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Governance

The Next Generation Shared Services through BPO

Dennis Winkler, Director, Jim Matthews, Managing Consultant, Alsbridge

Executives are all asking similar questions of their shared service organizations (SSO): “How do I get to the next level of shared services and realize more value?” “How do I change my SSO model to expand services and go global?” “How do I drive continuous process improvement initiatives?” “How do I deal with social media and big data?” Depending on timelines, costs or politics, many first-generation SSO initiatives started out with a goal of centralizing business processes to meet short-term budgetary goals primarily through FTE reductions. With today’s business environment, executives are now aligning their shared services goals with overall long-term corporate goals, and the SSO’s vision is expanding to a broader strategic role in sourcing. With the demands and opportunities of globalization, companies are developing new sourcing models with a focus on outsourcing transactional processes under control of the SSO as well as adding more value-added processes to it. SSOs are moving to the next generation by implementing the following processes and capabilities: New operating models – new services and new geographies First- generation SSO operating models started as a consolidation of processes such as finance and accounting into a central location. Then many SSOs evolved to a consolidation of multiple business processes in an entrepreneurial, separate business unit, stand-alone shared services operation. Next generation SSOs are now shifting to global integrated service delivery models with regional hubs and centers of excellence. Many multi-national companies are creating regional service centers in lower cost areas, and the majority of large corporations have more than one shared service center. There has been significant growth lately in Latin American centers (serving US and Canada), Eastern European (serving EMEA), and China and the Philippines (serving Asia Pac). Other SSOs are blending their offerings into hybrid models (shared services and BPO) providing back-office, transactional services through BPO arrangements. The BPO provider already has established operations in the geographies that the SSO and its business units are looking to grow into. By leveraging the BPO’s existing infrastructure, the SSO can improve speed to market, avoid start-up costs and still take advantage of labor arbitrage savings. The types of services SSOs are offering are expanding to include not only the typical transactional processes but also: True end-to-end services, such as procure-to-pay More cutting-edge services around big data analytics and social media Customer-facing and competency-based processes, such as vendor management Again the BPO advantage of having pre-existing infrastructures and an experienced team providing these services is causing more SSOs to leverage their service provider for these higher-end services instead of building it themselves. This is especially true when they require technology investments and specialized skills that may not be available in the local SSO market. Continuous improvement process The first generation of SSO typically took a project approach to implementing process improvements with the focus often on reducing specific operating costs and/or achieving a stable level of operating maturity. To move to the next generation, SSOs must implement a continuous improvement strategy. The next generation SSO has its own in-house consulting group with Lean Six Sigma skills that is constantly analyzing the SSO business processes against benchmarks and best practices and determining the best path to achieve process optimization through standardization and process re-engineering. Successful SSOs recognize that “going live” is only the beginning—to continue to add value, they must persistently standardize, consolidate and re-engineer. Mature SSO organizations that have a BPO relationship typically align their provider with developing and executing their continuous improvement strategy. The SSO and BPO provider teams typically work together on certain end-to-end process improvement initiatives and separately on other initiatives where each respective party owns the cost/benefit. For example, a BPO provider that has guaranteed certain on-going process improvements as part of future reduced fees may take the lead and own implementing middleware that would provide a standard data-entry screen that could then feed various client systems to enable more efficient processing of data by the provider team. Continuous improvement departments are the driving force for not only cost-cutting process efficiencies but also operational and relationship improvements. The continuous improvement team should be focused on proactively addressing change management issues-identifying, communicating and transitioning the cultural, technology, personal and process changes that are an inherent part of the shared service and outsourcing lifecycles. Service management First generation shared services management focused on cost controls and basic operating metrics for the shared service center portfolio management, being a blend of resource allocation, risk assessment, and balanced scorecard analysis. The benefits of developing service management include optimizing customer service, improving customer satisfaction and reducing overall service costs. Companies are expanding their sourcing options. As a result, their make/buy decisions are leading many SSOs to sourcing strategies that include outsourcing as an enabler of standardization and process reengineering as well as a way to drive on-going continuous improvement strategy across all functions and geographies. In order to move to the next generation, the SSO should establish a service management framework and processes for those services associated with supporting the shared services organization. New generation SSOs are managing both the internally-provided functions and the business process outsourcing relationships of sourced functions. The SSO must drive optimization and management of its mixed services portfolio by developing a strong governance organization, with a focus on compliance and measurement. The commitment must be to best practices and benchmarking KPIs that have a direct business impact. There should be an emphasis on innovation, not just cost and quality. A strong service management framework will allow the SSO to manage its BPO providers through a shared scorecard that rewards the BPO providers that are achieving the SSO goals and proactively manages the lower performers to raise the bar or have their workload/future opportunities erode over time. Relationship management The key to relationship management is building stakeholder consensus. The SSO director should continuously leverage key stakeholders to understand customer requirements. With BPO providers focused on quality of processes, the SSO is now able to work with the business units to coordinate process …

