How to stop the value leakage
According to research by KPMG, ineffective governance of provider contracts can cause value leakage ranging from 17% to 40%. So how do you maintain quality and reduced costs in this complex environment?
One of the biggest problems in outsourcing is the loss of value during the life-cycle of the project. In times of unstable economic forecasts for many organisations, this loss of value can undermine the success of the project. In conducting outsourcing contracts and relationships, users are often faced with ‘value leakage’. This loss of value often comes about during contract development and governance.
Failures in implementing good governance and establishing effective contracts both damage cost savings and value.
George Davies, CEO of MooD International, a next generation software provider, comments: “The key to reducing value leakage lies with the client and supplier working together every step of the way.” He adds that, “It is not enough simply to award an outsourcing contract and then just expect the supplier to get on with it. Both sides need to make things happen. The supplier will need things from the client to be successful, and vice versa. The answer is having a common approach to the way you view the contract and the data. Rather than leaving one side or the other to monitor everything, both sides should have access the same data, a single pane of glass along the whole contract through which both sides can look at any time. That way both sides can monitor where everything is simultaneously, keeping the value where you want it – in the business outcomes.”
‘Value leakage’ can be more common place in certain outsourcing relationships than in others. Shared services can represent a fertile ground for loss of value through mismanagement due to scale and multiple suppliers. The focus can shift rapidly when using shared services with multiple vendors, often the shift in focus comes too early.
Loss of value can also come from rigid organisational structures from both sides of the supplier/user relationship. Sachin Shah, a London-based partner at global management consulting firm Bain & Company’s IT practice, said “people who remain within the business after transition to shared services do not actually change their roles or develop new skills, resulting in more duplication, and less transformation.” A government plan can prevent these issues from occurring, if properly introduced in the planning phase of the outsourcing project.
Establishing accountability during service delivery prevents both users and suppliers from neglecting communications and services. Accountability also serves in rapidly identifying and acting against errors while holding users and suppliers to account for collecting data and ensuring value.
As already mentioned, management of the outsourcing relationship is fundamental aspect of any relationship. Ensuring that both sides understand the required deliverables and obligations at the outset of the engagement goes a long way in preventing loss of value from miscommunication and misinterpretation of roles and services.
Colin Craig, Director, Information Services Group, comments: “ In my experience, those relationships that display a strong degree of trust also have a much better, deeper understanding between the parties, a greater focus on the longer term relationship and a desire to adopt risk sharing rather than a risk avoidance approach – all resulting in delivering greater value from the contract. Strong governance will be the key differentiator between effective, efficient outsourcing relationships, and those leaking value and long turned sour.”
Managed governance services can reduce value leakage. It is vital that users manage suppliers and both sides understand and manage the services to be delivered, the implementation of a governance plan is essential.
The establishment of a government plan must include the management of:
This is designed to avoid loss through inaccuracies in accounting, including invoice and payment errors.
Managing performance is necessary to identify ‘value leakage’, such as where targets are not being delivered, so that such loss can be prevented.
In large outsourcing contracts resources can often be under or over-used, even in small contracts it is easy for services to be mismanaged and become under or overextended.
Failure to effectively manage relationships between users and suppliers can lead to loss in value, establishing effective communications is a large part of relationship management and preventing ‘value leakage’.
Strong governance is the key element to reduce value leakage, generating a government plan in the early stages of an outsourcing project can prevent loss of value at later stages of the project. Governance can be expensive and time consuming but comes into its own in the long run, where cost savings and speed of delivery gained form reducing value leakage out ways the initial expense. While it is important to monitor multiple areas with the project in order to reduce loss, relationship management is at the heart of any outsourcing relationship. Facilitating the creation of a strong relationship can often be the best practice for reducing ‘value leakage’.