Governance (Finally) Grows Up | Article

Graduation hats being thrown in the airOutsourcing processes are well-established and well-embedded in today’s organizations. That’s because the history of outsourcing is fairly rich — some global airlines like British Airways were outsourcing their business processes to companies in New Delhi in the 1980s. Yet, there isn’t a CIO around who won’t have a disaster story to narrate on their outsourcing experience. Ask, “Have you been unhappy with your outsourcing partner in the last 6 months?” at an outsourcing conference and watch a majority of the hands go up. Reason? Outsourcing may have become a business inevitability, but the methods to manage outsourcing relationships have lagged.

At the core of the problem is the lack of effective governance. Service providers who have been crafting contracts around SLAs are discovering this the tough way. According to the Financial Times, lack of management is central to the problems with multiple sourcing. The publication reported that 84 percent of companies do not have what they regard as a mature governance model.

Sourcing Governance—the key to success

“Sourcing Governance is a key for success in outsourcing contracts,” says Sharad Heda, President, India and the Middle East for Microland, a Bangalore-based pioneer in the technology outsourcing space. The efforts put in by both the service provider and the client is extremely high during the pre-contract stage which is typically 3 to 6 months for any medium sized deal. But the same is not true during the steady state period which is typically 3 to 5 years. This is the period when value is expected to be delivered.  Heda says that the churn witnessed in a large number of contracts much before the end of the term is a reflection of the lack of effective governance.  Weak governance—one based on perception rather than data —has a significant impact on invoice clearance, leading to a deteriorating overall relationship, which in turn impacts quality.

What’s to be blamed? Amongst the leading issues is post-contract relationship management. As an example, there could be very little clarity on who in the client’s organization can make new service requests and how those requests are to be managed. What is the documentation required for a new service request? What are the tools that must be used for documentation, approval, costing, initiation and reporting of the service? How are emergency service requests managed? What constitutes an emergency? Most service contracts don’t capture these needs – and neither are they supposed to. Rather, governance processes must address these needs. Instead, most organizations end up treating the service contract as a service manual.

The Rise of objective-led, fact-based governance models

It’s not surprising that a number of service providers are asking clients to build robust governance mechanism. Even service providers are waking up to the need. Service providers, says Heda, are increasingly proposing structured, objective-led, fact-based governance models to clients and ensuring these are well documented during the contracting phase itself. As an example, Microland is proposing Business Outcome Based engagement models rather than Input or Output based pricing models. In addition, service providers are asking clients to agree on a governance process that includes SLA calculations, reporting requirements, invoice clearance process, documentation required, clarity in obligations and deliverables, new service requests, emergency requests, etc.

So what is the future of the standard-issue SLA model? That’s dying. It is no longer viable. IT infrastructure and application availability is a given. CIOs are now moving on. Their new goals and deliverables include:

  • Enhancing end-user customer experience
  • Drive innovation through partnerships
  • More for less – Re-invest savings into significant technology advancement to help business achieve competitive advantage
  • Variabilize the total operations expense and link the same to key business KPIs

The challenge is for service providers appreciate and understand these business objectives. They must become KPI focused. As Heda observes, “Meeting Infra and Apps SLAs are now seen only as `means to an end’ and not the end itself.”

For service providers this is not an easy shift. They must move from a commoditized transaction (driven by a SLA-centric contract) to a trusted partner (driven by a robust governance model) that delivers innovation and business outcomes. We’ve seen service providers fail when it comes to working outside SLA driven parameters.

Can service providers adjust to emerging business needs and bring strong governance practices to the table? How can they demonstrate to customers that they have governance practices that are as mature as their traditional SLA-driven practices?

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