WORKSHOP Optimizing Value: Delivering on the Promise of Outsourcing

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(No Transcript)
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Optimizing Value Best Practices in Outsourcing
Relationship Management
Providing participants with practical strategies
and best practices to optimize the value of an
outsourcing relationship.
Breakout Session Bernie Clendenin, Project
Director Relationship Management Practice,
EquaTerra Date Monday, October 17th, 2005
Time 1100 am 1200 pm
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Bernie Clendenin

• Project Director, EquaTerras Relationship
  Management Practice
• Bernie co-created the consulting practice known
  as Customer Value Relationship Management, now
  known as IBM Relationship Alignment Solutions
  (RAS). He assumed the position of Director of
  Customer Relations Development providing
  functional guidance worldwide. This leading edge
  business design has been implemented in over 70
  engagements.
• Prior to creating RAS, Bernie spent many years
  with IBM in various leadership roles. In 1995, he
  accepted the position of Director of External
  Business Relations responsible for ISSC and
  Global Services - Americas strategic supplier
  relationship management. In this role, Bernie and
  his team negotiated and managed relationships
  that saved IBM millions of dollars for computer
  products and services.
• Bernie began his entrepreneurial career with IBM
  by completing a utilization analysis of personal
  computers in a corporate IT infrastructure
  environment and identifying the considerations
  for effective use of this new technology. This
  project and his experience in banking shared
  services initiated his knowledge and
  understanding of BPO and how to advise clients on
  sourcing solutions.

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Introduction
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Evolution of Outsourcing

• 1960s Timesharing used to manage costs
• 1980s Entire IT operations shifted to an
  external provider
• 1990s Extension of outsourcing to IT-
  intensive business processes
• Customer Care
• Financial and payment services
• Human Resources services
• Primary drivers
• Increased competitive pressures
• Need to access world-class capabilities
• Desire to share risk

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Contracting Trends

• Length of contracts has stabilized in the 5-7
  year range
• Maturing contracts in BPO are now coming up for
  rebid or renegotiation
• Globalization of service delivery is complicating
  the financial structures
• Demand for multi-tower deals is rising and
  driving new and interesting economic models
• Selected providers in specialized industries are
  experiencing full dance cards
• Shrinking timeframe to get to contract

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Outsourcing Satisfaction

• Many customers have achieved benefits and are
  satisfied with their current BPO supplier

Source 2004 META Group Research of IT and
Business Executives
Satisfaction Rating Scale 1 Dissatisfied to 5
Fully Satisfied
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Relationship Management is Key to Achieving Value

• ...Ineffective relationship management can reduce
  returns by as much as 75 percent

Loss of Outsourcing Value from Ineffective Vendor
Management
Efforts Duplicated
Resources Wasted
Problems Not Managed
Performance Not at Expected Levels
Between 50 and 75 Percent of Relationship Value
may be lost due to poor Relationship Management
Vendors Deployed Against Conflicting Or Wrong Goal
10-10 Value Loss Operational Challenges
Opportunities Untapped
20-30 Value Loss Performance Challenges
5-10 Value Loss Portfolio Management Challenges
Total Potential Value Gained From the Outsourcing
Relationship
Net Value Gained From the Outsourcing
Relationship
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Outsourcing Philosophy

• Our focus is to create viable long-term
  relationships
• Our process establishes successful and balanced
  relationships by
• Being collaborative
• Enabling convergent behaviors
• Encouraging mutual respect
• Weve abandoned adversarial behaviors
• We advocate the long-term view and emphasize
  long-term solutions and the operational
  relationship
• The lifetime success of outsourcing agreements is
  critically dependent on effective relationship
  management and governance - we introduce this
  concept early and often

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Purpose of Relationship Management Governance

• Meet contractual obligations
• Ensure effective management
• Rapid resolution of issues
• Ensure management control
• Provide consistent direction to Provider

• Ensure delivery of expected Savings
• Ensure market pricing
• Manage demand
• Create optimization through standardization
• Leverage and focus Provider capabilities
• Institutionalize process improvement

Relationship Mgt Governance must effectively
balance these objectives while bringing the
intent of the deal to life
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Optimizing the Value of Outsourcing
Governance Operating Model
Intent of the Deal
Commercial Management
Relationship Management
To achieve optimum value from an outsourcing
relationship, all 3 governance components must be
tailored to the intent of the deal and adjusted
over the life of the relationship
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Relationship Management The Skill of
Governance
Governance Operating Model
Intent of the Deal
Commercial Management
Relationship Management
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Relationship Management Defined

• The process of aligning, assessing, and improving
  business relationships
• Involves setting and managing expectations
• Relies heavily on collaboration skills
  communication skills

Service Provider
Governance
Business Units
Retained Organization
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Substantive vs. Relational Issues

