g. the Americas, Europe, Asia? Management Scope What contractual agreements will be controlled and managed within the model? How will the relationship with operations management be defined? Business Decision- Making Processes What is the schedule of authority and decision rights? What is the role and influence of various committees? How much latitude does the business unit have vs. Corporate? Geographical Spread Are the business units or locations receiving the services in the US? North America? Globally? Performance Reporting Structure Will individual service levels be tracked at the location, business unit or enterprise level? Where will performance credits be assessed? Scope Of Services Being Provided Can all the services be provided from a central location or will some be delivered on-site? What interfaces with internal support groups will be required? Will service agreements between those groups be developed? Service Delivery Model Are services delivered from a central location or locally as well? Are centralized service centers located domestically, near-shore or offshore or a combination? Volume Of Transactions What is the anticipated volume of transactions? Are there breakpoints for discounts or service level adjustments? Financial Controls What is the process for reviewing and approving incremental expenditures? Is a mechanism in place to facilitate leveraging multiple vendors? Are financial processes linked to corporate budgeting and forecasting processes? Risk Management and Controls Have the pertinent risks associated with the in-scope services been identified? Has a control structure been designed and implemented that meets the internal controls requirements of the business? What organizational requirements does the contract call for? Relationship Manager? Management Committee? Process Advisory Committee? How will performance audits be performed and by whom? What are the reporting and communications requirements? How will contract changes be managed? People What are the key positions? How will the key positions be filled? Will they be drawn from the ranks of the affected employees or will a supplier management skill set be required? THE IMPORTANCE OF TIMING O ften, very little attention is paid to relationship management during the sourcing strategy development process and the RFP process. It isn’t until negotiations are nearing completion that the client realizes they must have the resources in place to manage the service provider.This realization is generally driven by the need for someone to manage the transition as well as contractual terms related to service level performance reporting, management committee requirements and audit provisions. Waiting until this late in the process hinders the ability to drive contract terms that are conducive to efficient and effective management. If the relationship management model is developed in conjunction with the sourcing strategy development process, and further refined during the RFP/ negotiation process, it will more closely reflect the requirements of the business and will ensure relative consistency across multiple contracts. Beginning the model development process earlier also allows more time to solicit input from the business, identify candidates for key positions and establish the organizational framework for full model implementation.
  4. 4. 5. In the financial base case, budget 10-15% of the annual contract value for each year’s cost of relationship management. Where possible, leverage resources across multiple relationships in order to realize economies of scale and control overall cost 6. Leverage your experience in other contracts when structuring a new contract and the governance structure for this new contract. 7. Place extra emphasis on the development and consistent execution of a communications plan.The plan should provide for input from the business units and the service provider as well as the relationship management team. 8. Tie management committee meeting agendas to the business planning cycle. Summary The governance and relationship management model developed and implemented to support a sourcing strategy is the single most important factor in the realization of success in an outsourcing relationship. It is imperative that the model be consistent with the management processes of the client organization and interacts well with those of the service provider.The cost and effort associated with implementing and operating the model should not be underestimated. Adequate funding and careful selection of key relationship managers are critical to success. Please contact WGroup to learn more about our Governance and Relationship Management Methodology and case study examples of past experience. Contact Us WGroup 301 Lindenwood Drive, Suite 301 Malvern, PA 19355 610-854-2700 Copyright © 2012 WGroup. All Rights Reserved.4 OS_GRMGOSSB_091012_003 About WGroup Founded in 1995, WGroup is a boutique management consulting that provides Strategy, Management, and Execution Services to optimize performance, reduce costs, and create value for Fortune 1000 companies. Our consultants, who have years of experience, both as industry executives and trusted advisors, help clients think through complicated and pressing challenges so they can drive their business forward. For more information on WGroup, visit http://thinkwgroup.com WGroup Recommendations Based on WGroup’s experience in advising on the creation and management of outsourcing relationships and governance and guiding clients in the development and implementation of sourcing strategies for existing contracts we recommend the following: 1. Begin the relationship management model establishment process early—during the sourcing strategy discussions, if possible. 2. Interact with the various business units to understand what they will require from the contract and what role they feel they need to play in the management of the relationship and what will make them feel comfortable they are realizing the proposed benefits. Use this as input to the development of the statement of work and contract terms and conditions. 3. Define the skills needed and then consider this desired skill set in those selected to manage the relationship. Managing a long- term service relationship with a service provider requires a different skill set than managing a technical operation, a business function or just contract management. 4. Include the individuals who will manage the relationship as part of the deal development and negotiating team so they learn the nuances of each party’s positions. Do not put them in a lead negotiating role and potentially expose them to intense argument with the service provider negotiating team.This will enable them to establish a better working relationship during transition.

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