Sourcing Governance - 2012 Global Update

Sourcing Governance – Global Update

Steve Kopp
Partner, Business Advisory Services

September, 2012

Copyright © 2012 Information Services Group, Inc. All Rights Reserved. No part of this document may be reproduced
in any form or by any electronic or mechanical means, including information storage and retrieval devices or systems, without prior written permission from ISG, Inc.

Contents 2

► Global insights into Governance

► Why Governance fails or succeeds

► Trends in Outsourcing Governance

Copyright © 2012 Information Services Group, Inc. All Rights Reserved 2

Global insights into Governance


What Do We Mean By Governance?

Corporate Governance

Governance (or Functional Governance)

Service Management Governance

Contract Governance


Sourcing Governance Remains An Immature Function In A Mature
Industry.
“Companies report between 5% and
30% of the expected value of their
transaction is lost through ineffective
governance.” ISG Research
Study

“81% of suppliers believe that poor or
failed outcomes are primarily or
Client completely the customer’s fault

89% of customers believe that poor or
Governance
failed outcomes are primarily or
completely the supplier’s fault.”
Providers International Association of Outsourcing Professionals

“Lack of management is central to the
problems with multiple sourcing. 84% of
companies do not have what they
regard as a mature governance model.”
Financial Times


Investment Too Often Still Remains Focused On The Contracting Activity

Greatest time, money, and complexity occur post-contract; that is where true value
and success are measured – not at contract signing.

Assess Strategy Transaction Transition Manage & Govern Renew

Post-contract period – where governance
processes really matter!

► Post-contract stages:
► ~10-15% of time spent in overall lifecycle ► ~85-90% of time spent in overall lifecycle

► About 2-3% of total spend ► About 97-98% of total spend

► Choreographed process ► Dynamic business changes

► Specialists within both client and service ► Multiple internal and external stakeholders
provider
Strategy and evaluation stages:


Large Amounts Of Value Are Lost Through Lack Of Good Governance
The dollar value is becoming apparent through organizations tracking the delta
between good and poor/absent governance…..
Savings were recorded as an average of 16% ACV over the three years.

Savings

Savings as % of ACV
$1,200
$1,000 $972M

$800 $678M
Hard
$600 Dollar
$400 $253M
Savings
$200 17.33%
14.73%
16.58%

$-
2009 2010 2011


Third-Generation Outsourcing Governance Is Filling This Critical Gap…

Third Generation
► Single top-down view of all
► Holistic view of outsourcing outsourcing performance
► Optimization of governance
► Consolidated dashboard on all
aspects of governance
Second Generation
► External/internal
► Improved isolated elements measurements
of governance
► Common data sources

First Generation ► Measures effectiveness of
► Focused on measuring service governance
provider cost and performance
only


Underpinnings of 3rd Generation Sourcing Governance
Third generation sourcing governance relies on expertise, robust processes and
technology, and flexible resource options.

Governance Processes Technology Flexible Resource
Expertise Options
► Processes
integrated with ► Onsite, offsite or
► 30+ processes
► Years of robust software offshore resource
► Proven through
governance ► Adaptable to options
dozens of
experience specific client ► Utilizes a mix that
transitions and
► Subject matter needs and in- optimizes
adapted for
expertise house performance
unique client
available as technologies while keeping
needs
required ► Comprehensive costs down
► Proven offshore
► Experienced dashboard ► Utilizes labor
management
design teams improves overall arbitrage where it
processes
sourcing makes sense
management
Combining these elements result in value exceeding the sum of the parts


Why Governance fails or succeeds


Governance Should Prevent Failure And Ensure Value Retention
Nearly 90% of the time, legal or financial terms and conditions are not the principle
source of problems.

Foremost causes of sourcing failure

Flawed strategy and
Poor or damaged
business planning
relationships
between firms 37%
52%
11%

Flawed legal and
financial terms and
conditions

Source: Sourcing advisory service executive report, Cutter Consortium

What Do You Absolutely Need To Get Right?
Governance is not a one-way street……..