Under the Radar: A Look at Oft-Overshadowed ITO Trends

Outsourcing Center, Patti Putnicki, Business Writer

If information technology outsourcing (ITO) were a movie, cloud, analytics and mobility would be the headliners. Although this trendsetting triad is having a dramatic impact on how services are consumed and how companies operate, a number of other significant trends are emerging in the information technology outsourcing space. This article focuses on those unsung heroes and the impact they’ll have on the industry moving forward. Changing Expectations In a previous article, we talked about the coming demise of the long-term, single-provider contract. Today’s engagements are shorter, more specialized and far less relationship-based than we’ve seen in the past. Governance is less granular, focused more on results than day-to-day transactions. In almost every way, expectations have changed. “In the past, our clients wanted to know the number of incidents and problems that occurred and how many of these we resolved. That was the benchmark,” said Vijay Balasubramanian, vice president and global head of CPG and eCommerce for HCL Technologies. “Now our clients want to know how much value we added. Instead of just resolving incidents and problems, they rely on us to link the business processes to applications landscape and identify value. In the olden days of information technology outsourcing, the support person didn’t know the impact of the incident on a business process. Now, providers are starting to map business processes to applications and business structures, so front-line support personnel don’t just respond to issues but identify ways to solve these permanently. Instead of contracts built on service level agreements, companies are beginning to base these contracts on output. Innovation has also moved from a value-add buried in the depths of a proposal, into a position of prominence. “We used to spend six months explaining who we were and what we did. Now, customers care more about how providers do ITO; how they bring innovation and how quickly they can do it,” Balasubramanian said. “Innovation is now a critical component to any ITO engagement.” The innovation is in the HOW rather than in the “who” or “what.” A Surge in Desktop Virtualization Desktop virtualization is also on the rise, driven in part by increasing numbers of remote users and contract employees. Desktop virtualization gives these users secure, anytime, anywhere system access from any device they choose – from laptop to tablet to smartphone. “Desktop virtualization offers a number of benefits to companies and their users,” said Harish Krishnan, general manager and head of the End User Computing Services Practice at Wipro Technologies. “Because the data resides in a central location, it is much more secure than data housed on individual devices. The updates and patches can be easily done as the virtual desktops are in the data center as compared to geographically dispersed physical desktops. This lowers the management costs”. According to Krishnan, thin clients significantly reduce power consumption by as much as 80 percent. It also lowers refresh costs. “A thin client is cheaper and the refresh cycles are longer,” he said. “In a traditional environment, a refresh lasts three or four years, whereas a virtual refresh lasts six or seven years. Provisioning is easier as well, because you’re not working with a physical desktop.” Today, companies are recognizing that the real value of virtualization isn’t lowering cost. It’s more about the value virtual environments bring to the table. For similar price as a traditional environment, virtualization delivers increased security, availability, agility, flexibility and a better user experience. However, like cloud, virtualization isn’t an “all or nothing” proposition. “It’s important to note that it’s not feasible to virtualize everything. Companies need to segment users and virtualize what makes the most sense,” Krishnan said. “While power users on legacy systems aren’t strong candidates for virtualization, general office workers and contract workers are. It all comes down to the business case and so it is important to have the right virtualization solution based on the categorization of users.” Consolidating IT Support This new virtual environment has prompted companies and outsourcing providers to re-engineer the way they deliver support. Historically the desktop and service desk were combined functions. But in the last 10 years, these functions have largely been broken out, operating as separate units. “In the past, when someone called the help desk, 20 percent to 30 percent of the calls required someone to physically go to the device to correct the issue. Now, with the widespread adoption of high-performance desktop operating subsystems and remote monitoring capabilities, that’s no longer the case,” explained Chris Pattacini, director of benchmarking for Alsbridge’s benchmarking division. According to Pattacini, more companies are identifying the service desk as the source for problem resolution and desktop/help desk support for more “install, move, add or change” functions. “We’re seeing more organizations bringing these two functions back together and no longer treating them as separate functions,” he said. “As desktop virtualization adoption increases, this more centralized support structure will increase in popularity as well.” Converging Technologies Companies are also getting more innovative in how they promote their product and brand to the consumer market. For example, because of a promotion that involves music downloads, a large, U.S.-based soft drink manufacturer is now also the third-largest music distributor in the United Kingdom. “We’re seeing a huge convergence of media entertainment, consumer packaged goods and retail,” Balasubramanian said. “Instead of investing in television advertising, companies want to engage consumers through social media, music downloads, digital coupons and other digital media. They’re turning to outsourcing partners to take advantage of digitization.” More Complex Skill Sets The advent of cloud, the increase in virtualization and the transformation of IT in the digital age are all changing what a traditional IT department looks like, from the CIO on down. “Fifteen years ago, a CIO’s job was making sure the system worked. Since that time, the CIO’s role has changed as IT is now more closely mapped to business strategy,” Pattacini said. “With that evolution continuing and new delivery models increasing in significance, the CIO of the future will become an aggregator of suppliers and …

