Subscribe    |    Sponsors    |    About Us   |   Contact Us                

BPO Journal Home
Outsourcing Journal
Current Issue
Back Issues
Everest Value

Table of Contents

Everest Voice
Governance Mistakes Can Undermine a Valuable Outsourcing Relationship

BPO Trends
Meet a New BPO Supplier: Compaq

Contracts and Negotiations
Contracting for Energy Management Outsourcing

Focus on Email
The Original Mission Critical Application Becomes Even More Important as People Go Postal About Regular Mail

Focus on F&A
BPO Cuts Moving Costs, Cures Headache for Dry Cleaner

Focus on Training
Teaching a Risky Business

Focus on CRM
There's Gold in Them Thar Hills

Focus on HR
Going All the Way

Global Top Decision-Makers Study on BPO Energy

Gain Control of Your Computing Environment

As an industry, both sides of the outsourcing equation are making tremendous progress in understanding how to structure outsourcing transactions. Buyers have studied the process, learned from others' mistakes and hired consultants like Everest. Their resulting sophistication has removed the historical inequity in outsourcing negotiations where the suppliers had all the natural advantages. Buyers have now learned how to capture the value outsourcing brings to their companies by structuring their outsourcing deals appropriately.

However, we all have a long way to go in the governance area. Governance is crucial to outsourcing success because someone has to direct the work, oversee the output and nurture the outsourcing relationship.

Here at the Everest Group, we study outsourcing relationships to help our clients create successful long-term relationships. From my vantage point, I see governance as a fundamental philosophical problem for buyers.

Often, company leaders determine that outsourcing is the best business solution for a specific company challenge. They realize they must divest their important but non-core processes so their organization can devote its time, talent and capital to the processes that distinguish it in the marketplace. At the same time, outsourcing these non-core activities allows them to enjoy the superior process expertise, lower cost, more flexibility and the higher quality that an outsourcing provider brings to the process.

Once the decision has been made, these C-level executives then give lavish attention to the structure of their outsourcing transaction. This they are doing very well.

Rule No. 1: Don't Let the Former Process Owners Manage the New Relationship

But the problems begin the day the relationship starts. The leadership turns over the day-to-day operation of the outsourcing relationship to its operational teams. Many buyers have adopted the philosophy from the 1960's TV show "It Takes a Thief." The underlying premise of the show was only a thief would know the tricks of the trade and therefore be much more skilled at catching one. In the same way, buyers believe the old process owner is the best person to manage this relationship because they too know the tricks of the trade. After all, who knows better than they do how the process works?

However, after watching many outsourcing transactions fall apart at this point, I believe this is a major mistake. In my opinion, this is a recipe for disaster. Here's why: These executives know too much about the process. They grew up in that process and have made a career of managing it their way. That makes them exceedingly critical of the new supplier and the way it performs the process.

In addition, these newly displaced managers are still smarting from having their beloved process "ripped untimely from their grasp," as Shakespeare would say. More often than not, they are very resentful at their fate. Being human, these natural negative emotions do not make them impartial observers. Even if they are employees of top character and known for their good will, the temptation to meddle instead of govern is overwhelming.

These circumstances create a situation that violates the No. 1 rule of outsourcing: the buyer must transfer the complete ownership of the process to the supplier. This is the only way to create true value through outsourcing.

Rule No. 2: Reward the Governance Team on Supplier Success, Not Failure

Buyers must be careful in how they reward the employees who are governing the outsourcing relationship. Unintentionally, first time buyers end up rewarding their governance officers when they find fault with the outsourcing supplier. The bosses don't actually give out bonuses when the governance team finds a problem-- the rewards are subtler. For example, the only time the governance team receives recognition from the higher ups is when it finds a problem. They gain executive access and approval by finding fault--not by making the relationship more valuable or helping the process flow well.

This attitude results in what I call "the Friday five o'clock whipping." Late Friday afternoon both groups meet to review service level performance. More often than not, this is the time the supplier receives a whipping.

Since humans are working with humans, I can assure you it's impossible for the supplier not to have made some kind of modest error, especially if the outsourced process is very complex.

Continually finding fault with trivial elements of the outsourcing relationship is the wrong mindset. Everyone in the organization must view the supplier as an asset, not the enemy. Continually finding fault with the supplier accomplishes no common business goals and harms the outsourcing relationship instead of building a true partnership.

If the negative mindset persists, the relationship tends to spiral into a sub optimal, co-dependent dance. The constant spirit of recrimination creates a spirit of mistrust. These feelings build and magnify over time. The end result: the value the company leadership expected by outsourcing erodes and can be lost.

Don't confuse this attitude with not holding the supplier accountable for its performance. The best path is to maintain a sense of perspective. Remember the ultimate goal of this relationship is to continually create greater value for both sides.

Rule No. 3: Assemble a Governance Team with Business Judgment and No Direct Process Skills

Clearly, sophisticated governance models are difficult to implement. They must be customized to represent the buyer's corporate culture, making service levels specific to the process.

Executives need to rethink the governance process, keeping the ultimate goal in mind: to make the relationship with the supplier as valuable as possible. Instead of assigning former executives with a historical stake in the process, give the job to a capable executive or a team who has sound business judgment but no direct skills in the area.

Then, compensate and measure this team on how much value they can encourage the supplier to bring to the relationship. Incent them around the business goals of the organization. Base the governance team's evaluations, self-worth, career progress and bonuses on the success, not the failure of the outsourcing relationship.

Reward them when the supplier makes innovations to the process. And suppliers will if you let them. From my observations, most suppliers have lots of innovations available to a buyer with an enlightened governance approach. This is especially true if the supplier will also benefit in the innovation.

Rule No. 4: Give Governance the Importance It Deserves

Finally, give governance the importance it deserves. Don't make it a dead end job. It's not the place to park old process owners before they retire. Governance should be the place young Turks want to go because that is the next rung on the ladder to corporate success. View the governance slot as a place where the up-and-coming superstars want to go to learn about alternate channels of process delivery.

Keep these governance teams small. And, keep the rules consistent.

Governance is the place where buyers and suppliers forge a relationship that works for them. In February the Everest Group announces its 2002 Outsourcing Awards. We're currently viewing the nominees. I see a common theme running through all the stories: both parties in the transaction put a high value on their relationship. Both sides work in a cooperative manner, especially when challenges and conflicts arose. I can tell you after reading the interviews that each party is doing its best to meet the business goals of the buyers. In my view, these successes are the product of enlightened governance.

Rule No. 5: Be Tough But Fair

Outsourcing is all about accountability. When a buyer experiences serious and significant non-performance, it must hold the supplier accountable. Buyers must be clear, objective and professional. The outsourcing contract should clearly state the consequences for non-performance.

Sometimes buyers' expectations are different from what the supplier delivers. This is an entirely different matter. In this case, suppliers have to realign expectations by either changing the work product or the expectations so both parties are clear about the work that will be performed.

Suppliers who don't nip this problem in the bud generate serious dissatisfaction and negative behavior on both sides. More often than not, that leads to the buyer dissolving the relationship prematurely.

Lessons from the Outsourcing Primer:

• Outsourcing success is the product of enlightened governance.
• The five rules for successful governance are:
1. Don't let the former process owners manage the relationship.
2. Reward the governance team on supplier success, not failure.
3. Assemble a governance team with good business judgment but no direct process skills.
4. Give governance the importance it deserves in your corporate hierarchy.
5. Be tough but fair.

Publish Date: November 2001

Related Articles
13 Big Mistakes to Avoid

Copyright © 2001 - Everest Partners, L.P.

[Previous Story] [Next Story]