Stan Lepeak, Managing Director, Global Research

One particular topic on which EquaTerra focused its recently released 3Q10 global advisor and service provider Pulse survey was the most common outsourcing governance models buyers are deploying in the market today and, more importantly, the degree to which these models are a good fit to the needs of specific outsourcing efforts. We routinely cite the criticality of good outsourcing governance to the success of any outsourcing effort. Furthering this theme, it is clear that part of outsourcing governance success is identifying and employing the most appropriate model/s to meet the needs and demand of different types of outsourcing efforts.

EquaTerra has defined four main outsourcing governance models, though there are many variations to these base models. Based on our experience and the 3Q10 Pulse results, the following ordering is a representative hierarchy of these models, both in terms of the frequency deployed and complexity and sophistication of the models.

1. Relationship Focus: governance/service provider management specific to each outsourcing deal
2. Functional Governance Office: governance/service provider management as a separate group with a functional area, managing all agreements for one functional area
3. Enterprise Outsourcing Council: governance/service provider management as a community of interest, with limited formal organization and structure
4. Enterprise Center of Excellence (CoE): enterprise governance/service provider management functioning as a CoE supporting multiple functional areas and multiple providers

There is not necessarily a right or wrong outsourcing governance model for a buyer to use in an effort. It is more relevant to match the model deployed to the type of outsourcing deal in terms of functional area, scale and scope, and goals (i.e., from more basic cost cutting through more complex transformational efforts). Buyers need to ensure they have the skills, experiences and resources to adequately support the model they utilize. For example, it is more viable for more experienced and sophisticated outsourcing buyers to successfully deploy an enterprise outsourcing CoE than it is for less experienced buyers to do so.

Service providers and EquaTerra advisors polled in the 3Q10 Pulse survey ranked how well they felt typical buyers’ governance models met the needs of their existing outsourcing efforts on a one-to-five scale where one represents poor fit/does not support outsourcing efforts well and five means very good fit/supports outsourcing efforts well (see figure below).

There was general consensus that buyers are often not using the most applicable outsourcing governance model. Service providers were somewhat more optimistic, but this is likely because they view buyer outsourcing governance capabilities from the perspective of their own effort and not in the context of a buyer’s overall outsourcing portfolio.

These findings indicate that not only do many buyers struggle with their outsourcing governance efforts, but that they do so in part because of a mismatch between models deployed and the needs of a specific type of outsourcing effort. A mismatch example is employing a series of relationship-focused efforts against a comprehensive set of integrated enterprise-wide outsourcing efforts that require a more coordinated and harmonized management model. So, in addition to prioritizing the importance of outsourcing governance to the overall success of outsourcing efforts, buyers must also ensure they are picking the best outsourcing governance model for their situations and recognize this is a continually evolving process. As their outsourcing efforts expand in scale and scope, this increasingly implies taking a more portfolio and CoE approach to outsourcing governance.

Filed under: Governance, Market Trends and News, Outsourcing by EquaTerra