Why does governance matter?

Why does governance matter?

Sourcing provides client organisations access to a broad range of specialised skills, the ability to control and manage operating costs, and the realisations of improved efficiency, speed and agility to deliver services. Getting through contracting and into the operational stage of transition and service delivery is the first major milestone. However, the journey to maintaining value does not end there. Contract durations typically are anywhere from three to seven years. During this time, organisation realignments can occur, leadership can change, new services can be offered, company strategy can change – the dynamics of a firm do not change simply due to somewhat static sourcing contracts.

Even though sourcing governance and supplier management are recognized as critical factors, they do not always get the priority required. Studies by advisory firms like Alsbridge, Ernst & Young, KPMG and the International Association of Outsourcing Professionals (IAOP) indicate that the ability to sustain high value realisation over the full operational stage of the agreement is a major challenge. They report value losses between 5 and 70 percent of the potential value of the engagement caused by operational, performance and portfolio challenges. Partly based on these studies we at Leadmark estimate the gap between strong and weak governance between 19 and 48 percent of the contract value with a modal value of around 30 percent.

Working in a sourced services environment is not trivial and simple things sometimes seem to take longer and cost more than what you would typically expect. So, what’s missing? Is it leadership, innovation, knowledge or collaboration? After working for many years in sourcing we have come to learn that most sourcing performance issues are actually governance issues in disguise.

The simple fact is this. Work gets done through and with people from the client and the service provider. It is built on numerous personal interactions using processes and information that are held together by the sourcing contract and a balanced set of governance principles. Therefor in sourcing there is nothing more impactful on people, their work and their performance than smart, collaborative, balanced and harmonious day-to-day management of the engagement. The symptoms of poor governance can be seen everywhere. They show up as exhausting communication, poor execution, disputes and escalations, lack of collaboration and trust, disengagement and attrition, erosion of the business case and failed relationships.

Given the high stakes, it is clear that sourcing relationships are strategic assets that demand on-going senior executive investment and attention commensurate with their importance. Ignoring the value of properly managing sourcing relationships is tantamount to corporate negligence – simply because it has such a huge impact on return on investment and the potential value gained from sourcing. Governance consists of more than simple contract management. It encompasses the entire spectra of management: financial, contract, consumption, performance, risk and issues, and relationship and change issues. The goal of governance is to ensure accountability, transparency and information sharing between the parties to the engagement.

Strong governance interconnects value and risk management and helps companies achieve cost savings of up to 38% and add up to 10% value beyond contract compliance. It provides a common language, shared processes and data transparency to facilitate a balanced and trusted relationship. It clarifies roles and responsibilities to reduce duplicity, highlights objectives, risks, activities and results aligned with contract terms. Effective governance stimulates engaged and productive collaboration, decreases operational cost, minimizes legal and regulatory non-compliance, promotes service improvement and reduces risks and business disruptions.

For organisations to realize the full value of sourced services, governance is a must. Not a nice to have. It must be a priority to successfully realize business value and comply with regulatory requirements. You can unknowingly ignore, underestimate or neglect the challenges inherent to sourced services and supplier relationships .. ..  but they will not ignore you, as many organisations already have experienced.

Value-Led is our proprietary approach that provides the governance framework and process that drive the performance of service provider relationships and deliver sustainable results throughout the life-cycle of the engagement.