The Power Of A Corporate Governance Organization | Article
Governance, which is never easy, is nonetheless simpler when there’s just one buyer and one supplier doing one process. We’ve found that it’s relatively simple to determine if a single outsourcing relationship is working but extremely difficult to tell if a company’s multi-source outsourcing strategy is successful.
As many companies increasingly embrace and take advantage of the benefits of outsourcing, more and more firms are finding themselves with the challenge of governing multiple relationships over diverse functions and widespread geographies. In our experience, the most effective way to do this is to set up a governance structure at the enterprise level.
This is a relatively new concept. Here’s our definition of a corporate governance structure: a central organization at the corporate level which focuses on providing support across various aspects of the outsourcing lifecycle throughout the enterprise. It has one mission: to ensure the realization of the buyer’s desired value from its outsourcing activities. Its activities could include:
- Subject matter expert consulting
- Sourcing tools
- Templates
- Best practices
- Oversight
- Leadership
- Strategic thinking
Creating an enterprise outsourcing governance organization can produce many benefits, including:
- More effective strategy formulation
- Reduction of sourcing cycle time
- Greater realization of value
- Better alignment of buyer and supplier goals over time
Why Buyers Need an Enterprise Outsourcing Governance Team
Without taking this top-down world view, each business unit manages its own outsourcing relationship according to its own needs. There’s no guarantee these needs meet the overarching strategic goals of the entire enterprise. In addition, there is no way to measure the total effectiveness of the outsourcing relationships at the enterprise level.
Setting up an enterprise-level governance office is a good fix for buyers. We’ve seen this office successfully assigned to either the CIO’s or the CFO’s office. This governance team provides all the requisite oversight required to support senior executives including monitoring the effectiveness of all the relationships and ensuring they support the top-level corporate strategy.
Established governance at the top is helpful for suppliers, too. It is not a one-way street or a leverage play against the supplier. The supplier team gets regular, intimate access to the top corporate players who are eager to share the corporation’s long-term strategy. That helps the supplier craft an execution plan that more readily meets those goals and adds value over the course of the contract.
In addition, this knowledge helps suppliers establish enterprise-wise standards and best practices. This is rarely possible when every relationship has its own rules.
Sometimes this situation crops up even when a company outsources to one supplier. We recently helped one of our clients with this problem. The corporation spent $50 million a year on a dozen outsourcing relationships. Even though the company only worked with one supplier, each business unit negotiated its own deal with its own service level agreements (SLAs).
The first problem was the C-level executives had no idea how the supplier was performing in the aggregate. Was the supplier helping the corporation get where it wanted to go? The second difficulty was the buyer could not negotiate from strength; it certainly could have gotten a better deal when talking about a $50 million annual spend. Finally, the bigger number certainly would have attracted the attention of the most senior executives at the supplier; currently it was getting the second-string team. Getting the supplier’s A-team is always the buyer’s goal.
Establishing an enterprise-level governance gave this buyer more leverage and control. For the first time, both parties had a common goal and were using the same roadmap.
First Steps
How do you set up such an organization? Here are some things you need to think about:
- Where will the organization reside in the corporation?
- What level of authority will it have?
- What talent will you need to run it?
- Who will be its sponsor?
Governance is never easy. But we believe an enterprise-level governance organization can make it less difficult.
Next month: A review of (i)Structure’s new online book on multisourcing.
Category: Articles, Governance, Multisourcing
