Outsourcing Vendor Governance

1
Outsourcing Vendor Governance

• Suggestions for Successful Partnerships

Alicia Kuhn, CISA September 2008
2
Agenda

• Introduction
• Outsourcing Defined
• State of the Outsourcing Industry
• Vendor Governance Defined
• One Take on a Vendor Governance Model
• Ideas for Auditing Vendor Governance

3
Outsourcing Defined

• Outsourcing is delegating the responsibility for
  performing a business function to a 3rd Party
• The basic commercial proposition
• The outsource supplier will do
• What the customer currently does
• At the same or better level of performance
• For the same or lower price

4
Key Outsourcing Types

• Information Technology Outsourcing (ITO)
• The delegation of a significant portion of a
  companys IT operations
• Business Process Outsourcing (BPO)
• The delegation of a significant portion of a
  companys back office and technology-enabled
  operations. BPO is often an updated,
  re-incarnation of business process reengineering.
  
• Application Development Maintenance Outsourcing
  (ADM)
• The delegation of a significant portion of a
  companys Application Development and Maintenance
  work
• The outsourcing opportunities may involve the
  transfer of personnel, the sale or assignment of
  hardware, and the granting of access rights to
  software.

5
State of The Industry

• 2008 Black Book of Outsourcing

6
Top 6 Outsourcing Initiatives

• In the next 12 months, the Outsourcing
  Initiatives estimated to expand the fastest are
  those functions that support Rapid Organizational
  Business Transformations
• Purchasing, Procurement, Spend Management,
  Payables
• Compliance, Finance Accounting (FAO)
• Technology (ITO)
• Legal Services (LPO)
• Bundled ITO BPO
• Research, Development, Innovation (KPO)
• 2008 Black Book of Outsourcing State of
  Industry Report

7
WHATS BUDGETED FOR NEW ITO IN 2009?

• Top ITO Initiatives with Funds Marked for 2009
• Rationalization (Applications and Infrastructure)
  Full Assessments ( 64.2)
• ITO Consultation (51.3)
• Technological Transformation (43.2)
• Process Improvement (40.8)
• ERP Implementations (24.9)
• Legacy Modernization (23.1)
• Quality Initiatives (22.2)
• Data Center Outsourcing (19.5)
• 2008 Black Book of Outsourcing State of
  Industry Report

8
The Importance of the Customer

• According to the 2008 Black Book of Outsourcing
  State of Industry Report,
• Customers are more sophisticated, and are
  demanding more flexible contracts, performance
  penalties, and benchmarking audits. Clients also
  place high value on collective user satisfaction
  data as a predictor of a suppliers future
  performance. Thats hurting future deals for
  suppliers whose relationships are not their first
  priority.

9
Outsourcing Satisfaction Factors

• Factors that increased a companys satisfaction
  with their Outsourcers
• American Implementers,
• Relationship Management Business Development
  vendor staff
• Top 2 Reasons why a company selected a vendor to
  outsource
• Vertical Capabilities and Experience (83.5)
• Horizontal Capabilities and Experience (77.2)
• Faster Cheaper was the last reason

10
What are the Next Big Industry Changes

• According to the 2008 Black Book of Outsourcing
  State of Industry Report, the next big things
  include
• Maturing ITO market sets Universal Outsourcing
  Performance Standards and less ambiguous
  contractual complexities.
• Cautious-to-enter industry verticals jump into IT
  outsourcing Insurance and Healthcare
• Providers have Bundled offerings, with the
  Division between ITO BPO diminished
• Tuned-Up Customer Experience using US staff for
  Front Office functions
• Competition for Seasoned Outsourcing management
  stars and corporate change agents with developed
  industry experience for both Buyer organizations
  Suppliers.
• Software-directed governance specialized
  sourcing administrators
• Advanced reporting tools and Customer portals so
  they can monitor the outsourcers performance in
  real time.

11
Vendor Governance

• Perfecting the Partnership

12
Vendor Governance Mission

• Ensure Outsourcing Vendors are
• Improving Service and Performance
• Enhancing Operational Stability
• Contributing to Cost Savings
• Driving Revenue Opportunities
• By Consistently Practicing Vendor Management
  Disciplines
• Performance Management
• Relationship Management
• Financial Management
• Contract Administration

Governance enables management to make
operational, tactical and strategic decisions
that increase the business value derived from the
outsourcing relationships, while reducing the
risk associated with using a global team
13
2008 State of Outsourcing Governance

• ORGANIZATIONS ARE CENTRALIZING OUTSOURCING
  GOVERNANCE BUT RECOGINZE THE NEED TO IMPROVE
  OUTSOURCING MANAGEMENT PROGRAMS LEADERSHIP
  INTERNALLY.

Change from 2007
Overall Organization Experience with Outsourcing
and Offshoring
2008 Black Book of Outsourcing State of
Industry Report
14
2008 Vendor Management Challenges

• Gartner analysts identified the most pressing
  issues facing organizations today
• Developing a vendor management discipline.
• Allocating vendor management responsibilities to
  the right sources.
• Getting visibility into the portfolio of vendors.
• Creating the right vendor performance metrics.
• Changing the culture of vendor relationships.
• Becoming a "strategic" customer.
• Defining the value of vendor management.
• Developing the key competencies of vendor
  managers.
• Compliance (for example, SOX).

