equasiis market assessment, outsourcing governance operational efficiency, may 2009 (e2002)

8/14/2019 EquaSiis Market Assessment, Outsourcing Governance Operational Efficiency, May 2009 (E2002)

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Effective Governance Yields Outsourcing Value www.equasiis.com | 1

EquaSiis Market AssessmentData, Research and Analysis on the Global Business and IT Services Markets

Effective Governance Yields Outsourcing ValueMike Beals , Vice President, EquaSiis Enterprise Stan Lepeak , Managing Director, EquaSiis Global Research

The value and importance of outsourcing governance in an outsourcing effort is in many waysself-evident and intuitive. Outsourcing governance is the vehicle through which buyers can ensurethe benefit is achieved. Given the increasingly complex nature (e.g., multi-sourced, multitower,multi-geography) of outsourcing today, good governance is more important than ever. EquaTerracontinues to find, however, that many buyers struggle with their outsourcing governance efforts.This is due to inadequate resources, skills, processes and tools. It is also due to the lack ofinformation or inability to build a solid business case required to make the investment to improvethese capabilities. One aspect of developing such a business case is clearly assessing andunderstanding current state governance capabilities and efficiencies or inefficiencies as the casemay be. This Market Assessment paper reviews the results from recent EquaTerra research thatassesses and measures the operational performance characteristics of buyers managing majoroutsourcing efforts.

The Details

Outsourcing Governance Overview

EquaTerra has long stressed the role and importance of outsourcing governance to the success of

outsourcing efforts. EquaTerra s direct client experience and market research studies have founda direct correlation between the quantity and quality of governance investments and the successand satisfaction of outsourcing efforts. This is not to imply that the more a buyer spends ongovernance, they happier they become. Rather it means that there is a minimum investmentthreshold needed to ensure that buyers can field and support adequate and skilled outsourcinggovernance resources, processes and tools.

EquaTerra has identified six key capabilities that enable outsourcing governance success. Thesecapabilities can be categorized further and are mapped to the competing priorities that buyersmust balance in their governance efforts: risk mitigation against desires for value realization.These categories are highlighted below.

Risk MitigationFinance and commercial management: the ability to ensure contractual obligations are beingmet by both parties and verifying the invoice reflects the service quality received andprovisionedCompliance management: ensuring effective compliance with regulatory, safety and privacyrequirementsIssue and problem management: appropriate mitigation of issues and resolution

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Value Realization

Change and program management: manage demand for services as well as leverage andfocus on service provider capabilitiesService quality management: create optimization through standardization, definedperformance and satisfaction levelsCommunication management: business requirements and relationship alignment

Both risk mitigation and value realization are critical to outsourcing success. Outsourcing buyerstend to focus on the risk mitigation issues spending much of their time and energy on contractualor financial issues leaving very little time or focus on the areas that create the most value. Failureto perform either well will lead to value “leakage” in the outsourcin g effort. This leakage can takethe form of dollars spent unnecessarily in governance, missed cost savings opportunities, or thefailure to achieve broader business case goals like process improvement and innovation. Figure 1illustrates the potential value leakage from poor or inadequate outsourcing governance.

Minimizing leakage is critical. Effective risk mitigation can help ensure that costs remain in linewith projected usage and costs. Creating efficiencies in the risk management function can reducethe cost of outsourcing governance itself. These cost savings can flow to the bottom line or buyerscan reinvest them in improving outsourcing governance capabilities. It is easier to measure the“hard dollar” (or € or £) costs and benefits of good governance than its impact on value creation. Ensuring outsourcing achieves the intended savings or the projected business case will alsoresonate with financial and executive management outside of the governance organization.

Figure 1 – Potential Value Leakage from Poor Outsourcing Governance




Gaining the support of these constituencies is needed to get the approval for the investments in

governance and tools required to improve outsourcing governance capabilities and ultimately thevalue achieved from outsourcing.

Seeking to better quantify the potential benefits from effective governance, EquaTerra launched amarket research study (see Figure 2) to complement and extend findings from its own clientoutsourcing governance experiences. The balance of this paper will review and interpret theresults of that study. For more information on general outsourcing governance best practices,please refer to the following Perspective paper as well as to the EquaTerra Library .

Figure 2 – Study Method & Demographics

Market Study FindingsSome level of outsourcing governance inefficiencies will exist in any organization. The magnitude

depends both on the scope and scale of the outsourcing effort and the sophistication of thebuyer s outsourcing governance capabilities. The market study assessed outsourcing governanceactivities in ITO and BPO (see Figure 3). Average total contract value (TCV) under managementby study respondents was in excess of $100M.

