The global outsourcing industry is estimated to be US$565 B strong in 2017 and according to some estimates, more than two-thirds of the large companies in the U.S. employ outsourcing in some form or the other. Any company that wants to improve its bottom line and focus on strategic business initiatives, rather than on non-core activities will look towards outsourcing work to other companies.
Although there are obvious advantages to outsourcing such as reduced cost, access to latest technology, and lower capital outlay, there are downsides to it that may have a severe impact on the business of clients. The client or the company that outsources work is prone to risks such as exposure of sensitive data, regulatory compliances, high employee turnover, and delays due to the physical distance between client and the service provider.
Some of these risks cannot be avoided completely. However, clients with an effective governance model can get more out of the supplier. According to an estimate by PricewaterhouseCoopers (PwC), about 20%-40% of the annual value of the contract is lost over the lifetime of the partnership due to an inefficient/lack of governance method.
Governance, in case of outsourcing, is the process of continuously monitoring and managing contracts and relationships with the supplier. Traditionally, governance is limited to contract management. However, emerging technologies in outsourcing such as robotic process automation, hybrid cloud, and machine learning, and newer operating models such as Software-as-a-Service (SaaS) and shared services utility model make it difficult for the service buyer or the client to monitor the contract using existing governance models. Clients need a comprehensive governance tools that are proactive, automated, and deliberate.
What to measure?
Apart from tracking the performance, which validates if all the contract compliances are met by the supplier, clients should focus on areas that help increase collaboration and realize better value from the relationship. An active governance model also includes issues such as “consumption management” that helps supplier forecast demand, “issue management” that helps track resolutions, and “relationship management” ensuring that all stakeholders are on same page, and help them validate supplier’s compliance.
Many of the third-party services providers, especially IT vendors, are not limiting themselves to providing services and now act as co-innovators. In the uber-connected world, no company can work in silos and needs a strong eco-system of suppliers that helps it innovate new solutions. For example, Accenture alone set up more than 12 innovation centers across the globe in 2017 to work closely with its customers and co-develop solutions. Clients need to focus more on strategic initiatives with the supplier rather than focusing all of their resources on monitoring vendor performance. This is where managed governance service providers can help clients.
Managed governance is essentially the process of further outsourcing the governance work so that clients can focus on vital aspects of the vendor relationship. Non-core activities of supplier governance mainly include contract maintenance, and financial and performance reviews. These can be outsourced to specialist governance providers. Third-party governance providers normally help in routine performance management, financial reviews, contract management, and issue & risk management.
Managed governance helps clients to set up a governance structure quickly. Further, it also results in cost efficiencies when compared to the clients setting up their own governance teams. Clients also get a complete insight over the services provided by third-party vendors. Another advantage of outsourcing governance work is scalability. With changing governance needs, clients can alter the governance services leveraged from a managed governance provider more quickly.
If you are looking for more insights on how to develop strategies and plans for Governance Solutions within your organization, Neo Group can help set up a governance solution. Contact us for more information or to get started.