• Substantive Issues
• Service levels
• Pricing
• Replace/Refresh hardware
• Terms of employee transfers
• Third-party software
• Timely performance reporting

• Relational Issues
• Understanding each others objectives
• Building trust/mutual respect
• Feeling fairly treated/not coerced
• Consulting with other party in timely way
• Open, quality communications

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Relationship Issues

• Contract terms and performance expectations have
  diverged
• Buyer wanted an advisor/collaborator, but got new
  operations management
• Staff turnover has resulted in unmanaged
  expectations priorities
• Scoped functions are being managed effectively,
  but changes in business requirements are
  straining the relationship
• Incentives do not align with outsourcing
  objectives
• Difficult conversations negotiation cause
  strife trust erosion
• Assumption of predatory motives leads to
  counterproductive behavior inability to capture
  value of outsourcing

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Relationship Management is Key to Achieving Value

• ...Ineffective relationship management can reduce
  returns by as much as 75 percent

Loss of Outsourcing Value from Ineffective Vendor
Management
Efforts Duplicated
Resources Wasted
Problems Not Managed
Performance Not at Expected Levels
Between 50 and 75 Percent of Relationship Value
may be lost due to poor Relationship Management
Vendors Deployed Against Conflicting Or Wrong Goal
10-10 Value Loss Operational Challenges
Opportunities Untapped
20-30 Value Loss Performance Challenges
5-10 Value Loss Portfolio Management Challenges
Total Potential Value Gained From the Outsourcing
Relationship
Net Value Gained From the Outsourcing
Relationship
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Relationship Mgmt Value Capture
The Intent of the Deal guides the selection of
the right Relationship Type
Governance Operating Model

• Capturing Value requires
• Relationship Mgmt Framework
• New Skills institutionalized capability
• Continuing Relationship Focus

Intent of the Deal
Commercial Management
Relationship Management
Achieving optimized value requires
institutionalized focus and execution of
relationship management capabilities tailored to
the intent of the deal and adjusted to the
changing business needs
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The Relationship Continuum
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The Relationship Continuum
Outsourcing can be viewed on a continuum at one
end are commodity suppliers, and at the other
end, solution providers or partners
Transactional
Collaborative
Partnership
Enhanced
Commodity Price Interchangeable Product
Customized Value Integrated Solution
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Transactional Relationships
Description

• Market Pricing
• Commodity Product or Service
• Mass Production

Characteristics

• No Knowledge of Each Others Processes
• Price is only differentiator
• Unable to Beat Competition with Relationship

Service provider does same for you as for
everyone else
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Enhanced Relationships
Description

• Some Customized Expertise
• Expectations Negotiated
• Performance Contract
• Little Willingness to Change Process

Characteristics

• Customer Service and/or Product Quality are
  Superior
• Value Derived From Reliability
• Some Client Knowledge/Intimacy

Service provider uses limited customer knowledge
to provide value-added services
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Collaborative Relationships
Description

• Customized Expertise
• Integration of Process

Characteristics

• Joint planning and sharing of information
• High Degree of Client Knowledge and Intimacy
• High Degree of Loyalty

Develop an appreciation for each others
capabilities, and use that knowledge to develop
solutions
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Partnership Relationships
Description

• Customized Expertise
• Full Process Integration
• Shared Responsibility
• Focused on Outcome

Characteristics

• Intent to Innovate
• High Degree of Mutual Knowledge and Intimacy
• High Degree of Loyalty
• Shared Risks/Rewards

New competitive capability through joint
innovation
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The Relationship Continuum Characteristics
Transactional
Collaborative
Partnership
Enhanced

• Shared risks investment
• Deeply integrated
• Mutually dependent

• Customized/ individualized
• Process data integration
• Solutions oriented
• Shared rewards

• Commodity Price
• Interchangeable Product
• Highly specifieddeliverables

• Some customization
• Flexibility/levels of service
• Special knowledge

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Establishing a Collaborative Relationship
Requires a Paradigm Shift

• Attributes of a
• collaborative relationship
• This is about meeting both our needs in a
  sustainable way
• When things go wrong, diagnose joint
  contributions and work to avoid repetition
• Wise decisions need joint input
• At least some metrics are jointly developed and
  shared, or symmetrical
• Negotiations focus on problem-solving produce
  good precedents
• Surprises are rare planning is highly
  integrated communication is frequent and robust

• Attributes of a typical
• customer-vendor relationship
• This is about getting them to meet our needs
• When things go wrong, assign blame and apply
  contractual penalties
• Customer decides, vendor executes
• Customer defines metrics supplier is evaluated
• Negotiations are often adversarial produce
  arbitrary outcomes
• Each party is often surprised and learns of
  decisions after they are made

This implies a behavioral change in dealing with
the BPO service provider
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Size and Scale of Governance Team
Global BPO agreements typically require
Collaborative Relationships and an annual
investment sized to the scope of the deal.
Transactional
Collaborative
Partnership
Enhanced
of annual Contract Value

• Delivery Management

• Quality Management
• Operational Customization

• Joint Planning
• Coordination Communication
• Program Management
• Value Management Reporting

Focus
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Now think of a Current or Desired Relationship

• What type of relationship do you/did you desire
  in the long-term? Why?
• What type of relationship do you have? Why?

