9 Ways to Stop Your IT Outsourcing Deal From Leaking Money

Experts estimate that an outsourcing deal can lose up to 30 percent of its value each year due to poor governance. Here's how to plug the holes.

By Stephanie Overby
Wed, June 15, 2011

CIO — If there were a relatively straightforward way for an IT leader to boost his company's bottom line by millions of dollars a year, chances are he wouldn't ignore it. But that's just what many CIOs are doing as a result of poor outsourcing management.

The typical outsourcing deal loses between five and 30 percent of its expected value each year through ineffective governance, according to outsourcing consultancy TPI. That lines up with the results of a survey by the International Association of Outsourcing Professionals, which found that 63 percent of companies believed they were losing an average of 25 percent of contract value due to poor governance. For a typical five-year $100 million contract, that's a loss of as much as $6 million annually.

"Companies make the same mistake over and over again," says Claude Marais, TPI partner and managing director of governance services. "All the effort goes into the transaction. Outsourcing governance is an afterthought."

As outsourcing investments have grown more complex—more locations, more functions, more service providers—governance has become even more important and difficult.

"The bar is constantly being raised, and for many outsourcing buyers, the capability to perform good outsourcing governance cannot keep up with sourcing ambitions," says Stan Lepeak, director in KPMG's Shared Services and Outsourcing Advisory group.

Here are nine governance tips for managing your outsourcing deal.

1. Assess your strengths and weaknesses. "The actual acts of governance may be simple, but doing it has become sophisticated," says Marais. "Everyone thinks they do it well, but very few do."

Be honest about what you're good at and what you're not and consider outsourcing the areas that are suffering or that you have no interest in making a core competency.

2. Invest in insight, not just oversight. Nothing saps the value from an outsourcing relationship like layers of management. "Most of the time when you are not seeing the value you were expecting from outsourcing, it's not because anyone is breaching a contract," says Edward Hansen, partner at law firm Baker & McKenzie. "One of the first places to look is how the governance structure is working."

The typical outsourcing management hierarchy, designed for contract enforcement, may be ineffective. Hansen advises CIOs to encourage functional communication between the customer and supplier at all levels.

"It can be helpful to turn to the people in the trenches who are working together on a day to day basis," Hansen says. "These people have worked out problems together and [may] even have ideas on how to improve [the engagement] that would bring real value to both companies."

3. Focus on high-value governance processes. Two places you get the most bang for your buck are invoice management and contract management. If you focus on those two areas alone, "that will get you a long way," Marais says.

4. Reconsider the role of service level agreements (SLAs). SLAs exist to balance what is essentially a flawed business model. "At its most basic you have two companies that are not naturally aligned economically, so the natural profit-seeking tendency is for the customer to overburden the provider and for the provider to over-charge and underperform," says Hansen. "Most SLAs attempt to make non-performance expensive for the vendor in an attempt to realign the economics."

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