Sourcing Governance - 2012 Global Update

Copyright © 2012 Information Services Group, Inc. All Rights Reserved. No part of this document may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval devices or systems, without prior written permission from ISG, Inc.

Steve Kopp Partner, Business Advisory Services

September, 2012

Sourcing Governance – Global Update

2 Copyright © 2012 Information Services Group, Inc. All Rights Reserved

2

► Global insights into Governance

► Why Governance fails or succeeds

► Trends in Outsourcing Governance

Contents


Global insights into Governance


What Do We Mean By Governance?

Corporate Governance

Governance (or Functional Governance)

Service Management Governance

Contract Governance


Sourcing Governance Remains An Immature Function In A Mature Industry.

“Lack of management is central to the problems with multiple sourcing. 84% of companies do not have what they regard as a mature governance model.” Financial Times

“81% of suppliers believe that poor or failed outcomes are primarily or completely the customer’s fault 89% of customers believe that poor or failed outcomes are primarily or completely the supplier’s fault.” International Association of Outsourcing Professionals

“Companies report between 5% and 30% of the expected value of their transaction is lost through ineffective governance.” ISG Research

Study

Governance

Providers

Client


Investment Too Often Still Remains Focused On The Contracting Activity

Greatest time, money, and complexity occur post-contract; that is where true value and success are measured – not at contract signing.

Strategy Assess Transaction Transition Manage & Govern Renew

Post-contract period – where governance processes really matter!

Strategy and evaluation stages:

► ~10-15% of time spent in overall lifecycle

► About 2-3% of total spend

► Choreographed process

► Specialists within both client and service provider

► Post-contract stages: ► ~85-90% of time spent in overall lifecycle

► About 97-98% of total spend

► Dynamic business changes

► Multiple internal and external stakeholders


The dollar value is becoming apparent through organizations tracking the delta between good and poor/absent governance…..

Large Amounts Of Value Are Lost Through Lack Of Good Governance

Savings were recorded as an average of 16% ACV over the three years.

Savings

$- $200 $400 $600 $800

$1,000 $1,200

2009 2010 2011

Savings as % of ACV

HardDollarSavings

$253M

$678M

$972M

17.33% 14.73%

16.58%


Third-Generation Outsourcing Governance Is Filling This Critical Gap…

► Focused on measuring service provider cost and performance only

First Generation

► Improved isolated elements of governance

Second Generation

► Holistic view of outsourcing ► Optimization of governance

Third Generation ► Single top-down view of all

outsourcing performance

► Consolidated dashboard on all aspects of governance

► External/internal measurements

► Common data sources

► Measures effectiveness of governance


Combining these elements result in value exceeding the sum of the parts

Third generation sourcing governance relies on expertise, robust processes and technology, and flexible resource options.

Underpinnings of 3rd Generation Sourcing Governance

Governance Expertise

► Years of governance experience

► Subject matter expertise available as required

► Experienced design teams

Processes

► 30+ processes ► Proven through

dozens of transitions and adapted for unique client needs

► Proven offshore management processes

Flexible Resource Options

► Processes integrated with robust software

► Adaptable to specific client needs and in-house technologies

► Comprehensive dashboard improves overall sourcing management

Technology

► Onsite, offsite or offshore resource options

► Utilizes a mix that optimizes performance while keeping costs down

► Utilizes labor arbitrage where it makes sense


Why Governance fails or succeeds


Nearly 90% of the time, legal or financial terms and conditions are not the principle source of problems.

Governance Should Prevent Failure And Ensure Value Retention

Source: Sourcing advisory service executive report, Cutter Consortium

Foremost causes of sourcing failure

Flawed legal and financial terms and conditions

Flawed strategy and business planning

Poor or damaged relationships between firms 52% 37%

11%


What Do You Absolutely Need To Get Right?

Governance is not a one-way street……..

►Respect from all parties from the get go

►Process alignment from early on, Process compliance throughout.

► Focus on collaboration with the Suppliers, its not a one-way street….

