Category Archives: Risk Management

A Great Guide to Outsourcing Risk Management, Part V

In Part I we discussed the starting point of your outsourcing project and how you go about selecting service providers to issue RFPs to. In Part II we discussed proposal evaluation and in Part III we discussed the dispute resolution process that needs to be addressed up-front in the contract. Then in Part IV we discussed the service level agreement. Today we will discuss what you do after the deal is signed, and remind you to check out the full series on outsourcing risk management by Alsbridge, as printed by SourcingMag.com, that the first four parts of this series is partially based on as well as “4 dimensions to managing your service provider” that today’s post is partially based on.

Now That The Deal Is Signed, What Do You Do Next?

You manage the relationship. It’s important to remember that risk management is a continual process of planning, monitoring and control that will last the lifetime of the project. It might seem intuitive, but a lot of companies believe that once the deal is signed, it’s the vendors problem. It’s the vendor’s responsibility, but it’s still your problem as it’s still your liability. You’re the one that can be fined and imprisoned under SOX (like poor old Fox) if you file incorrect financial statements, fined and imprisoned under IEEPA if you buy or sell the wrong kind of product from or to a denied party, and fined or imprisoned under a host of other import and export control and financial acts.

An outsourced function requires continual oversight and change management. There should be weekly oversight meetings between project managers and immediate escalation of any issues that can’t be amicably resolved within the allowed time-frames, and issues should be primarily identified on an exception basis. The meetings should only focus on issues and yellow and red-light metrics — anything green and going well doesn’t need to be discussed. In addition, all information on issues to be discussed should be made available on the corporate intranet well in advance of any meeting so that all parties can be briefed on the issue before hand and the meeting can focus simply on resolution.

After Months and Months of Work, Your Outsourcing Project Finally Hit ROI. Now What?

You keep monitoring, you keep managing, and, more importantly, you look for ways to improve the initiative. You didn’t spend weeks defining and negotiating that iron-clad contract with extensive SLAs, Change Management Provisions, and Staged Milestones for nothing. You put all that effort in up-front so that you could continue to extract better and better returns on the back-end. So look for areas of improvement, streamline the processes, and move it forward.

So How Do You Manage the Relationship?

Carefully. The first thing to remember is that vendors work for other people’s shareholders. To gain the payoff while minimizing costs and risks, vendors must be carefully managed, otherwise the full ROI will never materialize. The next thing to remember is that vendors feel they are getting paid to deliver results as fast as possible, not to manage the life-cycle their work product is part of. Some vendors are more than willing to sacrifice quality for “quick results”, especially if they believe they are only being paid for the latter or that they won’t be around to deal with the eventual consequences of cutting corners.

It takes a lot of time to manage outsourcing. In addition to the usual technical guidance, you also have to manage the HR issues. Not only might you find yourself in the position where you have to hound them to fill vacancies, but you might have to pressure them to replace staff if the staff they assign you aren’t good enough. Then you need project manager buffers to keep the more aggressive service providers at bay who will be all over you to outsource even more activities or start new projects. And your compliance and legal staff will have to constantly monitor their performance with respect to the contract to make sure that they are holding up their end of the agreement. The reality is that everything you were monitoring before still has to be monitored, and probably has to be monitored more regularly. Plus, you will need to review their performance on a regular basis against every function they are doing for you. That’s why you only outsource functions that have associated economies of scale. For example, invoice processing in a mid-size or larger organization that requires ten or more staff to process the invoices is a good candidate. Invoice processing in an organization that only keeps three full time staff busy is not, because they’ll still need to retain one or two people to monitor throughput and handle exceptions and you want the cost of the monitoring resources the organization needs to maintain to be less than the savings obtained from outsourcing the function.

Essentially, for each function you outsource, you need to retain at least one person internally who did that function to monitor the performance of the service provider and help resolve issues as they arise. And then they have to pass on any issues that go unresolved for more than a minimal amount of time to the project manager to get resolved at the next meeting. Outsourcing can pay off where there are economies of scale to be had, but only if you remember to monitor it carefully and help the vendor improve their performance year-over-year and quarter-over-quarter. Otherwise, you’re better off just hiring more people internally to tackle more strategic sourcing projects and increase your savings that way.

A Great Guide to Outsourcing Risk Management, Part IV

In Part I we discussed the starting point of your outsourcing project and how you go about selecting service providers to issue RFPs to. In Part II we discussed proposal evaluation and in Part III we discussed the dispute resolution process that needs to be addressed up-front in the contract. Today we will discuss the service level agreements, and remind you to check out the full series on outsourcing risk management by Alsbridge, as printed by SourcingMag.com, that this series is partially based on.

So What Do You Need With Respect to Service Level Agreements?