► Respect from all parties from the get
go
► Process alignment from early on,
Suppliers Process compliance throughout.
► Focus on collaboration with the
Suppliers, its not a one-way street….
SM & G
► Have the tough conversation with
Consumers both Suppliers and Consumers
► Be fair…perception of fairness is key
to successful governance


Pitfalls Of Supplier Governance
Too often, customers fail to manage to the contract that has been so painstakingly
negotiated.

► Supplier-promoted and client-
accepted, position that the contract
should be put on the shelf and
forgotten
► Lack of process or compliance to
established processes
► When it becomes only about service
delivery, or cost, or relationship…..
► Contractual Deliverables &
Obligations are not forgotten


Trends in Outsourcing Governance


15

1. Moving Governance from an art to a science
2. Measuring the Effectiveness of Outsourcing Governance End-
to-End
3. Choices in execution
4. The changing role of software


From Art to Science
Outsourcing governance is becoming more fact and measurement driven. Some
examples……..

Trends – Savings Vs Error
Error Value as % Contract Value Savings as % Contract Value
25% 21.61% 22.06% 22.34%
20.29%
% of Contract Value

20% 17.41%

15%
9.28%
10% 8.12%

5% 2.89%
1.31% 0.45% 0.28%
0%
0-6 7-12 13-18 19-24 25-30 31-36
Months into Governance Services


17

1. Moving from an Art to a Science
2. Measuring the Effectiveness of Outsourcing Governance End-to-End


Measurement –Has Become A Necessity, Not A Luxury…

ABC DEF Overall Governance Process Status
Supplier Overall Ratings
  Status # Trend #
ABC DEF ABC DEF
Contract Management Financial Management
Status Trend Status Trend Status Trend Status Trend
Contract Deliverables & Milestones
    Invoice Managem ent    
Contract Change Request & Revision
    Credits, Earnbacks and Milestones    
Governance Issue Managem ent
    Financial Analysis and Planning    
Governance Library
    Value Assurance    

ABC DEF ABC DEF
Relationship Management Performance Management
Status Trend Status Trend Status Trend Status Trend

Custom er Satisfaction Managem ent     Perform ance Analysis    
Spend Pool     Service Level Managem ent    
Governance Activities Managem ent     Service Request Managem ent    


Measuring Internal Governance Processes Is Also A Necessity

Governance Process - Health Metrics Sample

Service
Management Process Key Process Metric Target Sep-10 Oct-10 Nov-10 Dec-10
Discipline
Contract Change Contract Change Request
< 20 business days 23 days 23 days 58 days 28 days
Request Cycle Time

Contract Contract Issue Contract Issue Open
< 20 business days 9 days 12 days 14 days 10 days
Management Management Aging

Contract Contract Interpretation
< 10 days 2 days 3 days 2 days 4 days
Interpretations Resolution Cycle Time

Service Provider Invoice
Invoice Management < 10 business days 14 days 24 days 23 days 12 days
Financial Discrepancy Resolution
Management % Invoice Back Up Data
Invoice Management 5% 14% 17% 11% 50%
Line Items with Errors

Work Request Cycle
Work Requests < 10 business days 3 days 3 days 3 days 4 days
Performance Time
Management Work Request Open
Work Request < 20 business days 16 days 10 days 12 days 11 days
Aging

Relationship Governance Meeting >90% of last month's
Governance 35% 40% 55% 50%
Management Action Resolution action items closed

Green >=80%
Overall Health
Criteria
Yellow between 70% and 79%
Red Less than 70%


Measuring To Understanding Process Efficiency


21

3. Minding both the P’s and Q’s


Choices In Execution
Companies have choices when they start…Do it all on their own or practice what
they preach…

Client

► Relationship ► Governance
Process
► Client Culture ► Governance
Experience
► IT Delivery Processes ► Technology/Tools
► Flexible resource
► Accountability model at offshore
cost

3RD GENERATION GLOBAL SOURCING ORGANIZATION


Best of Breed Governance
Not everyone is good at everything; similarly not all organizations have the skills,
resources and tools to excel at outsourcing governance

► Organizational maturity dictates the level of investment companies are willing
to make to improve their outsourcing governance
 Always the third priority – a clear warning sign
► Pooling of governance resources and know-how across functional boundaries
are becoming more common place
 Enterprise outsourcing governance a reality
► Deliberate decisions on what is “core” in outsourcing management
► More than $11Billion in outsourcing contracts managed by third parties
 Rapid growth
 New market entrants