►Have the tough conversation with both Suppliers and Consumers

►Be fair…perception of fairness is key to successful governance

Consumers

SM & G

Suppliers


Pitfalls Of Supplier Governance

Too often, customers fail to manage to the contract that has been so painstakingly negotiated.

► Supplier-promoted and client-accepted, position that the contract should be put on the shelf and forgotten

► Lack of process or compliance to established processes

► When it becomes only about service delivery, or cost, or relationship…..

► Contractual Deliverables & Obligations are not forgotten


Trends in Outsourcing Governance


15

1. Moving Governance from an art to a science

2. Measuring the Effectiveness of Outsourcing Governance End-to-End

3. Choices in execution

4. The changing role of software


Outsourcing governance is becoming more fact and measurement driven. Some examples……..

From Art to Science

Trends – Savings Vs Error

8.12%

2.89% 1.31% 0.45% 0.28%

9.28%

17.41% 20.29% 21.61% 22.06% 22.34%

0%

5%

10%

15%

20%

25%

0-6 7-12 13-18 19-24 25-30 31-36

% o

f Con

trac

t Val

ue

Months into Governance Services

Error Value as % Contract Value Savings as % Contract Value


17

1. Moving from an Art to a Science





Measurement –Has Become A Necessity, Not A Luxury…

# Trend #

Status Trend Status Trend Status Trend Status Trend

Contract Deliverables & Milestones Invoice Management Contract Change Request & Revision Credits, Earnbacks and Milestones Governance Issue Management Financial Analysis and Planning Governance Library Value Assurance

Status Trend Status Trend Status Trend Status Trend

Customer Satisfaction Management Performance Analysis Spend Pool Service Level Management Governance Activities Management Service Request Management

ABC DEFRelationship Management

ABC DEFFinancial Management

ABC DEFPerformance Management

ABC DEFContract Management

ABC DEF

Supplier Overall Ratings

Overall Governance Process StatusStatus


Measuring Internal Governance Processes Is Also A Necessity

Governance Process - Health Metrics Sample

Service Management

DisciplineProcess Key Process Metric Target Sep-10 Oct-10 Nov-10 Dec-10

Contract Change Request

Contract Change Request Cycle Time < 20 business days 23 days 23 days 58 days 28 days

Contract Issue Management

Contract Issue Open Aging < 20 business days 9 days 12 days 14 days 10 days

Contract Interpretations

Contract Interpretation Resolution Cycle Time < 10 days 2 days 3 days 2 days 4 days

Invoice Management Service Provider Invoice Discrepancy Resolution < 10 business days 14 days 24 days 23 days 12 days

Invoice Management % Invoice Back Up Data Line Items with Errors 5% 14% 17% 11% 50%

Work Requests Work Request Cycle Time < 10 business days 3 days 3 days 3 days 4 days

Work Request Work Request Open Aging < 20 business days 16 days 10 days 12 days 11 days

Relationship Management Governance Governance Meeting

Action Resolution>90% of last month's action items closed 35% 40% 55% 50%

Green >=80%Yellow between 70% and 79%Red Less than 70%

Overall Health Criteria

Performance Management

Financial Management

Contract Management


Measuring To Understanding Process Efficiency


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3. Minding both the P’s and Q’s




Companies have choices when they start…Do it all on their own or practice what they preach…

Choices In Execution

► Relationship

► Client Culture

► IT Delivery Processes

► Accountability

► Governance Process

► Governance Experience

► Technology/Tools ► Flexible resource

model at offshore cost

3RD GENERATION GLOBAL SOURCING ORGANIZATION

Client


Not everyone is good at everything; similarly not all organizations have the skills, resources and tools to excel at outsourcing governance

Best of Breed Governance

►Organizational maturity dictates the level of investment companies are willing to make to improve their outsourcing governance Always the third priority – a clear warning sign

►Pooling of governance resources and know-how across functional boundaries are becoming more common place Enterprise outsourcing governance a reality

►Deliberate decisions on what is “core” in outsourcing management

►More than $11Billion in outsourcing contracts managed by third parties Rapid growth New market entrants


PERFORMANCE MANAGEMENT

CONTRACT MANAGEMENT

Best Of Breed At Ground Level

Large, experienced Companies understand what governance processes can be sourced, and which to keep in-house…….

