The market is maturing and clients are becoming more sophisticated in the way that they contract, yet one outsourcing skill is so underdeveloped it’s putting all outsourcing relationships at risk.
Morgan Chambers has, for the past few years, conducted outsourcing performance studies in many European countries—exploring client satisfaction with their service providers as well as the ability of clients to manage these relationships. The studies are carried out across Europe, with almost 500 C-level or senior managers participating this year alone. They investigate not only HRO contracts but wider BPO and ITO deals.
The results are alarming—clients are dissatisfied with performance. While providers are generally getting the basics right and largely meeting mandated SLAs or simple contract KPIs, this in itself does not contribute to satisfaction. Only 30 percent of respondents believe they have the requisite skills to manage their service providers, and governance was cited as the main reason for poor relationship performance. It is therefore unsurprising that outsourcing relationships are leaving clients desirous.
Governance within outsourced service contracts is understood to be the key to success or failure. However, the subject of governance is neither commonly understood nor appropriately skilled in most organizations, especially those with the larger and potentially more business-critical contracts. Governance is not just the processes and procedures that regulate communication and interface interaction. At its most fundamental level, it is a framework for decision-making with “client risk” versus “client opportunity” being kept in appropriate balance.
The implications of relationship quality and, therefore, governance are more exaggerated in an HRO relationship. The HR function is multi-faceted, very personal, and can result in large-scale, complex outsourcing agreements. HR processes delivered wrongly can quickly impact the performance of the organization as a whole.
However, as with communication, governance is often an area where both client and service provider believe they have adequately discussed the requirements leading up to contract signature, but upon signing the deal and into implementation, they are hardly ever addressed to the extent they should be or adequately established in low-level meetings and service reports.
Governance mechanisms determine how communication, responsibilities, and decision-making structures are formalized within client-supplier relationships.
These governance skills and activities are the single greatest factor in the long-term success or failure of any outsourcing contract—it is therefore surprising that there is such a low level of understanding and attention dedicated to this key subject. Four key areas underpin the governance model:
• Strategy Management: ensuring that the services remain aligned to corporate and business strategies, goals, and plans;
• Demand Management: ensuring that change is delivered into the organization in time to meet business requirements and that the planned benefits are realized;
• Cost and Contract Management: enabling the organization to take advantage of economies of scale while leveraging the capabilities of the suppliers to support business plans and priorities;
• Service Management: ensuring that service providers comply with their obligations and deliver the value proposition.
Key to getting this governance and relationship quality right is ensuring that this is fully addressed before contract signing and totally supported at the highest levels. When moving to an outsourced HR function, you could be spending up to 70 percent of your time managing the ongoing relationship. Make sure that time is spent managing innovations, risk-sharing, and identifying cost-savings, not managing complaints and service issues. If regular meetings are spent in heated debate over the frequency of service failures or the detail of service performance reports, then the relationship is already in the wrong place. Without significant remedial action, it will continue in the wrong direction as well.
Governance is a key element in client service satisfaction and therefore client loyalty. Done right, governance greatly benefits both client and service provider in the short, medium, and long term. However, the skills are simply not there in many organizations, and without these skills to manage, the outsourcing relationship will struggle to bring about the desired satisfaction.