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Realizing Increased Value from Outsourced Services in 2017
This article was originally published on The Shelby Group’s blog on January 30, 2017 Over the past two decades, companies in all industry sectors have become increasingly dependent on outsourced services. While there are many reasons for this, a primary driver has been the need to focus on core competencies in the face of increased competition. Unfortunately, the …
This article was originally published on The Shelby Group’s blog on January 30, 2017
Over the past two decades, companies in all industry sectors have become increasingly dependent on outsourced services. While there are many reasons for this, a primary driver has been the need to focus on core competencies in the face of increased competition. Unfortunately, the ability to effectively manage relationships with suppliers of outsourced services has not kept pace with increased levels of spending.
Why should better management of outsourced services relationships be on your company’s list of procurement optimization initiatives for 2017?
Chances are, your company is spending more than you think on services. On average, more than half of total spend goes to services today and is much higher for non-manufacturing entities. In 1994, services accounted for an average of only 19% of total spend, today it is around 56%.
If your company is using a traditional contracting model for managing services relationships, as much as 20% of Annual Contract Value is lost to value leakage that results from invoicing errors; unrealized discounts and earnbacks; and unrealized performance gains from contracted service-level agreements (SLAs).
An effective outsourced services management program can significantly reduce value leakage and help your company turn services vendors into strategic partners.
Moving from traditional contracting to outsourced services management
One challenge is that many companies don’t realize the extent to which they depend on outsourced services. In addition to IT services, companies are outsourcing facilities management, logistics, HR processes, marketing and an increasing range of goods that are bundled with services. The prevailing model for managing these services ends at the procurement phase when a contract is executed. By contrast, outsourced supplier management continues throughout the lifecycle of the relationship and includes 5 key disciplines, outlined below:
- Contract Management: In managing outsourced services, contract management doesn’t end with the writing and signing of the contract. It continues throughout the term of the relationship, providing the basis for capturing obligations between both parties, change management and contract interpretations.
- Performance Management: The performance management discipline defines the specific service levels and obligations between both parties for performance along with SOW/WO/PO management and provisions for credits and earnbacks. It is also closely tied to Contract Management and Financial Management.
- Financial Management: How do you know that what you are paying for is represented by the service you are receiving? In outsourced services management, financial management functions include invoice auditing, spend pool management, financial analysis and planning, and comparing the invoices to the contract obligations and the performance results.
- Relationship Management: How do you deal with actions and issues over the course of the contract and how do you ensure resolution of issues to maintain a good working relationship? The supplier relationship management discipline provides governance forums and issue/action management processes that are critical to successful outsourced services management.
- Risk Management: What risk is being incurred as a result of a relationship? The risk management discipline helps ensure that risks are identified, understood and accounted for in contract and performance provisions.
Each of the above disciplines is equally important in creating successful outsourced services relationships. Inordinate focus on one without the others has costly consequences for buyers and suppliers.
The importance of facts over opinions in enabling value creation
If your company and your suppliers are not able to look at the same information and interpret it in similar ways, there is a much higher risk of a failed relationship and unfulfilled performance expectations. You have a written contract, but do both parties understand their obligations and entitlements under the agreement? The contract should provide a factual and commonly understood basis for defining what the supplier delivers and the buyer receives.
Unfortunately, much of the dialogue between buyers and suppliers of outsourced services revolves around the accuracy of invoice data, performance data and contract data. It is only when a common source of truth and expectation exists that both parties can meaningfully focus on performance.
In order to meet obligations and expectations, suppliers and buyers require a common view of the truth. Absent this shared view, opinions fill the void, relationships become unnecessarily adversarial and both parties suffer.
Taking the next step
Is your company taking a reactive, ad hoc approach to managing suppliers of outsourced services? Do you lack the ability to actively manage the gap between expected (contracted) and delivered (performance) value?
To learn how our cloud-based supplier governance product, Sirion, can help you reduce value leakage and build stronger, more strategic relationships with services suppliers, download the Sirion product overview document here.