15
Governance Insight

• Governance is hard to define and implement across
  all risk areas
• Governance is an area always underestimated most
  frequently in terms of time and investment and
  the structural architecture necessary to manage
  accountability
• Organizations tend to think about it too late in
  the process- after the deal team has disappeared
  and when things are going wrong
• Governance teams must be able to effectively deal
  with change- in the organization, in the
  outsourcer, and the market
• Multi-sourcing will be one of the most visible
  trends in the industry going forward. So
  organizations will need to develop the
  competencies necessary to manage a multi-vendor
  environment.
• Determine your organizations level of trust with
  its providers the governance team must do
  whatever necessary to maintain or regain trust to
  avoid diminishing value.
• Make your vendors collaborators, not adversaries
• Employ Strategic vs. Tactical Vendor Governance

16
A Vendor Governance Model

• One View to use as an Example

17
Vendor Governance Approach

• Targets Four Management Disciplines
• Based on COSO COBIT Principles
• Ensures Success through Correct Alignment with
  the Companys Objectives Risks
• Implements Explicit Boundaries and Controls

Business Objectives Risks
Dictate
Vendor Lifecycle
18
Vendor Governance Disciplines

• Ensure the Right Work is Done Right- Inspect
  What We Expect
• Measure and Monitor Delivery Performance
• Drive Operational Efficiency

• Validate Manage Costs
• Monitor the Economics of the Deal
• Ensure Value Proposition Realized

Vendor Lifecycle

• Drive Satisfaction
• Partnership Oversight Strategic Alignment
• Risk Management

• Ensure Compliance with Service Delivery Structure
• Resolve Disputes
• Maintain Legal Documents

19
Vendor Governance Model
Executive Steering Committee
QUARTERLY
PERFORMANCE
ALLIANCES
CUSTOMER SATISFACTION
STRATEGIC ALIGNMENT
FINANCIALS
Performance Metrics
Escalation of Critical Issues
Long Range Strategies
Vendor Performance Review
MONTHLY
PERFORMANCE
CUSTOMER SATISFACTION
STRATEGIC ALIGNMENT
FINANCIALS
Status of Critical Issues
Financial Trends
Performance Trends
Business / Operating Units
Global Sourcing Office
Governance Library
Regulatory Compliance
BCP / DR


Dispute Resolution
Security Management
Procurement Asset Management
Forecasting and Demand Mgmt
Vendor Risk Assessment
Solution Architecture Management
Financial Analysis Planning
Performance Credits
Contract Change Management
Communications Management
Value Leakage Mitigation
Contract Compliance
Invoice Management
Service Delivery Management
(Relationship) Issue Management
Service Delivery Management, Systems, Tools,
Relationships
REAL TIME
Outsourced Services
Indicates IT teams for ADM, EIO for ITO and
business units for BPO
20
Vendor Governance Roles Responsibilities
21
Communication and Escalation Plan
Ongoing Communication, Escalation
Strategic Direction
Assessment of overall health of Engagement
4
Issue
Top-down proactive-set strategic direction and
planning
Client Executive Leadership
Vendor Executive Leadership
Resolve
Overall Vendor Performance, Strategic Planning
Escalate
Strategy execution, prioritization and overall
portfolio balance
Vendor performance, MSA level issues
3
Vendor Relationship Management
Client Sourcing Management
Issue
Resolve
Global Relationship, Contracting, New Business,
SLA Trends, Escalated Issues
Escalate
Establish specific targets and initiate material
ideas
Client IT or Business Management
Program level planning monitoring by BU
2
Vendor Program Management
Issue
Resolve
Operations Execution Performance, Strategic
Initiatives, SLA Misses
Escalate
Define processes, standards and ensure successful
execution
Project level planning and monitoring
1
Client IT/ Business/ Project Team
Vendor Project Team
Issue
Resolve
Coordination of all Quality, CSAT, Training,
Sales Initiatives, Operational Performance
Management
22
Vendor Governance Tools

• Weekly Monthly Operational Meetings and Reports
• Vendor SLA Report
• Quarterly Business Review

• Quarterly Scorecard
• Monthly Invoice Review
• Value Proposition Management

Vendor Lifecycle

• Services Oversight Committee
• Semi Annual Customer Satisfaction Reviews
• Communication Escalation Plan
• Annual Vendor Risk Assessment

• Contract Triggers
• Escalation Map

23
Ideas for Auditing Vendor Governance
24
Outsourcing Risk from Poor Governance

• Optimization and Transformation Risk
• The outsourcing contract is not managed
  effectively. Therefore, outsourcing benefits and
  efficiencies are not realized.
• Impact
• The return on investment is not what was expected
  or is minimal compared to the outsourcing costs.
• The organization provides services that fall
  below established expectation levels.
• There is a rise in unplanned costs.
• Misaligned commercial objectives and
  disincentives for collaboration

25
Audit Ideas

• Participate in Vendor Selection and Transition
  Processes
• Participate in Vendor Governance Meetings
• Review Vendor Governance Documentation- monthly
  reports, open items lists- are items getting
  resolved?
• Perform ValueLeakage Reviews
• Review Invoicing
• Map performance to goals set out during vendor
  selection
• Effectiveness of Multi-Vendor Environments
• Perform Control Reviews
• Survey Customer Satisfaction and Trust

26
Questions

• What are your organizations doing today to manage
  Vendor Governance?
• How effective is your Vendor Governance?
• What do you do to audit it?

27
Great Sources

• The Black Book of Outsourcing State of the
  Industry Report Brown-Wilson Group, Inc. 2008
  www.TheBlackBookOfOutsourcing.com
• Global Technology Audit Guide (GTAG) 7
  Information Technology Outsourcing Mayurakshi
  Ray, Parthasarathy Ramaswamy, The Institute of
  Internal Auditors (IIA) March 2007
• Realities of Outsourcing Business Process
  Outsourcing (BPO) Why It is Different Robert
  Zahler March 15, 2007
• TPI and EquaTerra Websites