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Tailoring governance to suit the deal
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Outsource magazine: thought-leadership and outsourcing strategy | March 3, 2015

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Tailoring governance to suit the deal

Tailoring governance to suit the deal
Danny Ertel
  • On May 18, 2011
  • http://www.vantagepartners.com

In our practice, we are thrilled to see more and more attention being paid to good governance and relationship management early on, during the negotiations of outsourcing arrangements. More companies are adding governance- and relationship management-related provisions to their contracts, and starting to put some focus and attention on what will enable success beyond a strong business case, a good contract, and a tight set of service level agreements.

Design governance during negotiation…

Though it is sensible for providers and buyers to have a set of consistent processes in place and a set of tools for managing their outsourcing arrangements, we should all remember that one size doesn’t fit all when it comes to governance.  While reusing the same governance exhibit from one deal to the next may seem efficient, it is generally a recipe for failure.

Different relationships have different goals and challenges that require a tailored approach to manage. An arrangement meant to dramatically transform a particular function requires significant change management and lots of attention on scope management. Outsourcing so that internal staff can focus on other activities requires a streamlined governance model that discourages “shadow organisations” and micro-management of the provider.  Centralising a function to serve multiple geographies simultaneously requires effective consultation and alignment mechanisms and stakeholder representation to ensure that appropriate tradeoffs are made between customisation and cost savings.

Just as you negotiate the terms and conditions, the statement of work, and the SLAs for each unique arrangement, so should you negotiate governance and relationship management.  Think hard about what the goals and intent of the arrangement are – is the focus on transformation or efficiency?  On “gold standard” service or cost-cutting?  Consider the unique challenges inherent in the functions being outsourced – are you dealing with a complex set of processes deeply intertwined with other activities in the organisation that are not being outsourced?  Are the services very distributed or more centralised?  Based on your answers to those questions, buyers and providers should work together to design a governance structure and set of relationship management processes suited to the deal’s specific needs.  You can always modify or build onto an existing, core set of processes and structures – just make sure that you account for the circumstances and goals that make each arrangement different.

…and based on relationship complexity.

One specific consideration when tailoring your governance is determining what is the appropriate degree of centralisation — where do governance resources “live” in the organisation, and how do they link to the outsourced functions?

For relatively straightforward relationships involving stand-alone or less complex functions, a simple, centralised structure is generally appropriate. A centralised governance organisation includes both functional experts from outsourced areas and those performing specific governance functions, like contract administration or financial monitoring.  These resources sit in an organisation outside of the outsourced function, and also separate from the retained organisation.

In a multi-process or multi-geography deal, the governance structure needs to be able to account for the additional complexities that arise.  This calls for a structure that incorporates a significant degree of input and participation from key stakeholders in different functions or geographies, pointing to a more decentralised governance with an end-user or business unit / geographic council, or a governance team made up of “embedded” business unit / geographic membership to gain buy-in from disparate parties in the actual outsourced areas. A Steering Committee might then provide the higher-level perspective that brings those functional or geographic views together into a cohesive picture.

Very complex relationships involving significant transformation require regular communication at multiple levels, as well as significant high-level oversight. These kinds of relationships therefore lend themselves to a combination of centralised and decentralised governance.  These relationships call for a multi-layered governance structure, with operational focus at lower levels and strategic focus at higher levels, and one of the committees or an entirely separate body focused specifically on innovation/transformation.