Transactional
Collaborative
Partnership
Enhanced
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How to close the gap between the starting
Relationship and the Desired Long term
Relationship
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Relationship Management Assessment
Transactional
Partnership
Relationship Focus Commodity / low price Co-create unique product or service
Capability Leverage Ability to fulfill product / services specific requirements Act upon market dynamics trends
Planning Horizon Current deal singular operation Unspecified end-point ongoing intention to co-create distinctive value
Nature of Trust Confident can competently execute the contract Shared vision outcome, based on behavioral organization capability
Metrics Focus Compliance tracking Business results shared incentives
Relationship Mode of Operation Competitive bid Sense Respond experimenting learning
Relationship Perpetuation Channel Procurement, purchasing department, buyers Joint senior management with focus on strategic joint interests
Process Linkage Independent processes Reconfiguring joint strategic processes, structures, mechanisms
Information Attributes Price of the product or service Proprietary knowledge, often unstructured and sensitive financial data
Tool Enablement Mechanisms Efficiency oriented Unique, innovative technology deployment
Vendor
Partner
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Relationship Components
Task Culture Business Model
Economic Value Innovation Risk Sharing
Operations
Context
Value
Awareness
DevelopmentofTrust
Shared goals Incentives Leadership
Assets Knowledge Processes
Inter-dependence
Commitment
Performance
Assumptions
Predisposition Attitudes Experience
Expectations Solutions Issue Resolution
The Relationship Components were derived from the
work of John Henderson, Boston University
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Value Commitment Assumptions

• Actions Needed?

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Relationship Components

• Awareness
• How well are any contractual obligations
  understood by the people in each organization
  i.e. task awareness?
• Are company cultures compatible enough for
  collaboration?
• Are the people in each organization aware of the
  each others business environment business
  model, decision making processes, operational
  tasks?

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Relationship Components

• Inter-Dependence
• To what extent will the organizations be able to
  leverage each others strengths or assets?
• How integrated do processes need to become?
• To what extent is knowledge transfer important?
• How dependent will you become on the Service
  Providers industry or functional area expertise?

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Relationship Components

• Performance
• How will contract service level changes keep up
  with business environment changes how will you
  manage ever changing expectations?
• What are the mechanisms/processes for issue
  resolution?
• Was the relationship established for
  commodity-type services, or was it established to
  leverage the providers solution orientation?

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Awareness Interdependence Performance

• Actions Needed?

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Governance Operating Model The Work of
Governance
Governance Operating Model
Intent of the Deal
Commercial Management
Relationship Management
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Purpose of Governance

• Meet contractual obligations
• Ensure effective management
• Rapid resolution of issues
• Ensure management control
• Provide consistent direction to Provider

• Ensure delivery of expected Savings
• Ensure market pricing
• Manage demand
• Create optimization through standardization
• Leverage and focus Provider capabilities
• Institutionalize process improvement

Governance must effectively balance these
objectives while bringing the intent of the deal
to life
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Most BPO Deals are Transformational

• Companies are outsourcing for more than cost
  savings, they are interested in transformation
• 46 said transformational services plus operating
  capability was the most important selection
  criteria in choosing a BPO provider
• 22 said lowest cost solution was most important
• Even Transactional deals may require some degree
  of organizational transformation

The Governance design must foster and facilitate
collaboration
Source IDC Outsourcing Forum April 20, 2004
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Governance Requirements
Governance enables all Italicized Contract
Schedules

• Parent Guaranty
• Scope of Services
• Service Levels
• Fees
• Reports
• Managed and Assigned Agreements
• Key supplier Personnel
• Data Privacy and Protections Personnel Transfers
• Transition Plan

• Service Locations
• Loaned Employee Agreement
• Governance
• Approved Subcontractors
• Software
• DRP BCP
• SP Competitors
• Records Management Plan
• Form Confidentiality Agreement

An analysis of the Intent of the Deal,the
contract, the Relationship Type and the Role of
Governance will identify the Governance
requirements
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Deconstructing Governance
Standardization/Efficiency Defined Service
Management Involvement/Knowledge Transfer

• Decision Rights Development
• Transformation Planning
• Project Portfolio Management

