Given the continued growth of outsourcing, leading organizations are beginning to view effective relationship management with suppliers as a core competency. However, businesses often underestimate the resources and skills required to manage multiple outsourcing relationships. It is critical to begin developing the relationship management model early in the outsourcing process, and to budget 10-15% of the annual contract value to the costs of managing the relationship. Proper governance ensures outsourcing relationships deliver expected benefits.

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. 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. 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. 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.