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Buidling Better Governance into Deal's Life Cycle
 

By Duie Block  12/14/2006

Welcome to a real-world situation that often occurs as companies launch significant outsourcing initiatives.

The situation is real, but the names have been changed to protect the unprotected. This article highlights the challenges companies face when launching outsourcing relationships and offers practical advice on how to prepare an organization to meet the challenges ahead.

The Situation

The HR department at “Larimer International” is in turmoil. Managers are frustrated and overworked, and their responsibilities are unclear. It seems that the harder they try, the more things slide off track. Deadlines are being missed, and employees are beginning to complain.

There is a tangible sense that things are slowly slipping out of control. Executive management wants to know what’s wrong. Bill, the veteran VP of HR, thinks, “How did this happen?” In a fit of obsessive compulsiveness, he then tries to retrace the chain of events that led to all this confusion.

Eight months ago, the Larimer board approved an aggressive cost-cutting strategy that included outsourcing HR to the well-respected, global service provider “Winwell Solutions.” After proposing a solid business case based on what seemed at the time to be accurate operating costs, Winwell entered into final negotiations with the Larimer CFO, their legal counsel and an unprepared Bill.

For three exhausting, nonstop months the Larimer executives hammered out, in nauseating detail, the terms of an outsourcing contract. Having no experience with outsourcing agreements, the Larimer negotiating team felt outgunned. They continuously kidnapped their HR operations managers to act as subject matter experts who eventually agreed to unproven service levels and a complex pricing scheme. Bill’s team, completely exhausted, wanted nothing more than to forget about outsourcing for a while.

The Larimer board, however, was especially pleased with the signed agreement, as it guaranteed the expected 30 percent cost reduction.

Bill’s visions of piña coladas and Maui sunsets evaporated the next day when he was called into a transition planning meeting with the Winwell service delivery team. It became increasingly clear to Bill as the meeting progressed that Larimer had underestimated the amount of effort it would take to manage the transition effectively while maintaining HR services seamlessly. Bill calmed his nerves by assuring himself that his people were HR professionals and would make it work.

From that moment on, things went downhill.

Bill’s operations managers, expecting to continue doing what they did best, became discouraged when they butted heads continuously with Winwell’s managers over how to do the work. Tension rose and tempers flared as seemingly minor issues turned into time-wasting skirmishes of finger-pointing and blaming. Before long, the Larimer HR team secretly began referring to Winwell as “the dark side.” Larimer employees, witnessing the breakdown, began siding with Bill’s team, thinking that outsourcing HR was a bad idea.

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A bad sign: The client’s HR team secretly began
referring to the outsourcing provider as
“the dark side.”
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The Problem

This example illustrates a serious problem with which many companies continue to struggle. Successful outsourcing depends heavily on the ability of the client organization to quickly field a governance team that understands and practices “outsourcing management” (OM) competencies.

Unlike Bill’s HR operations managers, who know how to manage their organization’s existing HR operations and perform their day-to-day responsibilities, effective governance organizations are made up of individuals who have different skill sets, including a demonstrated proficiency in collaboration, knowledge sharing, conflict resolution, facilitation, communication and creative problem-solving. These competencies are usually learned through years of experience working in collaborative partnerships, but individuals with the right aptitude can become effective at OM with sufficient training and mentoring.

As in Bill’s case, outsourcing transactions typically demand an inordinate amount of time and effort by key executives and usually require multiple marathon negotiating sessions to meet a board-imposed deadline. With all that going on, how is a company supposed to whip a team of highly skilled professionals together rapidly to form a governance organization—while, in most cases, transitioning staff to the service provider simultaneously? It’s not easy, but with the right advance planning, a meltdown like Bill’s can be avoided.

The Solution: Building OM into the Outsourcing Life Cycle

All outsourcing endeavors have a life cycle: First, a general assessment of the organization’s existing business process operations is conducted; based on that assessment, a cost-saving or service-improvement strategy is developed, then a provider is selected and contract negotiations begin. Upon acceptance of the contract, the outsourced services and personnel are transferred to the provider. When the transition is complete, the provider is expected to deliver value to the client on a continuing basis.

Each phase of the outsourcing life cycle represents an opportunity to develop and/or obtain appropriate OM skills and competencies. In order to avoid tragic consequences like those described above, it helps to leverage a structured staffing plan that is timed to take advantage of each life cycle phase.

Strategy Phase

As companies analyze the potential financial benefits of outsourcing selling, general and administrative functions, senior managers typically spend a considerable amount of time wrestling a detailed business case to the ground. Part of that effort should include an internal analysis of the unique OM skills, experience and associated costs that will be required to support the outsourcing initiative over time.