• Commercial Decision-making
• Client/Provider Alignment
• Customer Relationship Mgt.
• Project Prioritization Approval
• ID Business Requirements
• Communications Planning Delivery
• Solution Development

Strategic Activities
Specific Division/Location

• Report Consolidation Generation Report
  Distribution
• Issue Tracking and Monitoring
• Contact Administration
• Governance Process Mgt.
• Asset Tracking
• Tool Implementation Mgt.
• General Administrative

• Issue Resolution
• Benchmarking
• Compliance Audits
• Root Cause Analysis
• Tools Selection
• Best Practice Introduction

Transactional Activities
Consultative Activities
Generic
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Functional View of Governance
Value Creation / Realization
Risk Mitigation / Control
Governance encompasses the management of these
functions
Service Quality
Financial Contractual
Compliance
Change Program Management
Issues Problems
Communications
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Commercial Management and Compliance Management
Financial/Contract Management
Compliance Management

• Address contractual requests
• Monitor financial performance
• Ensure accuracy of all invoices and validate
  receipt of service
• Facilitate payment approval process and controls
• Facilitate business case development
• Monitor asset management
• Provide regular financial reviews
• Calculate and process cost allocations where
  appropriate
• Maintain industry knowledge of pricing and
  contract terms

• Statutory Regulatory
• Ensure adequate internal controls to meet audit
  and regulatory requirements
• Internal Controls
• Provide advice and guidance on security, business
  continuity and other internal standards
• Contract
• Ensure contract provisions are being enforced
• Ensure visibility into service provider
  operational changes
• Ensure governance protocols are developed,
  maintained and renewed

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Governance is multi-dimensional and complex
Service Provider
Governance
Business Units
Retained Organization
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Decision Rights

• A Decision Rights model facilitates high-quality
  decision making in a complex multi-stakeholder
  relationship
• So that
• It is clear who participates in decision making,
• Who facilitates the decision process, and
• Who has decision authority.
• Decision making does not have to be a binary
  choice (a person makes the decision or doesnt)
  multiple people/groups can participate in
  different ways

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Why do we need Decision Rights?

• To define the role, and authority, of Governance
  and how it interacts with other key stakeholders
• To set expectations at the beginning of the
  outsourcing relationship
• Maintain control during a period of transition
  and uncertainty
• To avoid the churn that happens in the first
  several months
• Sets the proper tone with the service provider

Decision Rights are the design points for the
governance processes and job descriptions
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Sample Governance Guiding Principles

• Foster a fair, productive and collaborative
  relationship between Client and Provider
• Develop an environment of mutual respect
• Empower Provider to provide the best services
  possible
• Leverage Providers expertise wherever possible
• Be proactive in planning, problem, and change
  management
• Dont duplicate Providers responsibilities
• Oversee and manage the What not the How
• Retain and develop the capability to establish
  and enforce
• Policy setting
• Decision Rights
• Performance oversight and reporting
• Strategy and innovation

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Processes

• Are how the work of governance gets done
• Help institutionalize governance capability
• Reinforce the interdependence of the governance
  team

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Governance Staffing
Do you have the right mix of roles, skills and
attributes to perform these functions?
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Governance Roles and Responsibilities
Governance Executive
Service Quality Compliance
Program Management Office
Commercial Management
Relationship Management

• Ensures timeliness and accuracy of performance
  reporting

• Facilitates planning for Transformation and
  Transition
• Acts as Transition lead for Client

• Responsible for timely and accurate payment of
  service provider
• Responsible for value tracking and all financial
  reporting
• Ensures compliance with contract commitments

• Prepares the organization for change
• Communicates the value of outsourcing and other
  changes
• Collects demand forecasts and business
  requirements
• Escalates business issues

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Optimizing the Value of Outsourcing
Governance Operating Model
Intent of the Deal
Commercial Management
Relationship Management
To achieve optimum value from an outsourcing
relationship, all (3) components must be tailored
to the intent of the deal and adjusted over the
life of the relationship
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Governance
Design and Build Proprietary tools,
methodologies and processes enabling clients to
build best practices outsourcing
relationships Post-Contract Assessment Comprehen
sive assessment analyzes all aspects of the
outsourcing relationship contract, operations
and management Portfolio Management Support for
clients looking to maximize multiple outsourcing
relationships in managing as a portfolio Managed
Services SLA-based services delivered by onsite
EQ professionals with the tools and processes to
support the Outsourcing governance organization
Governance
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Comprehensive Relationship Management Skills
Governance Functionality
Risk Mitigation/Control
Value Creation/Realization
Change and Program Management
Financial andContractual
Governance encompasses the management of these
functions
Service Quality
Compliance
Communications
Issues and Problems
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QA

• Further follow up or questions
• bernie.clendenin_at_equaterra.com
• 813-263-3550