11 Reasons Outsourcing Relationships Fail | Failure to Exercise Proper Governance

In the first article in this series, I outlined the 11 most common failure modes for IT outsourcing relationships.  These are summarized below for your reference:

• The vendor over-promises, and fails to deliver on their commitments
• The client fails to exercise proper governance over the vendor contract
• The vendor underprices the contract and fails to earn a profit
• The contract fails to align vendor and client goals and objectives
• Vendor reports contain raw data, but rarely include proper diagnosis
• The client does not understand the metrics included in vendor reports
• Both client and vendor view the contract as a zero-sum game
• Vendors spin data and reports to cast themselves in the most favorable light
• Continuous improvement is ill defined or not included in the contract
• Vendors experience extremely high turnover on a client project
• Vendors and/or the client do not adequately train personnel

In this third installment of the series I will address the problem of failing to exercise proper governance over the vendor.

Failure to Exercise Proper Governance

Governance is just a fancy way of referring to vendor management.  Unfortunately, poor governance is a pervasive problem in this industry, and contributes to at least 50% of all failed outsourcing relationships.  But it doesn’t have to be this way!  There are just a handful of success factors that, when adopted, can make the difference between poor vendor performance, and outstanding vendor performance.

The most basic principle in governance is to hold your vendor accountable to the terms of the contract they signed with your organization.  This should be easy enough, but for a variety of reasons many clients do a poor job of enforcing their vendor contracts. They either assume that the vendor will comply with the contract without any oversight, supervision and enforcement; or they simply don’t understand the importance of vendor management. But contracts don’t manage themselves.  And without rigorous oversight, vendors almost always fall short of their contractual obligations.

Please know that I am not anti-outsourcing, or anti-outsourcer.  But I have negotiated hundreds of managed service contracts worldwide, and I know from experience that without proper governance, vendors will fall short of their contractual obligations.

So, what’s the remedy?  It’s surprisingly simple.  It looks like this:

• Assign a contract manager to oversee the contract
• Establish a 100% compliance policy from the start of the contract
• Exercise your buyer power
• Enforce financial penalties
• Demand answers for non-compliance with the contract
• Expect immediate remediation for contract breaches

The importance of assigning a contract manager cannot be overstated.  This person will govern the contract and the relationship with the vendor.  They are the go-to person for all things vendor related.  In a nutshell, their job is to stay on top of the contract, monitor the contract for compliance, and take immediate action if/when a vendor falls out of compliance. The contract manager should be vested with all authority necessary to manage the vendor and to make decisions on behalf of the enterprise to optimize vendor performance.

Many service providers are out of compliance the day a contract is signed.  Sometimes this is normal, as there is often a 90-120 day ramp up period before the vendor is expected to meet all the terms and conditions of the contract. However, it is a mistake to allow any “slippage” in the contract, particularly with a new vendor, as this will send a clear signal that your enterprise is not serious about holding the vendor accountable to the contract they have signed.  And if this is the precedent you set, the vendor’s performance will inevitably deteriorate over time.  You are far better off signaling a zero-tolerance policy right from the start, than to allow even small violations of the contract.

You’re the buyer. Act like it!  Buyer power is not an abstraction.  Those who are willing to exercise their buyer power almost always get better performance from their service providers.  This is not an issue of bullying or being heavy-handed with your vendor.  Far from it.  Rather, it is a no-nonsense approach to vendor management that expects and demands the vendor to live up to the terms of the contract.  And here’s a great irony: responsible vendors like being held accountable because it means the rules (the contract) are spelled out, and immutable.  Gray areas, misunderstandings, and other ambiguities are eliminated when there is zero-tolerance for contract breaches.

Financial incentives and disincentives, sometimes called debits and credits, have been a central part of outsourcing contracts since the managed services industry got started. What’s different today is that most outsourcing contracts still have financial disincentives for non-performance, but incentives for exceeding contractual performance levels have been largely eliminated.  There are two reasons for this.  The first is the aforementioned buyer power.  Buyers can demand financial credit when a service provider misses their performance targets.  But they are increasingly reluctant to pay debits when a vendor exceeds their performance targets.  The second, less obvious reason, is that that vendor performance impacts customers in a non-linear way.  If service levels are exceeded, for example, there’s virtually no benefit to the client.  By contrast, when a vendor falls short of their service level targets, it can, and often does, have a significant impact on client productivity.  And in some cases, such as retail point-of-sale support, it can negatively impact client revenue.

After 30 plus years in this industry I am still surprised by what I have dubbed a culture of acceptance when it comes to vendor performance.  Stated bluntly, it means that vendors are allowed to fail without consequence.  But this is the antithesis of good governance.  The precise reason for governance is to prevent vendors from failing in the first place, and one of the primary roles of the contract manager is to do just that.  One of the most effective contract managers I’ve met in my career put it this way.

“My first job is prevention.  I work with our suppliers to prevent problems in the first place.  My second job is rapid response.  When any of our suppliers misses a performance target, it’s all hands on deck until the problem is resolved.  That goes for me as well as our suppliers.  Thirdly, I want answers.  What happened and why?  And I am relentless in this regard.  When a vendor fails to perform, I believe that I am owed an explanation, and assurances that it will not happen again.”

A Note on Soft Targets

Vendor requirements can be roughly divided between objective, measurable performance targets – so-called hard targets – and soft targets.  If I were to tell you that a vendor’s mean time to resolve (MTTR) target is four hours, and their customer satisfaction target is 90%, those are both objective, hard targets.  By contrast, if the vendor is expected to mature the ITIL practices of problem, incident, and knowledge management, shift left, and drive contacts into the self-help channel, these are soft requirements because they have no measurable goals associated with them. The solution to this is pretty simple; every requirement should have a performance target attached to it.

It doesn’t help to have aspirational goals in the contract that state, for example, that your vendor will work with you to reduce ticket volumes, increase adoption of the self-help channel, and shift tickets left.  The reason is that aspirational goals are never achieved; they are too vague and unenforceable.  However, you can attach performance targets to these aspirations, thereby turning them from soft requirements into hard targets.  There’s a world of difference between the soft requirement of, say, increasing adoption of the self-help channel, and the hard requirement of resolving 10% of all tickets through self-help in year one, 20% of all tickets in year two, and 30% of all tickets in year three of a contract.

Soft targets don’t work.  So, if you want something to get done, put a performance target on it and hold your vendor accountable for hitting the target.

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