Best Practices in Vendor Management

A White Paper produced by Firstsource Solutions

Executive overview

Setting the right expectations

Enterprises in many industry sectors have successfully outsourced business processes, delivering not only cost reductions, and efficiency improvements, but also enhancing customer service, and enabling improved focus on their key competences.

As the practice of outsourcing matures, many enterprises have identified a growing challenge in managing multiple outsourcing contracts with different vendors. To ensure that each contract delivers long-term business value without putting undue pressure on management resources, organisations are looking to consolidate and rationalise their supplier lists. The aim is to identify partners who can deliver lasting value to the business relationship. This is possible only with outsourcing partners that can truly understand their clients business objectives, rather than simply focusing on SLA adherence.

There is a number of different drivers for business process outsourcing. Enterprises may wish to cut costs through labour arbitrage, or by moving from fixed to variable costs. Equally, they may be looking to improve service and improve efficiency, or to remove non-core activities from their business. More often than not, the motivation for outsourcing will encompass all of these drivers, as different parts of the enterprise will typically have different goals.

At every stage in creating and running an outsourcing relationship, enterprises need to achieve a balance between the interests of the various internal stakeholders. Realistically, some compromises will always need to be made, especially between the requirements of procurement and the business users.

This paper proposes that, used in isolation, SLAs are a blunt tool for measuring the overall success of an outsourcing relationship. They should be complemented by careful pre-migration planning, rigorous governance structures on both sides, ongoing performance reviews and continual refinement of the top-level goals of the outsourcing contract. As you consider which - if any - of your existing outsourcing partners can grow into strategic partners, important factors to bear in mind are their commitment to building and maintaining relationships, and their ability to understand your changing business requirements and deliver the appropriate services.

Where there is any degree of mismatch between the outsourcing contract and the actual goals of the business owners, two problems emerge. First, it is unlikely that the outsourcing contract will be able to satisfy the requirements of all stakeholders on the client side. Second, it will be a challenge for the client to find the time and resources to manage stakeholder expectations and communicate them to the outsourcing vendor. For enterprises that have multiple outsourcing contracts with a number of vendors, the impact on management time and resources will be considerable.

By choosing an outsourcing partner who can understand the business goals behind the SLAs, and puts in place effective governance structures to meet them, you can outperform against your expectations while reducing the management overhead.

Outsourcing has moved into the next phase of maturity, as enterprises look to do more than just transfer existing processes and asking vendors to achieve the same SLAs at a lower cost. There is a growing awareness of the potential to tap into external expertise and produce a real transformation in outcomes for outsourced processes. After all, organisations outsource processes either because they dont have the internal competences that an external specialist has, or because they dont want to maintain these competences internally.

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In this next generation of outsourcing, enterprises are looking to manage their outsourcing relationships at a higher level of the business outcomes, leaving their specialised vendors to handle the lower level execution. This will require a shift on both sides of the outsourcing relationship: the vendor must be willing and able to gain a more holistic view of their clients business, and the client must be ready to communicate and explain their broader business goals. In an outsourcing relationship that looks beyond SLAs to consider the broader business outcomes, the outsource service provider must have its own clearly defined internal governance models if it is to successfully adapt to a less prescribed way of working. This is not to say that SLAs are to be abandoned - they are a vital tool in ensuring day-to-day control and performance - but that they are just one element in a broader set of controls and measures. To extract the greatest possible value from any outsourcing relationship, enterprises must first identify a vendor that is prepared to commit time and effort to the creation of a long-term relationship. It is then crucial for both sides to take a structured approach setting up the contract, including detailed assessments of the potential benefits and risks in outsourcing any given set of business processes, and strategies for avoiding disruption during migration. This paper will now consider the principal stages in creating and running a successful business process outsourcing partnership, demonstrating how a clear focus on contract definitions, relationship management, service delivery and governance will pay rich dividends in the long term. Defining the contract The first steps in the relationship are often the most important: the selected outsourcing vendor should conduct pre-contract, pre-operations research, following a standardised methodology. Instead of merely aiming to define SLAs, this stage enables the vendor to gain a real appreciation of the business as a whole, rather than just the portion earmarked for outsourcing. By understanding the levers for

success, the vendor can ensure that its own approach to the outsource contract will support the long-term business goals. Both sides should take a rigorous approach to defining the ways in which success will be measured, to set the stage for the later definition of precise SLAs. There should also be an in-depth discussion on the creation of a shared governance structure, including detail on the escalation processes and on the change control mechanisms, to ensure the appropriate level of discipline around the outsourced processes. When it comes to a decision about governance, there are no right or wrong approaches. Its all dependent on such elements as 1. 2. 3. 4. 5. The type of company The markets in which it operates Company structure/organisation The processes to be outsourced Who the end-users are, and their needs

