Governance: Protecting the Crown Jewels of Procurement Outsourcing
Parts one and two of this series addressed why procurement outsourcing is a viable corporate strategy, and how to plan for and implement a procurement outsourcing agreement. In this last installment, we will discuss a topic that buyers know they need, but don’t necessarily know what to do about it: governance.
Governance is not just a consultants’ buzzword – it is a critical element in ensuring the ongoing success of a procurement outsourcing relationship.
Governance: n 1: the persons (or committees or departments etc.) who make up a governing body and who administer something; (Webster’s Revised Unabridged Dictionary, ©; 1996, 1998 MICRA, Inc)
In essence, governance is the process of administering and monitoring the service provider to ensure the overarching goals set forth in the procurement outsourcing agreement are met.
The Role of the Joint Governance Board
A Joint Governance Board should be established and comprised of executives from both the client and the service provider in order to provide the top-level attention necessary to ensure a successful working relationship. Participating client executives may vary depending on the industry involved, but typically include the CFO, CPO (chief procurement officer), and COO. Communication is key in any relationship, and Joint Governance Board members should be prepared to report to stakeholders on a regular basis within their respective firms, between firms, and publicly.
Joint Governance Boards are more than show and handshakes. Outsourcing is like any other human relationship in that each party needs to work to get along and manage expectations in order to be successful. When the relationship inevitably gets bumpy, each party should have the ability to escalate issues to the Joint Governance Board for resolution pursuant to previously agreed protocol. Escalation procedures are critical in ensuring issues are resolved quickly and to the satisfaction of both parties. It is a good idea to include timeframes in the escalation so that issues do not languish and cause harm to the relationship.
For example, each step in the escalation process should be linked to a timeframe for resolution. In the event the issue is not resolved within the prescribed timeframe, the next level in the escalation procedure is engaged to resolve the issue. The last level of escalation is to forward the dispute to the Joint Governance board for resolution. Once issues are resolved, the Joint Governance Board should provide clear direction as the final arbiter of issues and disputes.
Negotiations will draw out the metrics that are important to both parties in measuring success in procurement outsourcing. Some companies may be interested in product costs while others are concerned with transaction costs. You should include whatever metrics are important to your organization in the agreement with the service provider.
Metrics are a part of service level agreements (SLAs) that will detail expectations and roles of both parties. SLAs may include incentives for the service provider to meet and exceed the goals established in the procurement outsourcing agreement.
The Joint Governance Board should review various metrics monthly, quarterly, semi-annually, and yearly to ensure operations are working as expected and that the level of data over time is sufficient to identify trends. Once trends are identified, the Joint Governance Board may agree on new benchmarks, changes in direction, or revised SLAs to support the changing environment. For example, consider how SLAs may change if your organization divests itself of a business unit, acquires a business, or is subject to severe budget cuts. Change management and adaptation are real and they provide a challenging role for the leaders on the Joint Governance Board.
Procurement outsourcing requires change agents and change management to be successful. The service provider, working closely with key champions in your organization, is the external change agent that creates and manages the transformation necessary to enable the divestiture of your non-core procurement functions, staff, and even systems. Champions within the client organization are necessary to promote the vision, accept change, and show ongoing management support to the outsourcing initiative. One important role of the Joint Governance Board is to be actively voicing the vision for the firm that is being carried out through procurement outsourcing. Continuous top-level support is required to ensure corporate initiatives are successful over the long term. Procurement outsourcing is no different.
Clients should also match internal initiatives and restrictions with the goals of procurement outsourcing to manage environmental change. Client CXOs on the Joint Governance Board should have insight to internal forces that may materially alter the procurement outsourcing scope of work and they should bring this information to the Joint Governance Board so that the parties can act to get the maximum value from procurement outsourcing. Service providers should be asking questions at least quarterly regarding new projects, budget issues, and initiatives in areas outside of procurement that may have a downstream effect.
For example, if a tier one supplier is chosen to provide major components for a new OEM product, timelines and volume projections should be shared with the service provider to allow them to forecast the impact on procurement operations, costs, and supplier contracts.
It is easy to get caught up in the work to move your organization into a procurement outsourcing relationship. The time-consuming process of garnering acceptance within your firm, conducting market research, tendering a request for proposal, attending service provider meetings, making down-select decisions, negotiating, and ultimately signing the agreement, is indeed exciting and stressful. However, do not let this hard work go to waste by not addressing governance every step of the way. The measure of success in procurement outsourcing will be based on results – not on best intentions or the hard work it took to get there. Early governance support is important in gaining and sustaining momentum in procurement outsourcing.
Governance is not an event, but a long-term process to plan for. The client’s governance team should be formed early on in the outsourcing process and the Joint Governance Board should start meeting during final negotiations.
This concludes the “Diamond in the Rough” procurement outsourcing series and is hopefully the beginning of your journey towards this exciting strategy for optimizing your procurement investment. What are you doing today to prepare for procurement outsourcing?
Lessons from the Outsourcing Journal:
- Governance is a critical element to the long-term success of a procurement outsourcing agreement and requires commitment from both the client and service provider.
- Measurements and service level agreements are essential tools in tracking service provider performance and your procurement ROI.
- The Joint Governance Board should provide strategic oversight and serve as internal and external champions for your procurement outsourcing initiative.
- Consider governance at every step in the outsourcing process including participants, roles, and communications plans.