How Cloud, Competition and a Maturing Market are Transforming ITO

Outsourcing Center, Patti Putnicki, Business Writer

In the world of IT, Cloud has been the media darling, taking center stage in every conversation and publication. While it’s true that Cloud is a major trend in and of itself, its adoption has caused a domino effect in the industry as a whole. The advent of utility-based pricing, in combination with a more savvy outsourcing customer, is dramatically impacting the way IT services are purchased and consumed – with far-reaching ramifications. Let’s take a look at the trends. The Decline of the Mega-Deal; The Rise of Fragmentation In recent years, ITO was a “partnership,” characterized by long-term, mega-deals with arduous sales cycles and complex pricing structures. Smaller companies rarely had the breadth to compete. Today, all of that is changing. “We see ITO morphing into something that’s more fragmented, ” explained Ben Trowbridge, founder and CEO of Alsbridge, Inc. and author of Cloud Sourcing the Corporation. “Instead of the mega-deal, single-provider contracts, clients are starting to break up deals based on competencies.  Two, three or more providers will become the norm.” According to Trowbridge, today’s outsourcing client is now well-equipped to manage the complexities of governance in a multi-sourced environment. “You have to remember that clients are maturing in their use of outsourcing, so they’re starting to govern the outcome instead of overseeing every tactical step,”  Trowbridge explains. “This approach makes managing multiple ITO providers far more feasible.” This new breed of client is engaging the advisor community differently as well. “Buyers are more informed, they’ve gone through the process – and service standardization has given them price transparency they didn’t have before,” explained Chris Pattacini, director of benchmarking for Alsbridge’s benchmarking division.  “Rather than coming to us to identify what and how to outsource, clients are engaging us to benchmark existing deals to make sure they’re not only getting a good price but are maximizing the value of that relationship.” Service-level agreements (SLAs) are no longer enough to secure client satisfaction. “We’re seeing a lot of ‘value leakage’ – clients who are seeing red when they should be seeing green. Their outsourcing partners are meeting the SLAs, but the clients just aren’t happy for a variety of reasons,” Pattacini said. “Clients ask us to do a ‘health check’ to identify what’s really causing the dissatisfaction.” An Expanded Provider Landscape At the same time the ITO market is transforming, new competitors are emerging. India, which historically competed in the space with applications, is now entering into the ITO market with a noticeable price advantage. “Years ago, most U.S. ITO providers started out as a body shop – order takers – then developed a solution around service delivery,” Trowbridge said. “The same transition is happening with Indian providers. They’re teaming with organizations that have rack space and creating a solution that capitalizes on the fundamental advantage of the Indian market – an extremely low cost of labor.” Other smaller, more specialized outsourcing providers are appearing worldwide. At the same time, many established providers are re-vamping their delivery models to compete, including going to market with new, “Cloud-like” service offerings. “On the server side, we’re going to see traditional data center services look more like Cloud solutions, so these providers can protect market share and provide a viable alternative for applications that don’t really ‘fit’ within the Cloud model,” Pattacini explained. For example, a traditional environment may have 100 servers, 30 operating systems and five or six platforms, making it difficult to manage cost effectively. A Cloud-like, more standardized solution enables clients to reduce costs, without following a pure Cloud model. “In Cloud, the client goes to the Internet, buys server capacity with a credit card, and acquires the needed capacity. In Cloud-like solutions, there’s no self-provisioning, but the client has the cost benefit of solution standardization,” Pattacini said. “It’s like renting a car, leasing a car or buying a car. Cloud is renting, Cloud-like is leasing and the traditional approach is like buying. The truth is, not every application needs the flexibility provided by Cloud.  That’s where Cloud-like delivery can be a viable, lower-cost alternative.” So, what does all of this mean to traditional, legacy providers? “The lower cost options will undoubtedly create some turmoil in the market, and we anticipate legacy providers responding in a couple of very significant ways,” Trowbridge said. “Traditional ITO providers will start offering more granular solutions – more of an ‘a la carte’ menu of sorts — as opposed to one, big mega-solution.  They’ll start to match the market’s move toward specialization, providing a broader range of very specific, very focused services.” The real game-changer could be when providers, like Amazon, begin making enterprise sales calls. “Today, if you want to procure ITO with Amazon.com, you log in, view a video and purchase what you need,” Trowbridge said. “But, consider what would happen if Amazon committed to deploying an enterprise sales team. That alone has the potential to turn traditional ITO upside-down.” A New World Order Although opinions vary on where the market will go or what will happen next, one thing is certain: the world of ITO as we know it today will never be the same. That goes for customers as well as ITO providers. Gone are the days of ‘an IT partner for life;’ in are the days of multiple, smaller, shorter contracts with a variety of specialized providers. India-based outsourcers are expanding their service portfolios beyond applications and programming to provide more traditional ITO services at significantly reduced rates. A more mature client base is taking a new approach to governance, managing by outcome and benchmarking to ensure they get the greatest value from their combined service provider partners. In short, the times they are a-changing – and the transformation is starting right now.  

Less Haste, More Speed: Improving the ROI on Outsourcing Transactions

Linda Tuck Chapman, President, ONTALA Performance Solutions Ltd.