If a company is lacking these critical, yet atypical, skills, part of the operating budget in the business case should be assigned to locating and hiring experienced OM professionals. Depending on where a company is located, this may prove difficult and costly, but it’s worth the effort to learn what OM competencies are and where to find resources when they are needed. While obtaining the data around OM needs and costs at this phase is important, time and resources should not be spent building out an entire OM organization until after a strategy and business case have been verified. Often, a business case and/or strategy will evolve between the strategy and negotiation phases.

The strategy phase is also a good time to research the sourcing advisory market. If an organization has not used an adviser previously, industry specialists can be leveraged for OM organization design, processes, job profiles, skill requirements and continuing training.

To-Do List

• Analyze internal OM experience and skills within your current organization.

• Analyze the local resource pool for OM skilled professionals.

• Interview consulting companies that specialize in OM services.

• Develop a cost estimate for OM salaries and headcount.

Negotiation Phase

During negotiation, the service provider will most likely have a plan to share information documenting how its service delivery organization will operate. Using this input from the service provider, as well as the data collected in the strategy phase relative to OM needs, an organization should design its retained organization and the OM or governance team that will provide management, control and reporting for the provider relationship.

The first step is to position a central management figure for the governance organization. This key individual will most likely be identified in the agreement as the “Responsible Executive,” positioned to ensure executive alignment/sponsorship, funding for changes and critical dispute resolution. Many successful companies bring in an experienced executive from outside of their organization for this role, believing that OM competencies are more essential than an intimate knowledge of how a company operates.

Additional positions should be developed to report to the Responsible Executive, typically involving skill sets such as financial and contractual management, service performance management, project funding and oversight and customer relationship management. Below is a table outlining some of the typical OM positions and responsibilities that make up these skill sets.

Typical “Outsourcing Management” (OM) Positions and Responsibilities

Financial Manager

Contract Manager

Service Performance Manager

Customer Relationship Manager

Program Manager

Invoice verification

Contract definition

Transition management

Interface to business units

Project oversight

Provider payments

Contract changes

Service level monitoring

Business unit requirements

Project approval and funding

Financial issues management

Contract issues management

Service metrics changes

Customer satisfaction management

Transformation management

Business case analysis

Business case analysis

Performance issues management

Business unit issues management

Project issues management

Cost allocation

Cost allocation

Program reporting and tracking

Source: EquaTerra

It is important to understand how a company is equipped for positioning experienced and skilled personnel in these key roles. As mentioned earlier, these skills are sometimes hard to find, so organizations should have an action plan and budget for:

1. Conducting an internal skill gap analysis based on OM roles and competencies.

2. Locating and hiring OM professionals.

3. Enlisting a sourcing adviser to fill knowledge and skill gaps temporarily.

4. Establishing an OM training plan.

Using a combination of these action plans will help to populate an organization’s new governance organization. As resources are brought aboard, they should be positioned in, or alongside of, the negotiation team. If, however, these key OM resources are not involved directly in contract negotiations, every effort should be made to keep them informed and updated on negotiations as they progress.

Knowledge of how your service contract evolves during the course of reaching a final agreement is invaluable.

To-Do List

    • Build an understanding of OM functions and the roles that support them.

    • Conduct a skill gap analysis on potential internal personnel.

    • Identify and hire OM professionals.

    • Fill key positions and involve them in the negotiation process.

    • Use sourcing advisers to assist with all of the above.

Transition Phase

Once the agreement has been signed and the provider’s transition plan is approved, the Responsible Executive should be involved in completing the action plans.

The skill gap analysis should show which staff members, with the appropriate mentoring and training, have the aptitude and OM competencies to fill governance positions. If an organization has hired professionals from outside companies, this is a good time to provide them with mentors and training to bring them up to speed with the new contract, operations and governance team reporting structure.

During this phase, the organization will need a transition manager in place to help manage the transition of services and, in some cases, staff. Although this role is necessary only during this phase of the outsourcing life cycle, this individual can gain invaluable insight and knowledge from the transition process, which may be used in other areas of the engagement once the transition is complete.

In order to take sufficient control of the provider relationship, the governance team will need to be familiar with the contract, its key terms, exhibits and scope as well as their specific roles and responsibilities. More importantly, the team must be trained in relationship management, issue resolution and communication—all the while learning how to operate as a team.