Functional AreaOutsourced

2+ years

Outsourced

< 2 years

In the process

of outsourcing

No plans to

outsource

Information Technology 59% 17% 10% 14%

Finance, Accounting & Administration 24% 12% 9% 55%

Human Resources 23% 10% 13% 54%

Procurement 15% 11% 17% 56%

Customer Care/Call Center 37% 16% 14% 33%

Industry Specific Services 35% 16% 10% 39%

Figure 3 – Levels of Outsourcing

Prior EquaTerra research and client experiences have found that buyers tend to invest more inoutsourcing governance, or minimally make better investment choices, after they have been inoutsourcing efforts for more than two years. Outsourcing satisfaction levels also tend to rise after

EquaTerra conducted this market study in the first quarter of 2008. It surveyed over 300North American buyers actively engaged in governing and managing their organizations’information technology and business process outsourcing efforts. Seventy-nine percent of

respondents were director or manager level, with the balance in vice-president or executive management roles. Twenty-six percent of respondents were from organizationswith $100M to $1B in annual revenues with the rest coming from larger firms. Twenty-ninepercent of respondents were from firms with revenues in excess of $25B annually. All major industries were represented led by banking, financial services and insurance (18 percent of

respondents) and manufacturing (13 percent).

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two years. Market study respondents included a mix of buyers who had outsourced both greater

and less than a two year time frame.

Respondents had reasonable though not exceptional success in achieving the benefits soughtfrom outsourcing. On a scale of one to five, where one represented benefits not at all achievedand five represented fully achieved, responses ranged between 3.1 and 3.6. Benefits soughtincluded the usual mix of cost reduction, cost avoidance, process improvement and seeking toredirect focus to more strategic activities. Most respondents planned to expand their existingoutsourcing efforts either in the same or new functional areas or into new business units andgeographies. Twenty-two percent planned to maintain current levels of outsourcing while just fourpercent planned to curtail or eliminate their outsourcing efforts. Arguably, the buyer samplemeasured in this market study represents “typical” outsourcing users in today s market.

Outsourcing governance spend levels fell within the ranges EquaTerra typically finds inoutsourcing efforts of this profile (see Figure 4). Forty-one percent of respondents estimated theiroutsourcing governance spend at three to five percent of TCV annually. A full 20 percent ofrespondents did not know their annual spend levels or spend was not tracked. Given thepotentially large size of outsourcing governance spend (basic math shows that three percent of a$100M contract equates to $3M spent annually) buyers that do not know or do not trackoutsourcing governance spend are in the dark around the details of a large annual expenditure.Minimally, these outsourcing governance spend numbers highlight the volume of potential leakagethat can occur in a typical ITO or BPO effort – not to mention the savings often sought in acontract of this magnitude.

While measuring total outsourcing governance spend is important, it is more valuable to

understand where the funds are spent and tracking the value of that spend. As with all businessfunctions, there is much administrative work, or transaction-type work, in outsourcing governance.The degree to which buyers can streamline or limit the time and effort spent on these tasksdetermines how much they can focus on more strategic aspects of outsourcing governance – activities to support value creation – while simultaneously maintaining or lowering cost levels.Buyers need to assess the costs associated with these administrative tasks as well as theirperformance levels. As the outsourcing governance marketplace matures, buyers will be able tocomparatively assess or “benchmark” their cost and performance levels against those of their peers EquaTerra has developed assessment diagnostic for outsourcing governance to helpbuyers better assess their performance against those of their peers.




Figure 4 – Outsourcing Governance Annual Spend as Percent of TCV

There are a number of key operational metrics associated with outsourcing governanceadministration. EquaTerra reviews these metrics when helping clients assess the efficiency of theirgovernance operations. They include the following:

Number of FTE s in the outsourcing governance organization and their fully loaded costs

Number of service providers and service provider relationships being managed

Invoices received monthly from outsourcing service providers

Estimated percentage of invoices that are inaccurate or wrong

Time spent per month in hours and/or FTE s on invoice verification and recovery/reconcili ation

Percentage of invoices received:

Electronically with summary informationElectronically with detail level informationNon-electronic or paper-based

Time spent per month in hours to calculate chargebacks (when programs are in place)

Estimated percentage of service provider service level credits that are wrong or inaccurate




Time spent per month in hours to manage service level credit programs (when programs are

in place)

Time spent per month in hours dealing with contractual issues (e.g., researching the contractfor specific deliverables, affirming scope, definitions, language, etc.)