Despite quantum improvements to outsourcing deals and governance over the past 10 to 15 years, when it comes to achieving outsourcing process excellence there’s still plenty of opportunity. Part of the challenge is that once the decision is made to outsource or change providers, the clock starts ticking….fast. It takes real discipline to know when to slow down and what to do that will ultimately speed up the journey to outsourcing excellence. Empower the Project Team There is often a big gulf between senior decision makers on the Project Steering Committee and the team leading the outsourcing process. Senior people determine their business objectives and set strategic direction but have limited knowledge about how service providers deliver services. The outsourcing team works very hard to deliver what they believe senior executives want. The team may feel reluctant to propose alternatives to the Project Steering Committee if the alternatives aren’t exactly what senior management asked for. As a result, in their quest to deliver what the Project Steering Committee asked for, they may require customized processes that disregard the service provider’s proven processes. The project timeline stretches out while the service provider tries to develop customized processes or the project team spends unrecoverable time backtracking to redesign parts of the solution. The best way to avoid this totally unnecessary slow down is to spend time up front establishing ground rules for the Steering Committee, project team and the service provider, building trust and empowering the team. Good leaders delegate real authority, actively listen and build trust. Senior leaders need to be aware of their positional power and ask the right questions, and the outsourcing team and the service provider need to feel comfortable raising issues and proposing solutions. Do your Homework for the Outsourcing Process The decisions made when establishing an outsourcing relationship have a long-term impact on your company.  Service delivery is the service provider’s core competence; time and again I’ve seen the buyer succumb to the temptation of letting a service provider guide their decisions regarding in-scope services and how those services will be delivered. This is particularly true when there is a pre-existing relationship or when the business development lead has exceptional relationship-building skills. This approach often seems like a great time saver because the service provider appears to have all the answers. When entering into any type of outsourcing relationship — large or small — it’s always a case of pay me now or pay me later. The time you invest in external market research, emerging competitors and solutions, site visits to service providers’ customers and developing exit scenarios is time well spent. Internally, it will save you time and money if you invest in a detailed current state assessment, which includes baseline costs, systems and process documentation, service standards and performance data, employee profiles and so on. Investing in these two steps allows you to develop a fact-based point of view in the context of your organization. You will make better long-term decisions about which service provider is the best fit, which of the service provider’s capabilities and services you will evaluate, and which solution will help you achieve your goals. Your investment in market research and competitive intelligence ensures that your expectations and the provider’s ability to deliver are well aligned. In the long run, you’ll have realistic expectations and save both time and money. Travelling in a straight line is always the shortest route. Invest in Governance Transition and change management plans invariably lay out detailed plans and controls for orderly transition to new technology, processes and workflow. They include detailed internal communication strategies and user training. Intense discussions take place and energy is invested in developing detailed employee retention agreements and severance packages, followed by timed communications about job elimination. Typically, limited resources are invested in developing good governance and management practices and protocols. Sometimes this important work isn’t started until transition is underway. While you can get by with weak governance processes, you are denying your organization and your service provider feedback. This minimizes the likelihood that you will ever reach high levels of performance and systematically engage in continuous improvement activities with your provider. The provider will invest their time and energy in those clients that have good practices and allow them to thrive and grow. In the absence of thoughtful governance, you’re placing a whole lot of faith in the service provider to meet your sometimes changeable expectations. The only predictable route to excellence is investing in governance – the controls, tools, competencies and communication processes necessary for proficient supplier management and a healthy relationship with your service provider. Conclusion to Streamlining the Outsourcing Process It may seem counter intuitive that you can shorten the timeline to achieving your outsourcing goals by spending more time in three key areas. Empowered project teams craft better solutions. Informed leaders make better decisions. And comprehensive governance programs ensure you and your service provider stay focused on all the right things. Linda Tuck Chapman is a seasoned Outsourcing Advisor and Governance expert. You can reach Linda at (416) 452-4635, [email protected] or visit ONTALA Performance Solutions at www.ONTALA.com  

Valuing Terms in Outsourcing Contracts

Brad L. Peterson, Partner, Mayer Brown LLP

If you are an outsourcing customer, outsourcing contracts are like a three-legged stool. Their value depends on what you agree to buy, what you agree to pay and the terms. Although the agreement and the other contract terms are often extensive, outsourcing customers often underestimate, or even overlook, the value in contract terms. Why Focus on the Value of the Terms for Outsourcing Contracts? Being able to identify, estimate and articulate the business value of the contract terms in an outsourcing agreement can help you to: Make smart choices between lower prices and better contract terms. Balance the desire to “get it done now” against the value of “doing it right.” Invest appropriate amounts of time and resources in drafting and negotiating contract terms. Focus negotiating energy on the high-value contract issues. Describe to your leadership why it is worth investing in contract terms and how your negotiating success created value for your company. Achieve better results for your company. The value in contract terms is in securing commitments, obtaining options, aligning incentives and supporting a successful relationship. Securing Commitments Contract terms can help to secure a commitment to provide specified products and services at firm prices. That commitment may include contract terms such as sweep clauses, service warranties, rights to make immaterial changes without additional charges, continuous improvement obligations, “all-in” pricing, audit rights, and a clear and complete definition of scope. Without these contract terms, the pricing is more of a forecast than a commitment. Customers without these contract terms often find themselves compelled to sign change orders and pay unexpected charges to avoid going without vital services. To estimate the value of one of these provisions, multiply your best estimate of the amount that the supplier could increase charges by exploiting its proposed provision by the probability that the supplier would choose to increase its profits in that way. Obtaining Options Contract terms can provide the customer options to, for example, obtain out-of-scope services at reasonable prices, in-source or re-source, change technical or operational requirements, impose reasonable rules and restrictions, relocate customer facilities, change customer technology, adjust prices through benchmarking, have services provided to related companies (including divested companies), terminate the agreement or obtain additional services such as M&A support or termination assistance services. Options are valuable because they reduce the size and risk of charges for changes; their value increases with the volatility of the markets, which seems to be on the rise. Customers’ financial models tend to overlook the value of options because those models assume that all will go as planned—an increasingly unlikely possibility. A straightforward approach for calculating the direct economic benefit of an option is by estimating the probability of exercising the option and multiplying that by an estimate of the economic benefit achieved by exercising the option. For example, if the supplier agrees that a termination-for-convenience charge will be reduced by $1 million if related to a change of control, and you estimate a one percent probability that you will terminate related to a change of control, this calculation would be 0.01 x $1,000,000 = $10,000. If you can obtain that provision for less than $10,000, it would be worth obtaining. Scenario analysis, Monte Carlo simulations, the Black-Scholes option pricing model and similar tools can provide better estimates, but even a simple estimate provides better guidance to economic decisions than ignoring the economic effect of contract terms or merely calling it out as a risk. Another approach to looking at the value of options is to look at whether your business can survive without the ability to change the outsourced part of its operations. As Charles Darwin put it: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” Aligning Incentives Contract terms can increase incentives for the supplier to act in the customer’s best interest. Contract terms such as service level credits, deliverable credits, holdbacks, obligations for the supplier to correct its errors at its cost, and indemnities against harm caused by the supplier support a successful relationship by aligning the interests of the supplier and the customer. These incentive provisions can also mitigate potential losses by requiring the supplier to pay some of the customer’s losses. The value you place on incentives depends on your estimates of (i) the value of achieving your desired business outcome, (ii) the supplier’s ability to help you achieve that outcome, and (iii) the strength of the incentive. These estimates require judgment, so a good approach is to collect and aggregate estimates from people whose judgment your company trusts. The strength of the incentive depends on its size relative to the supplier’s cost of achieving the desired result. Like you, the supplier is looking at the cost versus risk. For every $1 that you want the supplier to invest in reducing a risk by one percent, the supplier should have at least $100 at risk. Any less might make the potential liability more of a cost of doing business than an incentive. Supporting a Successful Relationship Contract terms can also support a successful outsourcing relationship by: Building trust. Trust increases when companies are willing to translate their communications into enforceable legal obligations. It is further increased when the contract terms make the two companies, to a degree, accountable to each other as “partners” in sharing the risks and rewards of operating the outsourced scope. Trust allows companies to work seamlessly together. Creating alignment on how to work together. Sourcing contracts create complex, multi- faceted relationships. Agreeing on how to work together allows these relationships to succeed across company boundaries. For example, reporting, governance and information rights simplify the communication process; agreeing on how work will be added or removed reduces the friction at important points in the relationship. Issue management and escalation provisions make it easier to resolve disputes. Giving you an understanding of where and how the supplier will provide the products and services. Contract terms …