Service Level Management Work Requests & Authorization Consumption Management - Operational Compliance Service Provider Asset Management Oversight Architecture & Standards Management Risk Management Security Management Service Delivery Management Performance Analysis Incident, Problem, Change Management

Contract Compliance & Deliverables Contract Change Request Contract Interpretation Issue Management Governance Library Third Party Contracts Management Service Provider Audit Consumption Management

RELATIONSHIP MANAGEMENT

FINANCIAL MANAGEMENT

Governance Administration Spend Pool Management Customer Survey Management Forecasts & Demand Management Regulatory & Tax Compliance Workplace Services Communications Management

Invoice Management Performance Credits & Earnbacks Contract Pricing Adjustments Value Assurance Financial Analysis & Planning Service Provider Procurement Oversight Chargeback

Sourced Selectively sourced Retained in-house

Financial Management

Performance Management

Contract Management

Relationship Management


Separating decision making and relationship management from the operational governance tasks.

The Philosophy Behind Best Of Breed Governance

► Decision making ► Approvals ► Relationships with the service providers

Clients generally retain…

► Process management and tracking ► Data collection and validation ► Performance and payment analysis

Third Parties perform…

► Scope ► Specific division of responsibilities on a task-by-task level ► Agreement on relative level of effort by task ► Specific deliverables

Agreements are tailored and detailed for …

► Contract change management ► Record keeping ► Reporting


Instead of… Internal Governance Team focus on…become…

Collecting data and calculating performance credits

Uncertainty regarding roles and responsibilities

Debating data accuracy and completeness

Finance Team validating invoices

Governance Manager collecting and logging issues from service delivery, billing & performance

governance meetings

Collecting various contract-related artifacts for filing in the Governance Library

Working with the service providers on service delivery issues, continuous improvement, and

clearing root cause analysis reports

Helping to clarify roles and operating in accordance with the process flows

Focused on working with service providers to improve service quality

Finance Team working on higher-value items - ensuring full value being obtained

Service Level Team working with service providers to improve service level performance

Governance Manager is focused on issue resolution

Governance teams are focused on higher-value items such as relationship improvement and

transformational projects

Service Level Team checking service level calculations

Higher value, best practices

A Day in the Life” examples of how a third party can support and enable governance processes.

The Result of Best of Breed Governance

Lower value, best efforts


Minimize Value Leakage

Risk Mitigation

Focus

Accelerated Savings

Scalability

Headcount Costs

Relationship Improvement

Retain value from outsourcing transactions by reducing value leakage through improved governance oversight

Increase control and lower risk of failure through use of best-in-class capabilities, processes, tools and people

Timely, fact-based recommendations allow the organization to focus on policies, approvals and service provider relationships

Utilizing proven world-class processes, accelerates the organization through the learning curve

Provides a cost effective platform that can easily scale as additional sourcing activity occurs

Minimize the number of employees required for governance

Fact-based governance execution fosters an environment that focuses efforts on performance and relationship improvement

Why Companies Decide To Source Some Of Their Governance


28



3. Minding both the P’s and Q’s




Software remains the missing link in outsourcing management excellence….

Changing Role Of Software Tools

► Only recently have we seen some comprehensive functionality evolving

► Other software solutions have: Disappeared Were acquired and are poorly positioned in the market Price, depth….. Remains under funded and under developed

► The market is poised for significant change in outsourcing governance through a new generation of software that: Is functionally comprehensive Addresses all aspects of workflow, intelligent storage and interrogation, reporting and

ease of interfacing Is very affordable at all levels in the industry Integrated with a managed service


“Fact-based Governance execution fosters an environment that focuses efforts on performance improvement rather than debates on whose data is right and whose data is wrong.” “Poor Governance is the silent killer of results.”

In Conclusion……

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