Vague, optimistic promises of a happy life together may work for some personal relationships, but they don’t work between two companies. Creating a well-defined SLA to define your organization’s needs and expectations has many benefits, including the:

  • provision of a common understanding of exactly what service is being provided (how, when, where, when, by whom, etc.)
  • definition of common realistic expectations
  • simplification of complex issues by focussing on what is important
  • reduction of conflict by eliminating what’s not important
  • clarification of the bonuses for exceeding SLAs and the ramifications for failing to meet delivery requirements
  • framework for later modification and improvement as the need arises

When deciding what to measure, remember that you shouldn’t measure anything that shouldn’t be quantified. For example, use phrases like “99.99% uptime” not “make our customers happy”. The first is objective and a measurement can be clearly defined. The second is subjective, and there’s no way to objectively measure it. Response time is important, but instead of saying “respond rapidly to customer inquiries”, define a maximum hold time of 10 minutes and then you can define a penalty metric if more than five calls per week exceed the maximum hold time.

Also be sure to clarify your responsibilities and the support a provider requires to meet their metrics. For example, if they are expected to investigate any issues that arise relating to the integration of their external systems with your internal systems, you must ensure that they have the right level of access at all times. Otherwise, they can’t be held responsible for missed delivery targets.

And make sure the number of metrics tracked is reasonable. Too few, and you can’t really measure how well the provider is operating (or define penalty clauses if more than a certain percentage of the metrics are missed in an evaluation period, since 20% of the metrics will always be missed every time the provider misses 1 metric if you only track 5). Too many, and the bookkeeping requirements are too costly and onerous for both parties. Somewhere between 10 and 20 is usually just fine if you focus on the right metrics. (And if you’re not sure what metrics to select to diagnose a sick patient, call the doctor.)

Finally, don’t forget that you need a baseline period. Typically, the first quarter is used to define a baseline and the provider is then measured starting in month four. (It typically takes two months of “transition period” where control is shifted to the provider and the “kinks” are worked out before you can extract a solid baseline in month three.)

When it comes to defining bonuses and penalties, you need to be somewhere between a new mug and a vacation in Hawaii for the former and somewhere between a slap on the wrist and the electric chair for the latter. Bonuses that are too trivial won’t entice the provider to step up their game, but bonuses that are too extravagant will end up costing you dearly as the provider will go out of their way to insure they do everything in their power for free money. Similarly, if all the provider gets is a slap on the wrist, they’re not going to care whether or not they hit a performance target or not. But if you threaten the electric char, if the provider even signs the agreement, you can be sure the fees for the service level guarantees will be exorbitant as they will have to build in a financial safety net. Be fair, and you’ll get the best possible deal.

In the next, and final part, of this series, we’ll talk about what you do after the contract is signed.

Even in Night, Procurement Shines Bright

The Winter Edition of CPO Agenda had a great article on how stand-out procurement functions are continuing to extend their reach and value despite volatile market conditions. In “How the Stars Shine Brighter”, the authors reviewed the 2008 Assessment of Excellence in Procurement from A.T. Kearney (AEP) that surveyed and benchmarked almost 500 respondents against their industry and geographic peer groups as well as best-in-class companies.

The study identified three key trends from leading procurement practices that can be directly linked to the attainment of sustainable competitive advantage:

  • Leaders achieve a broader mandate to drive change,
  • Leaders develop dynamic new value-creation strategies to satisfy ever-increasing customer demands, and
  • Leaders continue to develop and maintain robust enabling capabilities in performance management, knowledge and information management, and human resources management.

Leaders Drive Change

In direct materials leaders typically control two-thirds of external expenditure — twice that of the average firm. In indirect materials, the proportion is 73% for leaders, 42% for followers. By addressing a larger portion of the total corporate spend, leaders are yielding overall procurement-related savings that are 2.3 times greater than the followers. For a $20 billion company that could represent a 21% advantage in earnings per share versus its competition.

How do they do this? They:

  • Align with Corporate Strategy
    The CPO maintains a close relationship with senior management to help him or her align procurement strategies with the overall corporate strategy.
  • Refine the Organizational Structure
    Today’s procurement organizations frequently follow a center-led model that features common policies, approaches and practices for purchasing company-wide.
  • Increase Strategic Focus
    Leaders focus on strategic initiatives, not transactional activities that are best left to automated systems.

Leaders Develop New Value-Creation Strategies

Leaders go above and beyond the basics, initiate supplier collaboration, and differentiate themselves through superior approaches to risk management, best-cost country sourcing, and sustainability. They

  • Take Sourcing Practices to New Heights
    Leaders take a highly systematic approach to the application of traditional sourcing strategies, including volume concentration, best-price evaluation and global sourcing, as well as more relationship-orientated approaches such as product specification and joint process improvement, and relationship restructuring. Leaders also create value by using sourcing and category management methods such as innovation network leveraging, product “teardown” (a common method of analysing competitors’ products), collaborative cost reduction, expressive bidding and price benchmarking, to name but a few, to a far greater extent than followers. As a result, they attain higher levels of cost savings and value.
  • Drive Supplier Collaboration and Innovation
    Leaders are redefining boundaries and reaping the benefits of true partnerships, such as more product and service innovation and faster time to market.
  • Unlock Value through Risk Management
    The majority of leaders systematically use internal risk mitigation strategies to ensure supply continuity, develop category management contingency plans, align supply security with their overall business risk tolerance goals, and define, measure and track risk management and supply chain key performance indicators (KPIs).
  • Source from Emerging Markets
    Leaders arrive to the party early, while the savings buffet is full and plentiful. Leaders demonstrate that potential obstacles around emerging market sourcing can be overcome by actively engaging with and investing in suppliers. The ability to manage risk — through supplier process auditing, process risk assessment, high-quality data reporting and analysis, and the placement of key procurement executives in offshore locations — gives the leaders confidence that their emerging market sourcing activities will bring cost improvements without introducing excess risk.
  • Follow Sustainability and Corporate Social Responsibility Best Practices
    Finding the right balance between economic viability, environmental awareness and social well-being is a significant challenge, but a competitive advantage can be gained by companies that locate intersection points for all three. Sustainability leaders are differentiating themselves in a number of ways, be it through reductions in energy use and waste, taking on a holistic, future-orientated focus, or extending sustainability outward to the extended enterprise.

