Avoid surprises with a thorough governance program. Working closely with providers to remain flexible can help keep minimize unplanned costs.
Governance in HRO is the means by which buyers and service providers mutually assure that expected value is actually attained from outsourcing. It is also the means by which business risks that threaten the success of the deal are identified and managed.
These potential risks are many. Today’s industry “best practices” in outsourcing governance evolved as a result of the experiences of companies that learned about these risks the hard way. A few examples of the risks and practices for addressing them are illustrated in Fig. 1.
In 32 years of experience, TBI has seen and learned from many outsourcing governance failures. More organizations today than in earlier years proactively pose questions such as “How can we manage it after the deal is signed and the staff is gone?” This shows some understanding of the governance challenge, but too many organizations give this question little consideration, allocate too few resources, or wait until transition to ask and answer it. As evidenced by the statements echoed by clients, these illustrate what we’ve heard from companies that outsourced and then came to us for help:
—“Our service provider meets service levels, yet customer satisfaction is low. I get beat up over it frequently when I talk with BU executives.”
—“With multiple outsourcing deals in related service areas, whenever there’s a service problem, there’s a lot of finger-pointing that goes on around here. We need more proactive and cooperative support to resolve problems that occur.”
—“How can it be that five years after we signed this deal, instead of having efficiencies kick in to lower our cost, it costs us more? Out-of-scope charges exceeded annual base charges for the past couple of years.”
—“At first, we reduced staff, but two years later we added supervisors to each outsourced service area to watch over vendor staff. It was the only way we could get information we trusted. So, three years later, retained costs for services are double, even though scope is the same.”
—“We have major business pressures to lower spend, but the only innovations our service provider brings to us are proposals for systems enhancements that will cost us more.”
Each of these scenarios can be avoided with forethought and use of best practices in outsourcing governance. An effective outsourcing governance framework consists of management structures and processes designed for use in both controlling and nurturing an outsourcing relationship. This framework must be crafted as part of the outsourcing agreement, not later on. The framework objectives are assurance that the outsourcing arrangement provides extended value over time, with service delivery, performance, and cost-benefit keeping pace with changes in the business environment.
Future articles will discuss how to:
- Understand governance challenges before they sign an outsourcing contract;
- Create structure and processes to enable ongoing, meaningful discussion and collaborative work efforts with service providers;
- Align efforts and interests of internal and external units whose services interface;
- Assure risk awareness and outsourcer commitment to helping you comply with policies and regulatory requirements;
- Clarify scope of services and client and service provider roles and responsibilities;
- Implement effective performance measurement, monitoring, and reporting processes;
- Design pricing structures and financial reporting that enable proactive financial management
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