Eight Principles of Good Outsourcing Governance

Why are some outsourcing relationships successful, while others struggle or fail? While these complex relationships require strong processes, skills and tools to succeed, outsourcing excellence depends on a governance operating model based on principles, rather than rules. Here are eight proven principles that can help any outsourcing governance group increase its effectiveness well beyond traditional vendor management.

Balance stakeholder needs. Companies that successfully outsource continuously "take the pulse" of all stakeholder groups to balance their needs over time. Stakeholder groups include senior executives, IT personnel in both the retained and outsourced groups, the service provider and the "users" of the services (employees, customers, suppliers and others). While it may be impossible to please all these stakeholder groups at the same time because service availability or variety have been deliberately restricted to cut costs, the company's governance group can strive to balance each group's needs over the term of the agreement. When stakeholder groups see that the governance group doesn't place one group or one set of requirements above others all the time, their participation and satisfaction increase.

Here's an example. Say Business Unit A's requests for application enhancements always receive a higher priority than Business Unit B's, with no clear reason given. In frustration, Business Unit B goes to another provider or creates a "shadow organization" to do the work in-house. The solution? Explain the service restriction to Business Unit B, learn more about its business needs and timing, and adjust the prioritization schema or timing so its needs can be acknowledged and met.

Pursue stakeholder involvement. Formal governance boards and steering committees are essential, but informal stakeholder involvement is the way successful relationships are built and maintained over time. Stakeholder involvement results from an effective combination of information exchange and action. For example, a governance group can set up ad hoc advisory teams, actively pursue the opinions and participation of key business leaders, and offer informal educational presentations such as "lunch and learn" seminars that stimulate the exchange of information. Superior governance requires regular interaction, information exchange and meaningful action -- ultimately resulting in better solutions that more effectively meet stakeholder needs.

Let's say the governance group discovers that a key business leader believes his group receives poor service because the provider doesn't understand the fast pace of his business environment. Solution: The governance group arranges an information exchange in which the business leader learns about system constraints and the service provider learns about the business environment. Together, they develop creative ways to improve service without increasing costs.

Seek cultural synergy. One criterion often used when selecting an outsourcer is cultural synergy. Governance groups can achieve improved results by identifying and building on strengths both cultures share. For example, if both cultures are process-oriented, shared process development can be an effective way to work together. Interestingly, improved results can also be obtained by avoiding shared cultural weaknesses; once identified, the governance group and service provider can work together to find ways to steer clear of these traps.

Here's an example: Both client and service provider have optimized their organizations to work efficiently within functional boundaries. However, essential information rarely makes it across those boundaries, leading to misunderstanding and error. The solution is to have both agree to share regularly delivered status reports across functional boundaries, assign a team member to respond to questions and concerns and seek other opportunities to share information in new ways.

Drive out false agreement. False agreement occurs when someone agrees to do something without any intention of actually doing it. Although not unique to outsourcing relationships, this can be particularly damaging to them. Since the governance group operates predominantly through influence rather than authority, its members must be able to rely on commitments made by others, whether internal employees or service provider staff. Driving out false agreement requires diligence -- documenting agreements, consistently following up on commitments and holding others accountable. By asking others only for what they really need and following up diligently on all commitments, the governance group will build the trust and credibility needed to deliver results.

A good example is when a business unit asks the governance group to develop a new service level but won't make subject-matter experts available to the development team. Solution? The governance group should document the request and follow up with the business leader to find out what's really behind it -- maybe the real need can be satisfied in a simpler way.

Remember that the "customer" is not always right. Governance group members must keep their minds open and reach across organizational boundaries to understand the motivations of all stakeholders. Communication is an imprecise science, and misinterpretation increases when people attempt to bridge the language and experience gaps across functions and cultures. By taking special care to develop a deep understanding of stakeholders' motivations and expectations, governance group members can negotiate more creative and mutually beneficial solutions.

Here's an example: The service provider's estimated price for a seasonal service is significantly higher than the last time. A key business leader feels the new price is unfair and asks the governance group to source the work with a less preferred provider. Solution: If the governance group investigates the reasons the business leader feels the new price is unfair and the reasons behind the price increase, they may find that the increase is justifiable -- and they may also find a mutually agreeable solution.

Experience matters. When governance group members are drawn exclusively from the client company, they begin with an experience deficit that puts them at a real disadvantage. Moving from management to governance with little or no training on the critical differences between the two can lead to costly mistakes that can contribute to the failure of the outsourcing relationship. However, it is possible for governance groups to rapidly fill their experience deficit through the use of coaching and other outside support. Although service providers can and do help in this area, their perspective isn't fully aligned with the client company's perspective. The best source for this support is an independent third party with real hands-on experience in client-side governance. By making this investment, governance groups can shorten the learning curve, avoid costly mistakes and more quickly become effective partners.

Take this example: After assisting with an IT outsourcing transaction as a subject matter expert, an IT leader is promoted to a new position -- leading the company's new governance group. The service provider leaps into the transition process, leaving the new leader frustrated and concerned that she "doesn't know what she doesn't know" and, perhaps, floundering for direction. Solution: The governance group hires an independent advisory firm to support the IT leader during the transition process.

Avoid the paradox of alignment. Alignment between the client company's goals and the service provider's actions has long been considered the Holy Grail of outsourcing. Yet alignment remains elusive -- client companies want to cut costs and increase service quality, while service providers want to increase revenue and decrease service delivery costs. While these objectives are not necessarily opposed, they tend to prevent effective alignment unless both parties actively seek out those areas where both sets of objectives can be met. Client companies that expect the service provider to adopt and align with their objectives at the expense of their own will be disappointed, and continued disappointment leads to distrust, which can seriously damage the relationship. Better to seek true alignment around mutually beneficial outcomes than to gain false agreement to one-sided goals.

An example of this is when a governance group wants to reduce the cost of call center support without reducing service and considers moving call center support services to another provider. Solution: Following frank discussions, the client company and the service provider agree that by bringing another call center into the agreement, they can reduce the unit cost of support for both centers.

SLAs aren't enough. Service-level agreements are extremely important and should be continuously refined and improved over the life of the agreement. However, they must be augmented by other methods to ensure customer satisfaction. For example, the principles of balancing stakeholder needs and pursuing stakeholder involvement can be used to monitor and improve customer satisfaction and relationships among stakeholders. But ultimately, customer satisfaction depends on the relationship between the governance group and the service provider -- when trust is high and commitment to achieving the agreement's goals is shared, customer satisfaction becomes a key success ingredient that's jointly nurtured by both sides.

Let's say the business-unit leaders constantly complain that the IT services they receive don't meet their quality standards. The answer? The governance group and the service provider should convene a "customer council" that meets monthly to discuss and jointly resolve service delivery issues.

In the end, excellent outsourcing governance requires many components: leadership, tools, processes, personnel, skills and principles. Operating from shared principles can create the basis for the high-trust relationship required to deliver the complex results expected from today's outsourcing agreements.

Hyatt is a client executive at EquaTerra, an outsourcing consulting firm in Houston. Contact her at Cathy.hyatt@equaterra.com.

Copyright © 2004 IDG Communications, Inc.

Shop Tech Products at Amazon