Leaders Employ Robust Enabling Capabilities

Leaders measure actual benefits, perform audits of procurement benefits, examine the function’s impact on profit and loss, and track productivity performance indicators. Leaders

  • Employ Best-of-Breed Technology
    Leaders have taken spend visibility to the next level, linking systems to product development and product lifecycle management tools to further improve control and influence procurement decisions earlier in the design and decision-making process. Leaders are improving their business intelligence capabilities with respect to spend management, using techniques such as predictive modeling at a much faster rate than followers. And leaders hold, on average, more than five e-sourcing events per business day — a rate four times greater than that of the followers.
  • Win the Fierce Battle for Talent
    Leaders realise that continued success depends on their ability to attract and retain the right people.

A Great Guide to Outsourcing Risk Management, Part III

In Part I we we discussed the starting point of your outsourcing project and how you go about selecting service providers to issue RFPs to and in Part II we discussed proposal evaluation. Today we will discuss the contract, and the dispute resolution process in particular, and remind you to check out the full series on outsourcing risk management by Alsbridge, as printed by SourcingMag.com, that this series is partially based on.

So What Needs to Be In the Contract?

Lots and lots of legalese, of course, and I highly recommend you check out Stephen’s Guth Vendor Management Office Blog and the books and downloads he has indexed on his site (including The Contract Negotiation Handbook and Implementing a Vendor Management Office) before you start. That being said, there are two critical sections that must be in every outsourcing contract, and that must be carefully thought out and specified in detail before the contract is signed if you really want to alleviate potential risks, and they are dispute resolution and service level agreements.

So What Do You Need With Respect to Dispute Resolution?

Remember, if there is a disagreement between two parties, the time to figure out how to discuss and resolve it equitably is not in the midst of the disagreement. That’s why the rules for boxing matches are set in advance rather than discussed after one fighter has already tried to bite the other’s ear off. Making the process as defined and clinical as possible will remove tension from disagreements, especially when things must be escalated and your counterpart is angling for your ear. Be sure that each of the following questions are answered in your agreement before the agreement is signed.

  • What is the process for raising an issue?
    This must be spelled out, or the other party can claim that they were not aware of an issue, and hence under no obligation to take any action.
  • How long does each side get to investigate and formulate a reply?
    The party being notified of an issue must have a set timeframe in which they have to formulate a reply, otherwise, they can stall indefinitely with “we’re looking into it”.
  • If the issue is not resolved, who meets?
    The project managers? Subject matter experts? Mangers? Executives?
  • When?
    The meetings to resolve issues, and resulting disputes, can be ad-hoc or regularly scheduled, but there must be a maximum timeframe that can elapse without a meeting being when there is an issue to resolve or there is nothing to prevent one party from stalling the other indefinitely.
  • Does the timeline vary based on issue size?
    If one party discovers the issue to be larger than originally thought, is an additional fixed time allotted for further investigation or resolution?
  • When does an issue become a dispute?
    After an unsuccessful meeting? After 7 days without resolution? This must be clearly defined.
  • What clear authority does each party have to negotiate?
    This must be clearly defined so that the right people are at the table for issue, and dispute, resolution meetings. Otherwise, the other party can claim that their representative had no authority to negotiate on their behalf and stall a negotiation indefinitely. The contract should also stipulate what authority project managers have to resolve issues and disputes. For example, sometimes a few extra hours of work on behalf of one party or the other, even if they have to be off-the-record, can go a long way to resolving problems and building a rapport that is invaluable to team success. For example, if a project was supposed to take eight weeks, but at the end of eight weeks, three days of work is left, is it really worth a dispute? Or can the project managers for each party decide to just “split the difference” to get it done and move on.
  • How long do the authorities have to get to the table?
    If a dispute arises, how long do parties with the authority to resolve it have to get to the table.
  • If no agreement is reached, when can the issue be escalated?
    There’s always a good chance that a dispute will arise that cannot resolved amicably between the parties at the table in a reasonable timeframe, so it must be crystal clear when a party can request that the problem be escalated within their counterpart’s organization.
  • What triggers arbitration or legal action?
    Although everyone hopes it won’t happen, some disputes will not be resolved even when the CEOs make it to the table. Therefore, the agreement must clearly spell out when a party can request arbitration or resort to legal action if it was clearly damaged by an action, or inaction, of the other party.

The next post in the series will discuss service level agreements.