Outsourcing governance: Keeping tabs on outsourcing contracts

The concept of outsourcing is quite simple – take some part of business operation, generally “non-core,” and contract with an external firm for those services to reduce costs, streamline operations, and ideally improve service. While there are many important aspects to outsourcing, service quality stands out as one of the most critical. If, in the end, your company’s service levels suffer due to an outsourcing contract, the negative impact of poor service can mean lost customers and revenue. Conversely, gains in service quality can add to an enterprise’s customer-base, perception in the market, and ultimately improve the bottom-line.

Contracting with an external company for business-critical functions is nothing short of a “leap of faith.” Of course, this practice has become commonplace due to the upside of these relationships. The easy part is seeing the potential value. Execution, or post-contract operations, is the more difficult aspect of these commitments. Contract terms and conditions are also important as it can be impossible to foresee the impact of various process decisions until the agreement has been put in place.

Executives typically move forward by signing a contract that specifies service levels and other details. There is often a great deal of excitement going into these relationships. Yet, success of any business deal is dependent on what happens after the contract is signed. Governing, or managing commitments detailed in the contract will help to ensure that the outsourcing deal can be win-win.

Much like an internal service commitment, negotiating an appropriate service-level agreement (SLA) with meaningful metrics is the first step for establishing reasonable expectations. Outsourcers are often relying on multiple third-parties to deliver on their own commitments creating a “multi-tiered” structure. As a consumer of these services, it is important to insulate your company from any negative situations that may occur in the outsourcer’s “network of providers.” This is a topic that should be addressed in negotiating the SLA.

Services and service levels should be defined in ways that can be understood, measured, and managed by both parties. There is a common tendency for companies to focus on technical metrics rather than business language. While technical metrics such as throughput or availability are important, business results are the end-game and as such service level metrics should include measures of business success and user satisfaction. Structuring business-focused metrics, or key performance indicators (KPI) will help to ensure that the service provider is more accountable to the real needs of the business.

Any corporation with a large stake in outsourcing should also consider investing in software or services to proactively manage its outsourcing contracts. The two primary reasons for this are to ensure the service quality being delivered meets or exceeds the commitments made and secondly, to demand penalties that are associated with failures and/or to terminate contracts where service levels are not being met.

This type of management can be accomplished with tool sets that are on the market today. Manually, an enterprise would need to rely on the provider for details of service delivery. With a service-level management (SLM) solution, enterprise IT can essentially monitor the level of service it is receiving from an outside firm. Some of the key responsibilities for governing outsourcing contracts with respect to services include validating compliance of all service commitments, calculating penalties and credits according to service levels delivered, mediating any service level disputes that may arise through the use of actual data, and developing and implementing appropriate processes to ensure service delivery best practice. Today, this is largely built around the IT Infrastructure Library.

Effective SLM tool sets can automate these procedures through streamlined and flexible reporting systems, proactive alerting of potential service failures, financial calculations of penalties and credits, and tracking of the actual language of contracts along with associated revisions.

Enterprise Management Associates (EMA) will be featured in a Webinar hosted by Oblicore on this subject at 11 a.m. ET on Tuesday, April 18. During this Webinar, the topic of best practices for outsourcing governance will be covered in more detail. Registration for the event can be found here.