Throughout the definition stage, the vendor should be capturing each element in a standardised way, with all the dependencies clearly listed (across personnel, systems, change management, and so on). From the governance point of view, the vendor should seek a sign-off from the client at every major stage to ensure that the scope has been defined to the satisfaction of both parties. Simultaneously, the vendor should be able to report back with a detailed business requirements document showing every element of the project, to avoid the chance of any subsequent mismatch between expectations and outcomes. The vendor should be willing and able to work with the client to define a robust and comprehensive governance structure, with the appropriate communications, reviews and reporting around it. This governance structure should span everything from the migration phase through to business-asusual, and plans should be made for regular reviews and refinement of the governance processes.

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Typical governance structure

Customer Relationship Management and Governance

Executive Sponsors

Outsourcer Client

CEO / COO

Client Exec Sponsor

Quarterly / Half-yearly detailed review of program performance and identifying new key initiatives

Steering Committee
EVP Operations Global Head Business Development Client Operations & Business Leader

Relationship Council
Client director & relationship manager Client's Business & Procurement Team Leads

Monthly / Quarterly reviews to assess overall program status, review risks and issue logs, approve changes and plan next steps

Account management and Identification of other potential opportunities, monthly reviews

Program Team
Delivery and account management team Client Business & Operations Team

Daily dashboards and reports Weekly / bi-weekly conference calls Actively manage operational delivery and relationship

Transition phase Any outsourcing vendor that is capable of acting as a strategic partner will have a well established approach to the transition phase, including workshops led by a dedicated transition team and supported by vendor management from operations and technology. At this stage, the SLAs will be defined in absolute detail, with baselining exercises to determine the status quo. The transition process should include full process mapping, linked to a rigorous review of the available documentation. Where process documentation is missing, incomplete or otherwise of unsuitable quality, the chosen vendor should have a specialist in-house team capable of filling in any gaps and creating appropriate documentation. Each step in the transition process should incorporate a set of reviews and measurements, with a defined output. As each phase of the transition is passed, stakeholders on both sides should sign off this checklist of requirements. Time and effort spent in this phase and in the earlier definitions phase will help ensure better outcomes and will create a structured framework for continual process improvements.

Operational delivery SLAs are naturally the first measure of success or failure, but they should be treated as a baseline rather than as the sole and final word on performance. Once the outsourcing vendor has achieved the baseline SLAs, they should then continually improve performance over time - and they should proactively propose new or changed SLAs as appropriate to help their client achieve the broader business outcomes. A structured, repeatable approach is critical: the vendor should make use of methodologies and tools such as Six Sigma and Lean to create a rigorous way of measuring and improving process management. These methodologies should also feed into training and education for vendor teams, whilst making sure the right controls are in place to ensure client intellectual property or processes that provide them with a competitive advantage are not compromised.

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Communication will often be the deciding factor in achieving performance and process improvements: when the channels of communication between the vendor and the client are fully open, and when the right people are in place on each side, it will be possible to constantly challenge the results that are being achieved and push to match higher results achieved in other sectors. Domain expertise has an important role to play here: an outsourcing vendor with experience in the clients business sector will be able to add value by suggesting areas for improvement. The vendor should also have internal procedures for taking practical lessons learned for one client and applying them across others. Key factors in Vendor/Client relationship
Scope of services Contract structure / terms Services levels Contract flexibility

Governance structure and staffing levels Roles and responsibility Policies and procedures

Contract Governance
Relationship

Common goals and vision Alignment of expectations Communication Partnership Cultural fit

Service delivery
Savings versus the business case Pricing versus the market Performance Innovation and Optimization

Experience
Access to full resources of SUPPLIER Experience of: - BUYER customer - BUYER employees

Diagram based on material provided by Everest Group

SLAs by their nature will be focused on specific objectives, whereas overall performance measurement across multiple factors is also essential. Finding the right mix of governance, contract, relationship, experience and operational delivery will contribute to total value creation, and somehow this must be measured, too. For the client, the measures are simple: stock price, profits, turnover or P/E for example. For the outsourcing vendor, traditionally measured only on SLAs, the link between operational performance and value creation may be missing. Beyond operational SLAs and soft factors such as culture and vision, for example it is critical to find an outsourcing vendor prepared to share value creation goals, which may mean participating in both risk and reward. Its all about the people To build and retain a highly skilled workforce, it is vital for the outsourcing vendor to have a strong support infrastructure across recruitment, HR, training, and performance management. The vendor should also be looking to build up domain knowledge and competence across specific business functions, with the goal of achieving the desired business outcomes as well as meeting SLAs.