Time spent per month in hours dealing with or “rehashing” issues dealt with previously (e.g.,re-addressing the same contractual problems, looking for the same information)

Most of these are relatively “hard” metrics. The issue often is whether the governance organizationhas the information and/or time to capture and verify the metrics. Once the metrics are in hand,the governance team can perform a benefits calculation on potential performance improvements.As part of this it is also important to understand how much improvement is realistic to expect.

There are no broad industry accepted outsourcing governance performance “benchmarks” available in the market. Invoice verification is a time consuming process for most outsourcingbuyers, yet the magnitude of these projects warrant careful review of work performed and moneyspent with service providers.

EquaTerra has captured cost and performance levels for these outsourcing governanceoperational metrics shown in Figure 5 during several years of client engagements. The recentmarket study findings add broader market context and validation to those findings. Both arerepresented below.

Outsourcing governance metricLevel found in

market study

Percent inaccurate/wrong invoices 9%

Invoices – electronic summary 33%

Invoices – electronic detail 40%

Invoices – non-electronic 27%

Percent inaccurate service level credits 11%

FTE equivalent staff in governance team 9

Hours spent verifying invoices/month 35

Hours spent to calculate chargebacks/month 41

Hours spent on contract review/month 44

Hours spent “rehashing”/month 34

Figure 5 – Common Outsourcing Governance Performance Metrics

Dealing with inaccurate invoices may seem a normal cost of doing business. In an outsourcingeffort with a short-staffed outsourcing governance team, however, dealing with these inaccuraciescan prove a huge and costly headache. The following is a typical scenario.

First buyers have to expend a fair amount of effort to identify any potential discrepancies. When adiscrepancy is found, supporting detail will determine if they should pay or dispute the invoice.




Even if the supporting detail is provided electronically with the invoice, it usually involves re-

entering this information into spreadsheets to verify correct calculations. This can take weeks toinvestigate and resolve, and many times the service provider has to manually query theiroperational and billing systems for the information. Further complicating this issue, manyoutsourcing service providers negotiate a provision into client agreements stating that the buyerhas a limited amount of time to dispute an invoice and to recover fees that were incorrectly paid(that is, 30 days to dispute, and 60 days to recover). After the specified time period, the moneyreverts back to the service providers, so the timeliness of information is critical.

When making the decision to live with or fix these types of inefficiencies buyers need tounderstand the potential benefits from fixing them or at least lessening them. EquaTerra findsbuyers often underestimate potential impact of invoice errors and missed service level credits. Tohelp illustrate the potential benefits EquaTerra has developed an outsourcing governance benefits

calculator (see Figure 6).

Figure 6 – EquaTerra Outsourcing Governance Benefits Calculator

The scenario represented in Figure 6 is a buyer with outsourcing relationships totaling $250M TCVover five years with three service providers. Using average numbers from the market study,assume the buyer has a total of nine FTE staff in the outsourcing governance team, with two




focused on invoice verification and processing. Average invoicing accuracy is 91 percent. The

buyer s goal is to reduce invoice errors by two percent and reduce service level credit errors byone percent. Because of those reductions, the buyer wants to redeploy staff previouslyremediating those errors and achieve a labor reduction of productivity improvement gain or 10percent. If the buyer is able to achieve these relatively modest goals, the monthly bottom linesavings exceed $130,000 and total potential savings exceeds $8M. This clearly illustrates the harddollar value of improved outsourcing governance operational efficiency.

How are Governance Organizations Responding?Targeting lucrative cost savings and cost recovery from improved outsourcing governanceefficiency is a laudable goal. The challenge is successful execution. EquaTerra finds that moreoutsourcing buyers appreciate the value of good governance, especially those in second

generation or later outsourcing efforts. This was borne out in the results of a separate marketstudy on global outsourcing trends that EquaTerra conducted 1Q08. This study found that thegovernance model was cited as the top critical success factor in next generation outsourcingefforts (see Figure 7). Buyers that recognize the importance of good governance are alsodedicating more, or at least more skilled, resources to outsourcing governance efforts. Moreimportantly they are looking at how to improve outsourcing governance capabilities rather than justdevoting more bodies to its support.