Best Of Breed At Ground Level
Large, experienced Companies understand what governance processes can be
sourced, and which to keep in-house…….
CONTRACT MANAGEMENT FINANCIAL MANAGEMENT
Contract Compliance & Deliverables Invoice Management
Contract Change Request Performance Credits & Earnbacks
Contract Interpretation Contract Pricing Adjustments
Issue Management Value Assurance
Governance Library Financial Analysis & Planning
Third Party Contracts Management Service Provider Procurement Oversight
Service Provider Audit Chargeback
Consumption Management

Contract Financial Performance Relationship
Management Management Management Management

PERFORMANCE MANAGEMENT RELATIONSHIP MANAGEMENT
Service Level Management Governance Administration
Work Requests & Authorization Spend Pool Management
Consumption Management - Operational Compliance Customer Survey Management
Service Provider Asset Management Oversight Forecasts & Demand Management
Architecture & Standards Management Regulatory & Tax Compliance
Risk Management Workplace Services
Security Management Communications Management
Service Delivery Management
Performance Analysis
Incident, Problem, Change Management Sourced
Selectively sourced
Retained in-house


The Philosophy Behind Best Of Breed Governance
Separating decision making and relationship management from the operational
governance tasks.

► Decision making
Clients generally
► Approvals
retain…
► Relationships with the service providers

► Process management and tracking ► Contract change management
Third Parties ► Data collection and validation ► Record keeping
perform… ► Performance and payment analysis ► Reporting

► Scope
Agreements are ► Specific division of responsibilities on a task-by-task level
tailored and detailed
for … ► Agreement on relative level of effort by task
► Specific deliverables


The Result of Best of Breed Governance
A Day in the Life” examples of how a third party can support and enable
governance processes.
Instead of… Internal Governance Team focus on…become…

Working with the service providers on service
Collecting data and calculating performance credits delivery issues, continuous improvement, and
clearing root cause analysis reports

Uncertainty regarding roles and responsibilities Helping to clarify roles and operating in accordance
with the process flows

Focused on working with service providers to
Debating data accuracy and completeness
improve service quality

Finance Team validating invoices Finance Team working on higher-value items -
ensuring full value being obtained
Service Level Team checking service level Service Level Team working with service providers
calculations to improve service level performance
Governance Manager collecting and logging issues
from service delivery, billing & performance Governance Manager is focused on issue resolution
governance meetings
Governance teams are focused on higher-value
Collecting various contract-related artifacts for filing items such as relationship improvement and
in the Governance Library transformational projects

Lower value, best efforts Higher value, best practices

Why Companies Decide To Source Some Of Their Governance

Minimize Value Leakage Retain value from outsourcing transactions by reducing value
leakage through improved governance oversight

Increase control and lower risk of failure through use of best-
Risk Mitigation in-class capabilities, processes, tools and people

Timely, fact-based recommendations allow the organization to
Focus focus on policies, approvals and service provider relationships

Utilizing proven world-class processes, accelerates the
Accelerated Savings organization through the learning curve

Provides a cost effective platform that can easily scale as
Scalability additional sourcing activity occurs

Minimize the number of employees required for governance
Headcount Costs

Relationship Fact-based governance execution fosters an environment that
Improvement focuses efforts on performance and relationship improvement


28

3. Minding both the P’s and Q’s


Changing Role Of Software Tools
Software remains the missing link in outsourcing management excellence….

► Only recently have we seen some comprehensive functionality evolving
► Other software solutions have:
 Disappeared
 Were acquired and are poorly positioned in the market
 Price, depth…..
 Remains under funded and under developed
► The market is poised for significant change in outsourcing governance through a new
generation of software that:
 Is functionally comprehensive
 Addresses all aspects of workflow, intelligent storage and interrogation, reporting and
ease of interfacing
 Is very affordable at all levels in the industry
 Integrated with a managed service


In Conclusion……

“Fact-based Governance execution fosters an
environment that focuses efforts on performance
improvement rather than debates on whose
data is right and whose data is wrong.”

“Poor Governance is the silent killer of results.”


Sourcing Governance - 2012 Global Update

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