Award-Winning Outsourcing Relationships — Three Key Ingredients in their "Secret Sauce"

Linda Tuck Chapman, President, ONTALA Performance Solutions Ltd.

Behind each award-winning global outsourcing relationship is a fascinating story of extraordinary people, excellence in service delivery, lots of sweat equity, some painful bumps in the road, a mutual willingness to constructively solve problems, and trust earned. Contracts were awarded as a result of a competitive bid, so they started with a blank recipe card. While you may not aspire to win the Outsourcing Center’s annual Outsourcing Excellence Awards for global excellence in several categories, every outsourcing relationship has the potential to be a winner. The honor of being a judge for the awards and the privilege of hearing their stories help answer, “What are the three key ingredients in their secret sauce?” Ingredient #1: Flexibility and Willingness to Invest In addition to being flexible, every award-winning global outsourcing relationship demonstrated a willingness for service providers to invest additional expertise and even hard dollars to make things work. No nickel and diming here! Interestingly, the majority of relationships faced difficult challenges during transition or in the early days. In every case, openness and honesty on both sides combined with a genuine interest in constructive problem solving laid the foundation for an excellent relationship. And these were not insignificant issues. For example, early in year two of a five-year deal the credit crisis hit the world. The customer asked the service provider to cut their costs. Being sensitive to the commercial needs of each company, the outsourcer recognized they needed to be flexible and creative. They reduced their client’s costs by moving work to the Philippines, which was a new location for the service provider, and met the savings goals. Another similar case was during a client engagement that went through “rocky moments because of the systems integration issues.” When the going got tough, the service provider stepped up to the plate and addressed the necessary issues. They provided the resources their customer needed to do some special recovery work or redesign. In a third case, it became apparent during transition because of major constraints that were unknown during the RFP process that a large body of work was removed from the original contract. The service provider stepped up to the plate, assumed responsibility and gracefully accepted this blow. What can be learned from these hard lessons? In every case the service provider met their customers’ needs and made the necessary investments to resolve the issues even when it meant reduced profitability. And in every case, the customer was open and honest about their issues and willing to sign-off on appropriate changes to services and the contract. No table pounding, no standoffs. Ingredient #2: A Personal Sense of Ownership Service providers and service delivery aren’t always perfect, which leads us to ingredient #2 – personal ownership. What I mean by personal ownership is a willingness to be held accountable for the success of the relationship and the authority to make decisions. For example, a service provider missed their SLAs for three consecutive months, triggering service credits. With many people involved from both sides, the customer and service provider “got into quite a disagreement as to the amount of the service credits and the period they covered.” Too many opinions and politics were getting in the way. Rather than letting the problem put a permanent stain on the relationship, the customer and the service provider assigned one person from each side to reach agreement about what was fair and pragmatic. This gave them a chance to understand the other party’s point of view, to explore options and to appreciate the impact of the final decision. Another example is a service provider’s Operations Manager who really took their customer’s service level expectations seriously. In this case, a third party company proved to be integral to delivering services across the customer’s footprint. The Operations Manager led the process to integrate SLA‘s and now oversees total service delivery for the customer. They are now meeting service levels at no additional charge to the customer for this above-and-beyond service. There are countless examples of services failing to meet expectations or even going off the rails. What distinguishes award-winning relationships is the strong sense of ownership, accountability to make things work, and the authority to make decisions. Ingredient #3: One team, one goal Fundamentally, these are commercial relationships between two companies. Each one has goals and financial and quality targets they must meet in order to satisfy their own management and shareholders. Consistently these award-winning relationships quickly developed a practice of formally establishing joint annual and long-term goals. These goals generally include commitments to improving service quality, process improvement, and managing financial impact. As one service provider described it, “this is not a perfunctory exercise.” The customer’s Chief Operating Officer and the service provider’s CEO are often directly involved, including approving the joint goals and committing necessary resources. One successful relationship was built on a combination of joint goal setting and what they called “embedding leadership behaviors.” These are five key behaviors that both parties agree to model in everything they do together. Customers pragmatically and universally leveraged their service providers’ capabilities, reaping substantial financial and non-financial benefits year after year. One award-winning customer summed it up by saying that their service provider is able to “add value without adding costs.” And the benefits from the service providers’ perspective are relationships that grow over time in size and complexity, bringing them more revenue, increased profitability and highly referenceable accounts. Conclusion There is so much to be learned from these award-winning global outsourcing relationships between industry giants. By studying successful relationships and understanding what makes them great, you can avoid common mistakes and stress. It is said that “those who don’t study history are doomed to repeat it.” If you strive for operational excellence, words like cultural fit, trust, efficiency and transparency are just words unless you invest the time and effort needed to figure out what goes into your secret sauce for outsourcing excellence. Linda Tuck Chapman, President ONTALA Performance Solutions (www.ONTALA.com) is an expert advisor …

