Successful Multi-Vendor Sourcing
First published in Shared Services News: Volume 12 Issue 5 July 2009
Organizations that invest time to develop and implement a carefully drafted governance mechanism realize the benefits of multi-vendor sourcing because they understand the complexity involved in outsourcing to more than one vendor. According to a recently completed survey by PricewaterhouseCoopers and the Center for International Business Education and Research’s (CIBER) Offshoring Research Network (ORN) at Duke University’s Fuqua School of Business of more than 2,000 companies, failure to develop an integrated governance structure is a leading reason multi-vendor sourcing initiatives do not succeed. Furthermore, it is not uncommon for organizations to incur sourcing costs that are 50 percent higher than the business-case estimates because of problems related to the transition and the inability to adequately meet the terms of negotiated service level agreements (SLAs).
To address the complexity and risk related to sourcing and to facilitate multi-vendor sourcing success, companies should invest in a three-tiered governance framework that addresses the strategy, operations, and support functions. Once the governance structure is in place, companies should also implement tools such as the balanced scorecard and a responsibility matrix to align strategic business objectives with sourcing initiatives.
External market research shows that projects that lack effective governance and metrics take longer and cost more to transition, leading to value leakage equivalent to 17 percent to 40 percent of total contract value (TCV). Without proper oversight, service providers often do not meet SLA objectives, service quality, or customer satisfaction metrics.
The long-term success of an oversight program often is determined by how well it is introduced into the organization. Although alignment between an organization’s strategy and operations is critical, the weakest link in many sourcing initiatives appears at the tactical level during the execution of the transition.
The Offshoring Research Network (ORN) research findings are included in Figure 1.
Figure 1: Sourcing governance market trends
Why companies struggle with governance
Many organizations struggle with governance of multi-vendor sourcing due to:
Underinvesting: A failure to invest sufficiently in integrated governance is the most commonly cited reason for an organization’s struggles. Many companies do not realize that the cost of governance over the life of the contract can amount to as much as 5 percent to 10 percent of TCV.
Lack of organizational discipline: Governance requires organization and regulation, and some corporate cultures do not lend themselves well to the discipline this entails. When an organization has a strong metrics-based environment or a disciplined program management office (PMO), developing effective sourcing governance becomes relatively easy. By contrast, governance is difficult if a company is loosely structured and has more of a federated or decentralized culture and approach to business.
Choosing the wrong expertise for governance responsibilities: Organizations often struggle to select a specialist who has the right skills and experience to be responsible for effective governance of sourcing relationships (someone with balanced experience in project management, relationship management, cultural awareness, and contracts and metrics). Developing the organization end-state operating model, determining retained roles and responsibilities, and finding resources (internally and externally) with those skills are critical elements to ensure the right resources are driving the governance.
Lack of integration: To ensure that the goals of the service provider are aligned with the organization’s strategic objectives requires integration of internal and provider governance efforts. The absence of this integration can lead to inefficiencies and duplication of processes.
Three-Tiered Governance Structure
To manage the risks and complexity related to multi-vendor sourcing, leading companies establish a governance framework that aligns sourcing activities with the organization’s strategic objectives. This framework provides the integrated view needed to establish enterprise-wide governance at three levels of the organization: strategic, operational, and tactical.
Figure 2: Multi-Vendor Sourcing Governance Framework(Click to Enlarge):
TIER 1: STRATEGIC GOVERNANCE
Business strategy sits at the top of the three-tiered governance structure. This tier requires the organization to adopt a set of practices to align multi-vendor sourcing engagements to business objectives and risk management. The strategic tier also must consider critical resources within the organization and help facilitate that individual initiatives stay on track. An executive committee (EC) and a strategic steering committee (SSC) typically exercise strategic governance.
The EC provides company leadership and strategic direction and should be led by a C-level executive — the CIO, CFO, or COO — depending on the functions that are most heavily outsourced. Representation should also include any business units involved in sourcing.
The EC’s most important responsibility is overseeing the sourcing change-management programs, which is critical to the success of a sourcing initiative. This includes establishing an effective communication plan that garners employee support for the sourcing plans and reduces the risk of losing key employees.
The EC is also responsible for communicating the organization’s sourcing vision and for gaining management’s support. The EC ensures that sourcing goals and activities link to critical corporate performance goals, such as earnings per share, by holding business unit leaders accountable for their performance in executing sourcing plans.