After the team has had a chance to coalesce, the next step involves collaborating with the provider’s service delivery team to conduct relationship launch activities that might include group problem-solving, conflict resolution or joint decision-making sessions. Where necessary, the sourcing advisory partner can provide training content, facilitation assistance and relationship management coaching.

To-Do List

• Identify the training needs of selected governance team members.

• Begin the training program for governance team members.

• Bring outside OM professionals into the governance team.

• Conduct relationship management and operations training for team members.

• Conduct joint relationship launch sessions with both governance and service delivery teams.

Phased Action Plan

Outsourcing Phase

Action Plans
(Most companies require a combination of all three approaches)

       
 

1. Grow Your Own

2. Hire OM Professionals

3. Leverage Advisers

       

Strategy

• Analyze current OM skills

• Analyze the market for OM professionals

• Interview potential sourcing advisers

Negotiation

• Design the OM organization

• Roles and responsibilities

• Conduct skill-gap analysis

• Fill positions

• Participate in negotiations

• Design the OM organization

• Roles and responsibilities

• Conduct interviews

• Fill positions

• Participate in negotiations

• Conduct interviews

• Fill key positions

• Assist with org. design

• Assist with negotiation

• Provide OM training

• OM process development

• Organization development

• Change management

Transition

• Receive education and training

• Operate as a team

• Build relationship management skills

• Support transition

• Participate in education and training

• Operate as a team

• Act as relationship management mentors

• Manage transition

• Conduct relationship launch activities

• Provide education and training

• Act as relationship management coaches

• Manage key roles during transition

Ongoing Outsourcing Management

• Establish an OM competency baseline

• Develop an improvement plan with goals and key processes

• Develop and implement incentives

• Provide career advancement opportunities

• Participate in industry events

• Transition out as necessary

• Negotiate long-term agreements/
“managed services”

Source: EquaTerra

Continuing Outsourcing Management Phase

With the transition of services complete, there is still much to be done in building and improving OM skills within the governance organization. In order to evaluate a governance team’s OM skills and identify areas for improvement, many successful companies establish an OM competency baseline.

Newly developed OM maturity models, developed by industry experts, can be used to compare the collective effectiveness of the team against OM best practices. An improvement plan comes next, including team goals and key performance indicators with which to track and report progress. If an organization has hired experienced OM professionals, they can assist your HR organization in developing individual improvement plans, performance incentives and career paths for team members as they gain OM competencies.

To-Do List

• Establish an OM competency baseline in which to measure your organization’s progress.

• Develop an improvement plan for the governance organization.

• Implement individual incentives.

• Provide career advancement opportunities.

• Participate in industry events.

Conclusion

Instituting OM competency is not easy. Most, if not all, companies have trouble getting the right skills into key governance positions during the outsourcing lifecycle. It’s mostly a problem of timing. Staffing governance organizations hastily with whoever is available at the time is almost always a mistake. Organizations should take the time to do it right. They should build a staffing plan and budget, learn the required skills and competencies, choose the best candidates and allow them the time to be mentored and trained. Leverage professional talent. Allow time to search the market for OM professionals.

If key governance positions go unfilled for an extended period, OM expertise is available through the use of industry advisers. An experienced adviser may need to fill a key management role while the appropriate resource is located and hired. At that point, the adviser will then have the specific knowledge to mentor the resource that fills the position.

Additionally, governance support positions such as financial management and contract administration may be filled with experienced advisers on negotiated, long-term contracts. Timely and strategic positioning of the right skills into a governance organization during the outsourcing life cycle will create a more stable and effective team.

This article is adapted with permission from Equa Terra , a multinational outsourcing and insourcing advisory firm.

Duie Block, a senior adviser at EquaTerra, has more than 15 years of experience in outsourcing, including relationship management, process improvement, application development and flexible staffing.

© 2006 EquaTerra. All Rights Reserved. Reposted with Permission.

Related Reading

After the Ink Is Dry—How to Ensure Best Practice, HR Outsourcing Focus Area (August 2006)

HR Outsourcing from Outside and In, HR Outsourcing Focus Area (June 2006)

Correlation Seen Between Outsourcing Satisfaction and Management/Governance Spending, HR Outsourcing Focus Area (June 2006)

Governance of the Outsourcing Deal: Make It a Priority, from the Start, HR Outsourcing Focus Area (May 2006)

Lessons from DuPont: Governing a Collaborative Outsourcing Relationship, HR Outsourcing Focus Area (May 2006)

Best Outsourcing Relationships Become ‘Alliances,’ HR Outsourcing Focus Area (March 2006)

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