Manage Outsourcing Change by Communicating Remorse

Deborah Kops, Managing Principal, Sourcing Change

Most of us have been down on our knees praying that the relationship does not blow up over an error. Perhaps the cutover was delayed because the provider did not conduct sufficient user acceptance tests, or an employee committed fraud within a client account because controls were inadequate, or the client did not provide the entire list of company codes, delaying payment which got the business lines up in arms. Then several courses of action kick in: a) sweep the incident under the rug; b) start pointing fingers; c) blame the root cause on a decision that was taken some months back; or perhaps even d) fess up like a man and say mea culpa. Despite the fact that our mothers taught us to take responsibility for our actions, in the complicated relationship pas de deux that is outsourcing, we tend to feel that apologizing and making reparations is not the way to deal with the other party. Despite protestations of partnership between provider and client, our tendency is to frame outsourcing relationships as a constant you win, I lose. If we let the other party have the so-called upper hand in the relationship, we frankly think that we are abdicating terrain, to use a military term. The prevailing governance structures superimposed on outsourcing relationships don’t foster an admission that sourcing will go wrong from time to time. Governance as we practice it today is predicated on the concept that perfection is a given, and any and all mistakes are a major screw up. The health of the relationship is boiled down to a green-yellow-red scorecard. Obtain as many greens as possible permitting an occasional yellow to demonstrate a degree of humanity is the goal. It’s a game that leaves no room for, and ascribes no value to honestly admitting to a good, old-fashioned screw up. But in any endeavor, driven by either humans or technology, there is no such thing as perfection. Taking responsibility for a snafu is painful, but it signals that you live your value statement to the injured party and your employees. But it is not enough to apologize when you think sufficient time has passed, waiting until the injured party has moved onto other concerns and has enough perspective to brush the infraction off. It is necessary to act immediately and with sincerity. Without sincerity and, depending on the context, either a willingness to take on responsibility for the problem or meet the other party at least half way, there is no apology. Unfortunately the concept of amnesia does not exist in a sourcing relationship; the damage caused by empty gestures just festers over time. A little bit of penance is always helpful. Remediation is good — a bit more “give” than absolutely necessary indicates that the severity and impact of the fault is understood, and that the transgressors take it as a first principle to act in good faith. Saying we screwed up actually earns the erring party relationship credibility over the long haul. While the short term impact—additional cost or delay, a plethora of sharp emails and calls, perhaps a closer rein on decisions, and greater supervision—is painful, over time, a straightforward admission of responsibility pays off in a better working relationship, deeper trust, and an overarching belief that the parties will always strive to act in the best interest of the partnership. Admission of guilt also builds employees’ faith in the errant company and its leadership, and teaches lessons about customer service and value. Next time you think that the course of true outsourcing relationship should always run smooth, think again. But saying you’re sorry can go a long way.  

Biggest Challenges in Maintaining Superior Service Levels in Outsourcing Relationships