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A global outsourcing vendor has a critical advantage: Domain knowledge acquired across multiple clients, operating across many countries in each sector. Domain knowledge which can be used, for example, to bring best practice from an innovative company in Australia to the UK or from the UK to the US and so on. If the outsourcing vendor has expertise across multiple industries, there can be a high degree of cross-industry synergy as well. This tends to provide an attractive nurturing environment for key managers, helping to retain staff as they develop their skills and gain in-depth knowledge of not only the clients business, but that industry across multiple geographies. Likewise, training should reflect the requirement to understand the fundamentals of each business type rather than simply the fragmented set of outsourced processes that the vendor actually handles on a day-today basis. To ensure knowledge absorption, your vendor should be able to provide evidence of continual review and testing to check that training is being retained. This is another aspect of governance: how the vendor measures the effect of training, and feeds the results back into the design and delivery of future training initiatives. Managing the vendor relationship will become more important as clients look to simplify and improve their outsourcing arrangements. Without effective communication between the two parties, it is unlikely that the outcomes will be good - even if the vendor is capable of hitting the SLAs. In addition to ensuring that managers with the appropriate skills are in place on both sides, organisations need to be confident that their chosen vendor is employing people with the right skill sets to handle the outsourced business processes. When choosing a vendor, it is important to look for clear evidence of their ability to understand functional roles, design accurate job specifications, then recruit the right people.

Well Managed Outsourced Relationships Yield Four Key Benefits

Alignment Ensuring your business priorities are reflected in service performance across all suppliers

Communication Rapid and effective dissemination of feedback and information to effect positive change and business alignment

Optimized Results

Consistency Single point of contact for all facets of support across programs, vendors, technologies, and geographies

Results Monitoring, reporting, and optimizing enterprise performance data to improve the cost and quality of customer experience
Diagram provided by Everest Group

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Conclusion This paper has defined the key characteristics of an outsourcing vendor capable of delivering long-term benefits. Across preparation, definitions, transition, operational delivery, training and performance management, there is one common factor: The outsourcing vendor will have a documented, structured, methodical approach to every aspect of managing client relationships. With its well-established approach to governance and its ability to see the bigger picture, Firstsource creates long-term outsourcing partnerships that go beyond SLA adherence to deliver ongoing process improvement and innovation. As an expert in business process outsourcing with deep domain knowledge, Firstsource can act as an

enabler of business transformation. Working from an understanding of each clients larger business goals, Firstsource can determine the appropriate process re-engineering and deliver ongoing improvements to the outsourced processes. Firstsource combines global delivery capabilities with process excellence and a culture of innovation. With structured pre-sales research tools, a documented transition methodology, and Six Sigma, Lean and COPC frameworks for continuous improvements in operations, Firstsource has the rigour and discipline to build successful longterm outsourcing relationships. By outsourcing business processes to Firstsource, enterprises can reduce their supplier management overhead while achieving the desired business outcomes. Equally, Firstsource has the scale to take on business processes that are currently outsourced to a number of different vendors.

This paper is based on discussions from Firstsources regular Client Forums which debate topics that concern our clients. The Client Forum on Vendor Management was facilitated by Peter Bendor-Samuel, CEO of Everest Group and the content of this paper contains input from Everest Group, our clients viewpoints, as well as best practice from Firstsource, as one of the leading global Business Process Outsourcing companies.

Firstsource (NSE: FSL, BSE: 532809, Reuters: FISO.BO, Bloomberg: FSOL@IN) is among Indias leading BPO (business process outsourcing) service providers. Firstsource provides customized business process management to global leaders in the Banking & Financial Services, Telecom & Media and Healthcare sectors. Its clients include Fortune 500 and FTSE 100 companies. Firstsource has a global delivery model with operations in India, U.S., UK, Argentina and Philippines. For more information, please visit www.firstsource.com India 6th Floor Peninsula Chambers Ganpatrao Kadam Marg Lower Parel Mumbai 400 013, India Tel: +91 (22) 6666 0888 Fax: +91 (22) 6663 5481 UK Space One 1 Beadon Road London W6 0EA, UK Tel.: +44 (0) 20 8237 4500 Fax: +44 (0) 20 8237 4501 USA 205 Bryant Woods South Amherst NY 14228 3609 Tel.: +1 (716) 564 4400 Fax: +1 (716) 564 4440

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