Figure 7 – "Next Generation" Outsourcing's Critical Success Factors

There are many ways buyers can improve outsourcing governance capabilities. The most obviousis ensuring skilled and experienced staff are placed in key roles. Outsourcing governance must




become a valued role and career path, not a transitory position or home of last resort to former

members of outsourced functions. Buyers must also define clear roles for outsourcing governanceteam members and processes for outsourcing governance activities. Ad-hoc processes and rolesare a prime cause of inefficiencies.

To maximize cost savings, buyers must minimize the time and effort spent on administrativeoutsourcing governance activities while simultaneously improving the efficiency. A key means todo this is through process automation. EquaTerra finds that too much outsourcing governancework today is performed manually with the usual associated high levels of inaccuracies andoverhead. Automation of outsourcing governance activities through the greater use of dedicatedsoftware tools (beyond Excel) offer some of the greatest potential long-term opportunities toimprove efficiency and to help reduce costs.

At the more strategic level buyers must ensure their outsourcing governance investment matchesthe intent of the outsourcing efforts being supported. A rela tively straightforward “lift and shift”outsourcing effort focused on maximizing cost reduction does not require a large or complexoutsourcing governance to support it. More strategic or transformational outsourcing focused onprocess improvement and innovation requires higher skills and deeper outsourcing governancecapabilities.

How are Outsourcing Service Providers Responding?In some respects outsourcing service providers face competing goals when supporting their sideof a buyer s outsourcing governan ce effort. From one perspective there is money to be made if abuyer is lax around tasks like invoice verification. If the client is unaware that an outsourcingservice provider is not meeting its contractual obligations due to weak governance capabilities, theservice provider does not have a strong, immediate incentive to point out the shortcomings. In thiscase no news is good news.

Strategically, however, it is in the outsourcing service providers best interests to work with clientsthat are skilled in outsourcing governance. When the service provider is held accountable thebuyer is in a much better position to understand the value and benefits the service provider isdelivering. Both sides are better able to proactively identify problems and work to remediate thembefore they grow and threaten the long term viability of outsourcing. As the scale, scope andcomplexity of outsourcing efforts grow this becomes even more critical.

Service providers continue to improve the software applications and tools they use to supportoutsourcing governance. This benefits buyers but does not detract from the need for buyers toinvest in their own outsourcing governance audit and automation. Minimally, provider tools do notsupport other provider tools. And, provider tools are not ideal to audit service level credits andverify invoices. The service providers ability to automate and streamline the transmission of keyoperational data to the buyer will benefit both the buyer and the provider.




The Advisor Perspective – Critical Points to ConsiderEquaTerra continues to find that poor or inadequately supported outsourcing governance are aroot cause in underperforming outsourcing engagements. EquaTerra advisors polled in the 1Q08EquaTerra Pulse survey offered the following advice to buyers on how to improve theiroutsourcing governance capabilities.

“Continually check to ensure the two parties are aligned. Regularly assess the capability ofyour governance team and audit the level of adherence to the governance processes. Do youhave the right people with the right skills?”

“Buyers must remember they are not outsourcing their accountability. They have to find thatline between „managing and „governing (oversight) – a difficult mandate for line managerswho are thrust int o governance.”

“Don t force fi t individuals into governance roles - identify the required skills and enlistresources appropriately.”

“Service credits are not a punitive mechanism. Relationships should not be adversarial.Rather, you should be looking to e ncourage the right behaviors through a „win -win approach.”

“Don t over -engineer governance. Make governance something that is real, practical, and canbe implemented. Focus your resources on the biggest impact areas by using experiencedresources and advi sors. Use automated tools to accelerate your governance resources.”

“Go for a more integrated approach and a true partnership, instead of only mentioningpartnership but managing the relationship as a traditional buyer/seller situation.”

“Make sure to implement state-of-the art technology to support governance as this will not onlyincrease effectiveness but also reduce governance expenses and thus positively impact thebaseline of the outsourcing initiative.”

Relative to the last point, buyers need to leverage outsourcing governance software tools andapplications to assess their outsourcing governance operations. Scenarios presented above showthe tangible cost savings buyers can gain from improving the efficiency of administrative tasks.More importantly, improving outsourcing governance capabilities creates a foundation forimproving the more strategic and critical aspects of outsourcing governance around relationshipmanagement and value realization.