Outsourcing Center, Kathleen Goolsby, Senior Writer

Outsourcing rookies, of course, face many challenges in achieving their desired return on investment because their deals often lack one or more elements that are foundational to success. And all outsourcing relationships encounter challenges that arise in unanticipated situations. But what about experienced buyers and relationships that are more mature? What issues arise in their relationships that make it difficult for the service provider to maintain superior levels of service at all times? Outsourcing Center studied this question within the context of 26 BPO relationships that were nominated for its annual Outsourcing Excellence Awards program. The customers and providers ranked these relationships as highly successful in partnering aspects and in delivering the expected value proposition. Even so, the study found that 69 percent of the relationships experienced some significant challenges that impacted the provider’s ability to continually provide the expected level of service. The biggest challenges encountered by 69 percent of the studied relationships include (listed in order of most frequently cited): Meeting the requirement for year-over-year cost reduction while at the same time increasing the volume of the work and also pushing the productivity level. Several buyers commented that this stretched-resources situation can cause burn-out among the provider’s employees and lead to higher attrition. Changing market conditions and regulations in certain industries (especially healthcare, financial services and telecommunications). In most cases, it led to a need for different strategies in order maintain the buyer’s competitiveness in its market. Delays from multiple hand-offs due to multisourcing. New product releases in technology supporting the outsourced business processes; keeping up with the changes, fixing bugs, etc. cause a challenge in end-user adoption. Short time line for launching expanded services. To achieve success in the time constraints required “over-managing,” which added costs and some relationship issues. Surge in volume of work and need to ramp up quickly because the buyer’s pace of growth was higher than what the parties initially forecasted. Having to keep our eyes on the ball everywhere to make sure that improvements in one area do not cause a negative impact to another area and lead to the service provider having to focus its attention from month to month on whichever area is experiencing trouble. Conflicts that arise around the speed of decision making and communications about changes to all stakeholders, which are due to the differences in corporate cultures of the provider and customer. Changes in organizational structure and/or top executives in either company led to changes in stakeholder priorities. These challenges serve as alerts to companies planning for future outsourcing arrangements. While such situations are known risks that buyers and providers often include in the planning stages before signing their contracts, it’s important to note that companies seldom anticipate the full extent of the impact from these risks. With the exception of challenge #9 above, each company in the 26 studied relationships recognized these risks up front; but all underestimated the impact that such challenges would cause to the providers’ ability to deliver to expected performance levels.  

Ten Pitfalls in Outsourcing Transitions

Outsourcing Center, Kathleen Goolsby, Senior Writer

There’s no shortage of methodologies and advisories on best practices and risk mitigation strategies for the transition phase of outsourcing relationships. Even so, many buyers encounter situations they didn’t foresee when structuring their arrangement, which cause costs to rise and delay time to value. Outsourcing Center studied these types of situations by surveying companies nominated for the Outsourcing Excellence Awards program and found the following 10 pitfalls. 1. What you don’t know will cost you The Center asked the surveyed buyers this question: “There is a well-known saying that what you don’t know will cost you. Please describe something your company didn’t know at the outset of the outsourcing relationship, which ended up costing you and led to a change in the outsourcing arrangement.” The situations they described covered the gamut from technology issues to human behavior to lack of knowledge as well as operational structures that were too tight or too loose. 2. Technology connectivity Challenges arose in the provider’s ability to establish timely connectivity to all of its customers’ necessary systems because they were not aware of the various groups and business processes that governed connectivity. Remedying this situation involved forming a dedicated connectivity team with both business and network members. The team then built relationships within the customer’s technology group, seeking to understand the ownership and flow of information and also to help work through the issues more quickly. 3. Aggressive go-live date Two different relationships faced the same challenge of having to extend their original planned go-live date, but the causes of the problems differed. In one, the service provider encountered difficulty in recruiting the right talent in a remote area in the short transition time frame. In the other case, the buyer was transitioning from an incumbent provider to a new provider, but the bureaucracy and contractual negotiations in ending the prior relationship delayed the planned transition time line. In both cases, the aggressive ramp-up was necessary to achieve the desired time to value. Both buyers also had to spend time with their management teams and other stakeholders to lessen the potential negative impression and increased costs from having to extend the go-live date. 4. Service level agreement In a relationship delivering IT services to the customer’s 25+ facilities, the customer made the mistake of including all the facilities in the metrics for downtime. The situations they encountered as a result of these problematic service level measurements led to a contract renegotiation. As the customer stated, “Even if the downtime SLA is 99.9, it leaves a lot of wiggle room when you take that across all the facilities.” The renegotiated arrangement now measures the downtime/uptime percentage per facility. 5. Total cost of ownership A customer shared that, shortly after the outsourcing relationship was established, her company launched an initiative to determine its total cost of ownership (TCO) of various business processes. But the company was unable to determine TCO for the processes in its outsourcing scope because it lacked transparency into the service provider’s underlying enabling IT costs that were variable rather than fixed costs. When they renewed the contract, they renegotiated the pricing arrangement to ensure cost component transparency. This ultimately also enabled the customer to understand whether it was getting the most value for the price at both a service line and transaction level. 6. Software licensing Unexpected software licensing costs during the transition phase hit a company outsourcing several IT components. The transition involved moving from a standard database to a real application clustering database model (a cluster of servers to eliminate hardware downtime). The licensing cost structured across the CPUs was different than the buyer anticipated. It also encountered another issue around the server license component of a security product. Root-cause analysis found that these added-cost issues were due to a lack of communication. In some cases, the buyer assumed costs rather than communicating with the provider to determine if its assumption was correct. In other cases, the provider’s communication to the buyer was inaccurate because of ineffective communication among the different divisions of the provider’s business. 7. Managing the relationship Several buyers reported they incurred extra costs because they entered into the outsourcing relationship with the wrong mindset. As one buyer stated to Outsourcing Center, “There’s a lot of difference between working with an outsourcer and working with a team of people who are subordinate to you.” Not understanding that change up front, the buyers had to go through a learning process – and often relationship struggles as well as delayed time to value – to understand how to manage the relationship and the outcomes. 8. Learning curve Multiple buyers stated their costs increased because the learning curve was more difficult and took longer than they had anticipated. In some cases, the learning curve was for the provider’s team to learn the buyer’s business and its IT systems; in other cases, it was for the buyer’s end users to learn new systems and procedures. In either case, both parties had to step in and “save” the other by making sure they operated the processes and technology correctly and fixed the errors. Both parties lost money because the time to value was extended significantly. 9. Offshore readiness It’s not uncommon for buyers and providers to find out – when in the midst of the transition phase – that a specific component of an entire process scope is not ready for offshoring or, in some cases, is prohibited from being sent offshore. One buyer shared with Outsourcing Center that it encountered issues with the security controls of certain applications that were in the outsourced scope, and those controls prevented managing those applications from offshore locations. The costs in this case included suspending the transition midway through it and working together to redeploy teams and applications. 10. Communication around quality The transition phase of an outsourcing relationship often erupts in “noise” from the customer’s end users around dissatisfaction with the quality of services. Often, an analysis finds that the source of the …

