Managing outsourcing contracts can be way over any organization’s heads–unless a formalized, automated approach is adopted.
Anyone involved in HRO has heard the familiar cautionary words over and over again to the point of ad nauseam, but there’s a reason why governance never fails to crop up as one of the thornier issues around outsourcing. To ensure their engagements are delivering as promised and that issues are quickly addressed before they magnify into unmanageable problems, buyers must diligently govern their vendors and contracts—no small task for anyone new to HRO.
According to Mike Beals, managing director at sourcing advisory firm EquaTerra, outsourcing practitioners can become confused about their role in governance, especially around the internal skills they must build to oversee contracts. More importantly, by failing to devote enough resources to governance, many companies may be headed for a showdown with their vendors as a result of failing to communicate expectations and service goals.
“A common misperception of governance is an overdependence on the service provider to do governance. There is a bunch of processes and things that can’t be delegated to a provider—invoice verification, for instance,” Beals pointed out, adding that even when buyers are presented with a host of metrics, they aren’t really sure what to do with it. “There is information overload. You have this huge deal, and your service provider will pluck down an inch-thick report every month. The questions we get often is ‘Out of all the stuff I’m presented, what do I really care about and what are the parameters?’”
Indeed, different companies approach governance in different ways. Often, the project lead who oversaw the initial HRO engagement may be put in charge of the governance team. Other practitioners may divide those responsibilities among various retained HR personnel. Still others may look to hire a professional to assume these new duties. However, there is no getting over the fact that post-contract signing, HR organizations are expected to develop a new set of competencies in vendor management.
One pitfall they often experience is failing to devote enough resources to governance, and Beals said that could lead to myriad problems. Invoice verification is one area that buyers may potentially overlook. He cited one client for whom EquaTerra performed an audit that was paying in excess of $1 million in overcharges. In this instance, the buyer relied too much on the provider to verify correct invoicing—a task that he said falls squarely on the shoulders of the retained organization.
Furthermore, failing to implement an adequate governance program may delay an HR buyer’s goals to transform his organization. Because they lack the necessary skills initially to govern, buyers end up prolonging deal implementation and process transformation instead of focusing on improving service delivery or adding value for employees.
“Many organizations, frankly, just stumble along during that transition process. Coordination, scheduling, and knowledge transfer cannot be done by providers,” Beals cautioned. “During that first 6 to 18 months, they are trying to figure out how to track that contract.”
But like any process, setting up a governance mechanism can be standardized, and EquaTerra has collaborated with Microsoft to develop a toolkit for outsourcing buyers. Called Governance WorkPlace, the solution automates the transactional components of governance and provides decision-making support for more strategic work, according to the sourcing firm.
Beals said his firm developed the toolkit after observing clients maintaining their governance efforts through highly manual mechanisms such as Excel worksheets. With several large outsourcing clients already using the hosted platform, Beals said he sees Governance WorkPlace alleviating the administrative burdens placed on outsourcing practitioners.
The toolkit tracks seven key areas:
- Financial: facilitates invoice verification, payment, financial tracking, and reporting;
- Issues: enables the collection, resolution, tracking, management, and reporting of multiple issue types, including a repository of issue resolutions;
- Contract: provides a version-controlled repository for all contractual documentation, as well as an event calendar to enable effective and proactive management of agreements;
- Performance: enables effective service level information consolidation, decision making, tracking and reporting, and facilitates proximate-cause analysis;
- Compliance: provides a repository and links to compliance-related documentation, and enables the effective planning, auditing, monitoring, and reporting for all internal and external compliance-related areas;
- Relationship: facilitates the assessment, (re)alignment and action planning relating to the priorities and satisfaction between the client and its providers; and
- Consumption: monitors, reports, and tracks consumption, helping to manage the business case, modify behavior, and identify resource consumption per business unit.
Beals added that not only will the toolkit help automate some aspects of governance, but by allowing buyers to formalize their approach, it can institutionalize a lot of the tribal knowledge of team members so that an outsourcing deal isn’t crippled when a pivotal employee leaves or takes another position. “If one person is hit by a bus, all is not lost,” he added.