Strategic steering committee
The second component of strategic governance is the SSC, which is responsible for translating the strategic sourcing vision formed by the EC into sourcing implementation plans.
The SSC typically includes the head of the sourcing governance organization and leaders of each major functional area. The SSC should meet monthly with operational and tactical governance team members to review financials and performance and to discuss relationship satisfaction and any other related issues.
TIER 2: OPERATIONAL GOVERNANCE
Operational governance is required to help facilitate that the objectives established by the SSC are met at an operational level through performance monitoring. The establishment of a single, centralized resource is recommended for carrying out the responsibilities of operational governance.
Sourcing governance organization
This entity facilitates implementation of the organization’s sourcing strategy, plans, and sourcing governance processes across the organization. The sourcing organization communicates the strategic vision and metrics established by the EC to stakeholders, including the service providers. It also is responsible for creating key performance indicators (KPIs) for the tactical governance team to track and report, and for creating and monitoring the overall dashboard. A senior manager should lead the sourcing organization.
Under typical operational governance, a relationship manager, reporting to the executive level, acts as the single point of contact for sourcing activities throughout the organization. This person has ultimate responsibility for managing relationships with external service providers.
Ideally, the sourcing organization holds at least bi-weekly meetings to track and report delivery status, and to track and discuss tasks, issues, risks and change requests.
TIER 3: TACTICAL GOVERNANCE
The tactical governance team is responsible for the day-to-day support functions required to maintain successful sourcing operations: assuring quality, monitoring SLAs, collecting and reporting on metrics, managing resources, sharing knowledge, and facilitating communication. A typical team includes portfolio owners, who are accountable for achieving overall objectives for specific portfolios of services; process and legal advisers; an HR representative; finance and contracts managers; a resource coordinator; and a metrics monitor. These roles could be full or part time. Having sound operational processes and clear metrics in place enables the tactical governance team to identify the source of problems and quickly resolve them.
Tools to facilitate sourcing governance
Sourcing governance is a complex responsibility, and the complexity grows with the number of service providers. Two tools — the balanced scorecard and the responsibility matrix — can help organizations manage the complexity and implement a successful three-tiered governance framework.
The Balanced Scorecard
The balanced scorecard is a useful tool for ongoing governance of sourcing relationships. It can be used to track sourcing performance from four perspectives: financial, customers, operations, and human capital, and accomplishes four objectives:
- It links the sourcing strategy to the overall business strategy through common metrics.
- It serves as a customized, mutually agreed-upon performance management system.
- It captures key performance metrics, enabling the governance team to make ongoing changes in SLAs and expectations.
- It provides historical information to help determine the future of sourcing relationships as contracts come up for renewal.
The sourcing organization develops balanced scorecards, inserting KPIs in each quadrant that align with the overall corporate strategy. These KPIs become the dashboard used by the SGO to monitor the progress of the sourcing initiative. It is important to share the balanced scorecard with service providers so they have objective performance targets. SLAs should reflect the performance targets established in the balanced scorecard.
The responsibility matrix
The responsibility matrix defines roles and responsibilities of service providers and internal resources, helping the organization make decisions and outlining the process for escalating incidents. The matrix identifies:
- Responsible (the role responsible for performing a given task)
- Accountable (the role with overall responsibility for the task)
- Support (any of the roles in the organization that may be called upon to support a task)
- Consulted (the roles that provide input to help perform the task)
- Informed (the roles with vested interest, which should be kept informed)
A responsibility matrix helps ensure accountability, which is critical to the success of a sourcing initiative. Establishing a RACI matrix at the beginning of a sourcing relationship curtails misunderstanding and conflict down the road, especially during the transition phase.
To be successful, organizations that engage in multi-vendor sourcing should invest in a three-tiered governance structure that covers strategic, operational, and tactical aspects of the sourcing initiative. A properly instituted and maintained governance program increases value and minimizes risk by shortening transition times and providing the monitoring and metrics needed to manage the providers’ performance. With a sound governance framework in place that uses tools such as the balanced scorecard and responsibility matrix, organizations can realize operational and financial flexibility along with a competitive advantage that results from initiating an increasingly popular multi-sourcing strategy.
© 2009 PricewaterhouseCoopers LLP. All rights reserved. "PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
First published in Shared Services News: Volume 12 Issue 5 July 2009