Assessing Cultural Fit during the RFP Process – "No-Divorce" Outsourcing

Linda Tuck Chapman, President, ONTALA Performance Solutions Ltd.

A good cultural fit is one of the most important hallmarks between a successful and unsuccessful outsourcing relationship. Cultural fit assessment during the RFP process is far less structured than defined processes that help you quantitatively evaluate the service provider’s solution, capabilities and pricing. To decide whether your company and the service provider will have a comfortable cultural fit, you’ll have to assess their behavior during the bid, selection and contracting phases. You can use this article to help develop a series of questions to ask yourself and as a guideline on observable behaviors that are good indicators of cultural fit. Cultural fit indicators when responding to your RFP Process It’s actually pretty easy to assess flexibility, innovation, responsiveness and how hungry the provider is for your business at this phase. Some indicators at this phase of the process are obvious but meaningful. Your assessment can be based on how the provider deals with your process. Do they ask intelligent, insightful questions? Can they meet your response deadlines without asking for a last-minute extension? Do they demonstrate a good understanding of your strategy and expectations? Everyone says that they want innovative, flexible relationships that add value. So how much of the provider’s response delivers new insight and ideas, and how much of it is canned material created by their marketing department? Will you be invited to beta-test their new ideas with them? Is there any evidence of their commitment to learning and a continuous-improvement culture? Did they propose any process improvements, automation or money-saving ideas? Have they proposed meaningful metrics? Has any of this been quantified? Are they prepared to commit to any of this in your contract? It’s likely important to you to be an important client. So when you ask them why they want your business, aside from the obvious, what do they say? Will you have regular interactions and access to their top executives post contract? Will they commit their key resources to your account on a long-term basis? Are they open about their and your transition effort and costs? How and when will their costs be recovered in the contract? Have you been given the option to have the vendor amortize over the term of the agreement, or do they want full recovery up front? I’m not a fan of protracted contracting. If you are like-minded, you may use or want to introduce a best practice that truly accelerates the contracting process. Include a draft Master Services Agreement and important schedules and proposed performance metrics, reporting and billing requirements in your RFP package. The objective is to ask the vendor to red-line your document and propose their changes. The acid test is how many changes they make and whether the proposed changes are acceptable to your organization. On a separate note, does the vendor attempt to circumvent the process or personally influence key decision makers? You may recognize some of these annoying tactics: bundling with existing services or other bids to reduce costs, making an attractive but time-limited offer, inviting them to some spectacular entertainment during the bid process so they can press their value proposition on your senior leaders, dark hints about troubles within their top competitors’ organization, and so on. This type of behavior says a lot about their level of respect for your processes and protocol, and perhaps how they will communicate with your organization if trouble arises in the relationship. Cultural fit indicators during the selection and contracting processes The orals are your first chance to see how the provider’s team interacts with each other and with your team. These face-to-face interactions allow you to validate your impressions from the RFP process and take them to a whole new level. The first thing you’ll notice is their team dynamics. How many people are across the table, what is their role at the table and inside their own company? Is their role during this process clear? Did they bring operations leaders and subject matter experts, or is their team mostly comprised of sales people? How well do they know each other? Is one person dominating the meeting, or are they behaving like a high-performing team? Site visits are worth the investment. Be sure to also visit one of their clients. The first observation you can make is whether the client they chose has a relationship of similar size, objectives and scope as what you’re proposing. If not, then why not? When you’re onsite with their client, is the provider willing to leave you alone? Negotiations are serious business, and an indication to both parties that they are potentially on the verge of a long-term relationship. Everyone is right down to business at this stage, so behavior during this phase is often a good indicator of what will come later. As negotiations progress, how many times do they switch out their players? Do the changes make sense to you? How much of the conversation is tactical, operational or strategic? What did you expect, and what are you hearing? Can the team at the table make binding decisions? Is their attention to detail at an appropriate level – too much or too little? Looking ahead, do you have the chance to meet your proposed operations leader and key liaison? What about the transition leader? When you and they talk about governance, do they understand what is needed beyond operational management and reporting? Finally, keep in mind that all relationships, whether for the RFP process or not, are built on trust. So start gauging your ability to place trust in this relationship right from the beginning. As you get closer to finalizing provider selection, your evaluation process will evolve from a quantitative to a qualitative one. If you’re as prepared as possible at each stage, your critical listening skills for what is said – and what is unsaid – will be put to good use.  

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