Figure 8 – Mapping the Work of the Outsourcing Governance Organization

Figure 8 illustrates the totality of outsourcing governance work. EquaTerra estimates that 50percent of governance work falls in this lower left/transactional quadrant and that it is possible toautomate up to 40 percent of that work. Automating invoice verification, calculating service levelcredits, and collecting information and reporting accounts for much of this automation. Of theremaining 50 percent of governance work, EquaTerra believes that another 40 percent is

consultative and 10 percent strategic. There is also the opportunity to automate some amount ofthis work by providing scorecards to highlight issues and document repositories for quickreference. This will also aid in helping buyers perform more rapid and quality decision making.

There are important benefits buyers can gain once they have automated the transactional tasksand focused more on consultative and strategic work. One is to address the issue of consumptionmanagement. Regardless of whether a buyer has to deal with base service fees with additionalresource charges (ARCs) and reduced resource credits (RRCs), the buyer will pay more if itconsumes more resources from the service provider.

Most organizations outsource to get to a „future state often with a targ eted cost reduction. Thismeans that buyers want to shift the delivery of services from old, manual delivery mechanisms toself-service, and automated delivery mechanisms. The outsourcing business case is based on aset of assumptions around consumption patterns, and more specifically, the adoption of the newservices (e.g., HR self-service applications, improved help desk support, access to newknowledge based services). Buyers that do not have adequate consumption managementprocesses and tools in place – and therefore visibility into actual consumption levels of services -are flying blind. If new services offered are improved, users are naturally likely to consume more ofthem, driving up outsourcing costs.




Using invoice verification as an example, even if the buyer receives the invoice and consumption

detail that supports fees charged, it will not know which resources are out of variance withbusiness case assumptions. It will also not know which users or business units are the culprit. Thishighlights that the more a deal depends on transformation and the adoption of new services, themore critical it is to have demand forecasting and consumption management tools in place.

Buyers are increasingly developing higher-level relationships with their outsourcing serviceproviders for the purpose of transforming their back-office functions. The implication for serviceprovider relationships is that buyers must select a service provider not only for its operationaleffectiveness to cut costs, but as a strategic business partner who understands the industry andthe key to help you achieve your business objectives. Instead of telling its service provider what todo and how to do it, buyers inform the providers of their business objectives and let the serviceprovider use its recommended approach, given its expertise and knowledge of best practices.

So what does this mean from a governance capability perspective? It means that buyer skill setshave to include things like program management, change management and strongcommunications capabilities. It also means that buyers will need to facilitate regular, structured

joint-planning sessions between the collaborative provider(s), the retained organizations, and itsbusiness units, in order to create value.

If the buyer s governance team has the wrong skill set, or is totally bogged down doing work suchas verifying invoices and performance reports, it will not have the skills, or time to effectivelyfacilitate the innovation necessary to accomplish transformational objectives. EquaTerra typicallysees a relatively small amount of savings from operational efficiencies and many millions of dollarsin benefit expected from arriving at that future state.

ConclusionAs typical buyers expand their outsourcing efforts in terms of function, scope, scale, number ofservice providers and global delivery, good outsourcing governance is more important than ever tooutsourcing success. While EquaTerra sees a growing appreciation of the importance ofgovernance to outsourcing success, it still finds that many buyers struggle to deploy the adequateresources needed to support outsourcing governance efforts. Buyers must build a strongerbusiness case to garner the investment required to improve capabilities, but must also enhancethe performance of current operations. Focusing on improving the efficiency and effectiveness ofadministrative outsourcing governance operations is one area where buyers can both save moneyand free up resources for more strategic governance. Buyers should review their options toimprove capabilities in these areas, including the greater use of process automation throughsupport software applications and solutions.




About EquaSiisEquaSiis, an EquaTerra company, provides software and services that

improve the business support services lifestyle for shared services,

outsourcing practitioners and service providers. The software,

EquaSiis Workbench and EquaSiis Enterprise, is a framework for

collaboration used during the service delivery assessment and

sourcing process to assist in analysis and decision making for shared

services or outsourcing. EquaSiis provides intelligence and

optimization for the delivery of business support services across the

entire organization. The company also offers service providers market

intelligence, research, customer satisfaction and trending data through

its Insights group. For more details about EquaSiis research offerings,

please contact Stan Lepeak, [email protected] .

www.equasiis.com

Media ContactsRon Walker, EquaSiis

+1 858 486 6035

[email protected]

Lee Ann Moore, EquaTerra

+1 713 669 9292

[email protected]

Copyright © EquaTerra 2009. All rights reserved. The prior written permission of EquaTerra is required to reproduce

all or any part of this document, in any form whether physical or electronic, for any purpose.




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equasiis market assessment, outsourcing governance operational efficiency, may 2009 (e2002)

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