Getting back to the core focus of this blog – risk management – I’d like to discuss one of the main determinants of success in an outsourcing partnership. I’m talking about good governance, and it’s something most practitioners know about, but rarely do well.
We’ll be looking at a report published last year by Corporate Compliance Insights author Karen Wilson titled Risk Management in an Outsourced World. In the section on outsourcing governance, Wilson makes the statement that “Even the most well-considered ERM strategy is not a substitute for good governance [....] Experts say that when governance is ignored or shortchanged, the result can be a 30 to 70% decline in expected returns of both parties”. That should make most companies sit up and pay attention, especially the ones who are laser-focused on ERM as the answer to all their troubles. In other words, effectively working with your provider is critical to your project’s success.
Good governance is more than just managing the contract; it requires managing the relationship. And that’s important because the goals of the client and the provider are not always naturally aligned, especially with costly and complex IT work. Clients want to offload work and get more for less, while providers want to perform that work while making a profit. The role of governance then, is to “make sure the outsourcing strategy is aligned with long-term corporate objectives, and the relationship is delivering expected benefits to both parties”.
Wilson suggests that one way to achieve this is to place “outsourcing governance functions under a corporate executive like the CFO or CIO to promote transparency and decision-making at senior levels”. She says that members of governance teams should be full-time, with appropriate training, and be evaluated and compensated on value derived from improved strategy and managed change.
The governance model
I would add that when selecting a provider, be diligent about inspecting their governance model in detail. Make sure that the provider’s work processes, decision-making structure, and corporate culture match yours, or else there will be frustrations later. Wilson tells you to be suspicious of providers that “don’t have [a governance model], or one that’s limited to contract management tasks”.
Accurate financial modelling is also critical. Companies are usually pros at including all the overhead foreseeable costs, while underestimating the risks of the outsourced project. “If metrics exist, they’re usually too narrowly concentrated on quantitative data and must be adapted to a sourcing strategy that emphasizes qualitative measurements as well”, says Wilson. Those financial models and the team assessing risk, must be there for support throughout the outsourced project duration.
In terms of communication with your provider, make sure you have the right person on the job. Marty Pine, former Senior VP Global Strategic Sourcing at ACE Group recently told me, “The single biggest point of failure is the contact between your project manager and the vendor’s project manager. We’re always quick to fire the vendor’s guy – often it’s our own guy”.
In my next post we’ll be discussing the results of effective vs ineffective governance strategies. Don’t miss it!