Thought Leaders: Kate Vitasek on Governance in Outsourcing, part 1

When I ask people how their governance is for their outsourcing agreement I often get a blank stare. I guess I shouldn’t be surprised because legal scholars have called out the fact that managing supplier agreements is woefully lacking. It is for this reason I wanted to devote the next few thought leaders columns to the topic of governance.

For starters, let’s define what it means to have good outsource agreement governance. For this the University of Tennessee teamed with thought leaders at the International Association for Contract and Commercial Management (IACCM) and the Corporate Executive Board (CEB) to define (and think) about agreement governance in a new, more relevant way—one that not only embraces good management practices, but that also encourages deeper collaboration with service providers.

The three organisations agreed on the following definition: “A vested governance structure uses a relationship management structure and joint processes as a controlling mechanism to encourage the organisations to make proactive changes for the mutual benefit of all the parties.”

With a good definition as a common frame of reference, the harder part is to figure out how to implement it. The Vested Outsourcing Manual, published last June by Palgrave Macmillan, provides solid guidance for crafting a sound, flexible and collaborative agreement governance framework. The guidance is in the form of four provisions that encompass essential elements that every successful long-term vested agreement should include.

The four elements are: relationship management; transformation management; exit management; attention to special concerns and external regulations.

In this and subsequent posts I’ll expound further on these governance elements, starting today with the first, relationship management. A good relationship management structure sets and supports joint policies that emphasise the importance of building collaborative working relationships, attitudes, and behaviours.

That’s opposed to the “oversight mentality” where the management focus is one-sided, i.e. on the service provider, and where agreements are viewed mainly as risk avoidance exercises that emphasise tracking and bean-counting of functions and transactions.

The relationship management structure should be formulated jointly by the company outsourcing and the service provider. It is flexible and provides comprehensive insight about what is happening with their Desired Outcomes and the relationship between the parties. Here are a few of the best practices we have seen when it comes to relationship management.

Clear Roles - It is important that a governance framework include clear roles – even formal job descriptions. When possible, people should not play multiple roles unless the deal size is too small. We recommend four distinct roles.

Service Delivery - includes those who manage the day to day work

Transformation Management - includes those who are dedicated to making improvements in the business. While some agreements simply want "butts in seats," we find the best outsourcing agreements seek to drive innovations and proactive change to improving the business, not just doing the work.

Commercial Management - typically includes a person who manages the commercial aspects of the contract, including formal change management and the economics of the pricing model.

Relationship Management - includes the senior leader(s) who provide overall strategic direction regarding the relationship

Tiered Structure - A sound governance structure have at least three levels - executive, management and operations. Each level has clear roles in how they add value to the relationship. The tiered structure is managed with a formal cadence.

Cadence - A good cadence includes establishing a regular communications protocols and mechanisms that help the parties achieve a sound "rhythm of the business." For example, how often each "tier" meets, and the agenda items and escalation paths for each tier.

Peer to Peer (Reverse Bow Tie) - Conventional thinking is to have a "Single Point of Contact" or what some might refer to as "one throat to choke" with a vendor account manager and a client engagement manager as the key contacts. Our research shows the most successful deals move away from this to what is often referred to as a reverse bow tie or a "2 in a Box" concept. This includes having peer to peer relationships at multiple levels.

In the end, good governance is really a collaborative effort to manage the business—not just the supplier. It’s about moving from "me" to "we".

In my next column I will talk about the second element for an effective governance framework, transformation management.

Kate Vitasek is a faculty member at the University of Tennessee’s Center for Executive Education and is author of the popular book Vested Outsourcing: Five Rules That Will Transform Outsourcing and The Vested Outsourcing Manual, published in June by Palgrave Macmillan.