Fair market price, technology obsolescence, shifts in service levels, new business requirements, management turnover.
These are just a few of the examples of changes that may occur during the lifecycle of an outsourcing relationship. How they are handled can make the difference, not just in the ongoing character of an outsourcing partnership, but in the success of each of the two parties' enterprises.
That is why Governance is crucial to any outsourcing agreement. “Governance is the whole idea of executing a contract and making sure to keep up with the essential nature of what the two companies signed up for,” says Thomas W. Dougherty, former Vice President and General Manager of Global Outsourcing, NA at Unisys Corp. and a 30-year outsourcing veteran with experience on the client and provider side.
Ed Robinson, Vice President and General Manager of Global Program Management at Unisys agrees, adding, “The key thing is to have a well-defined statement of work between contracting parties and in that statement of work there should be a schedule that deals with governance that clearly lays out the roles and responsibilities of all the parties.”
In the '90s, one of the biggest fears of any company that wanted to sign a contract is how to protect themselves for any changes in technology. Now, with business process outsourcing, it is a thornier challenge to protect and handle changes in process that occur over time.
How do you combat those fears and others along the five-year or so outsourcing road? Management, management, management, says Dougherty. And not middle-management either. “There has to be buy-in from the top level,” he stresses.
When Dougherty worked on the provider side of the business, he put a lot of emphasis on creating levels of management in the contract. “You need people to participate in day-to-day operations, then a chain of command for whom to report,” he explains. “We found we needed to provide for an escalation process from the operations committee to the management committee and then to the executive committee.”
For example, Dougherty can remember times when the client did not keep up with its service level agreements. This left the provider in the lurch when it came to meeting its contract obligations, since they were dependent on activities that had not occurred. “What do we do about that? Are there penalties invoked? Does the contract get re-negotiated?”
He admits it is difficult to get concessions from clients, but says there must be equal voting power between the two companies. “When push comes to shove they signed a contract. You can't just sign a contract to have a company do accounting and receivables and then want to expand to have it do your shipping and receiving without negotiation,” he says.
Robinson has also grappled with this. “The most aggravating time in an engagement is when the client, for business reasons, misses its deliverables. It is okay if they miss their obligations, but it is not okay for us to miss ours,” he says.
The solution? “I have to understand what the client has ownership of and go inside his world to make sure he delivers on his deliverables,” he says.
On the other side of the fence, when Dougherty was Senior Vice President of Technology at United Healthcare Corp., he oversaw three major outsourcing contracts to provide core technology services with a combined value of over $1 billion.
“Some of our vendors didn't seem to have an appreciation of all the changes happening at United Healthcare,” he says. These changes, while not originally in the outsourcing contract, were crucial to the business.
First problem: AT&T Solutions, which provided the national frame network for United Healthcare, was getting bogged down with all the little intricacies of the day-to-day and losing sight of the bigger picture. “They did a good job of roll-out, but they didn't seem to have an appreciation of all the changes happening at United Healthcare,” explains Dougherty. “We thought they should have had a much higher-level executive on the account.”
So, working through a committee, the client got AT&T to put a vice president in charge. “Then they started running the business more like a business,” he says.
Second problem: IBM, which provided technology services, started thinking it wasn't making enough money and kept trying to increase the charge, he recalls. Again, the answer was top management. “We took it to a very high level, which was tougher, not as nice and easy, but basically forced them to work with us,” he says.
It is clear that by the third year or so of a long-term outsourcing agreement, the bloom is off the rose, so to speak, and there are some new paths to negotiate. “Often we forget why the client entered into an engagement after two years or so. It needs to be constantly refreshed,” says Robinson.
He says this constant attention to the goal of the outsourcing agreement is the difference inherent in the two main phases of outsourcing — transition and transformation. Transition — of people, assets, hardware, software, schedule and contracts and procurement cycle — is important, but it is a one-time event that takes about three to nine months to occur.
Transformation, on the other hand, is really about the future of both businesses. It is about paradigm change and rolling with the ongoing business needs of business partners. Robinson explains, “Transformation is the foundation. And it means that you have to set up a target model based on where you want the company and the partnership to go.”