Managing relationship equilibrium in outsourcing
HP’s relationship governance model and methodology
Executive summary............................................................................................................................... 2
The governance balance ...................................................................................................................... 3
HP’s unique governance model ............................................................................................................. 5
Partner-based, collaborative approach ................................................................................................... 6
Proven best practices ........................................................................................................................... 6
Flexibility is not just a buzzword............................................................................................................ 7
What to expect, end to end .................................................................................................................. 7
Relationship management ................................................................................................................. 7
Smooth transition ............................................................................................................................. 8
Proactive partnership........................................................................................................................ 8
Delivery on service promise ............................................................................................................... 8
Financial benefits ............................................................................................................................. 8
Linkage to the client’s corporate governance model ............................................................................. 8
Conclusion........................................................................................................................................ 11
For more information.......................................................................................................................... 11
pg_0002
2
Governance is the holistic way HP engages in and
operates within an outsourcing engagement—and it is
the key to relationship success.
Executive summary
The intent of governance in outsourcing is to provide a mutually agreed-upon framework for the way
a service provider and client will work together to conduct business (the outsourced function) and
manage their relationship. Traditionally, the relationship aspect has been overlooked. For decades,
third-party advisors have suggested to buyers that outsourcing governance agreements should focus
on a set of ground rules that dictate the parties’ roles and responsibilities, how they will measure and
monitor provider performance as well as how they will handle change and conflicts. In this manner,
the buyer puts in place processes that enable it to have some control over the outsourcing
arrangement.
Outsourcing, for today’s leading companies, has evolved beyond providers merely taking over a
function and performing the work with higher quality and/or lower cost. Desired outcomes from
dynamic, complex business process outsourcing (BPO) and business transformational outsourcing
(BTO) initiatives require a deeper relationship between a provider and its client. Unless the parties
trust each other and are willing to work together in a manner that achieves mutually beneficial
outcomes, one or both will become dissatisfied.
At HP, governance is a framework supported by a critical set of processes that tie delivery
infrastructure, service management, resource management and relationship management together.
A key element of HP’s governance model, the Total Customer Experience (TCE) and Quality Program,
is incorporated at every stage of the customer’s business life cycle. HP’s TCE is not a high-level
philosophy but, rather, a clearly defined process with objectives and documented tools and
methodologies.
“Our brand is a promise to clients. The Total Customer Experience we
provide reflects that promise.”
-- Carly Fiorina
In addition to the promise of TCE, HP’s global governance model focuses on ensuring that a
relationship is sustainable and mutually beneficial over a long term. This is, in fact, a key differentiator
for HP’s service delivery.
This paper discusses HP’s governance model and how it results in establishing:
•
A deeper level of trust
•
Greater mindshare
•
A stronger relationship
•
Increased delivery efficiencies
•
Business growth
All of which add up to mutual value.
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3
Equilibrium—the state of being balanced and stable despite
all influences
The governance balance
In outsourcing arrangements, the provider and client basically form a new type of business
relationship within the client’s business. As with any business, executives must determine how to run
the business. Although the provider performs the business services, both parties must jointly manage
how their new business will operate in a mutually beneficial, synergistic manner.
Whether a buyer of outsourced services is entering into its first arrangement with a service provider or
whether a prior “supplier”-type of arrangement is changing to a BPO or BTO initiative, an effective
process must be put in place to ensure the correct setting, managing and monitoring of the new
relationship. Ensuring return on investment and achieving high-value outcomes require that
governance—a viable, overarching framework for management principles—be a part of that process.
With increasing regulatory issues (such as the Sarbanes-Oxley Act of 2002) and media worldwide
focusing on failed outsourcing arrangements as much as successful ones, today’s buyers of outsourced
services are aware of the importance of governance. Increasingly, more focus is being given to
relationship management and governance as a key component in buyer expectations for structuring
their outsourcing arrangements.
But outsourcing governance structures typically do not emphasize the crucial activities associated with
enhancing the relationship itself. Some governance agreements are merely principles and actions that
focus primarily on policies surrounding decisions and responsibilities; such an approach can be a
force that cancels out the factors that deepen trust and the relationship. Yet, such principles need to
be in place to ensure stability as conditions—and the parties’ divergent interests—change over the
long run.
The contrasts between using governance to both manage and build/nurture a relationship require
careful balance. Many buyers and providers lack insight into how to design and maintain equilibrium
in governance structures. Effective governance should be a source of strength—not a show of force—
when challenges arise.
HP’s governance model stands out in the marketplace because of its focus on fewer rules and more
relationship.
The governance framework/structure is supported by a management system that includes a set of
standard, documented management processes and decision rights, which link to operational
processes and procedures. It also envelops a behavioral and cultural approach.
Governance enables seamless activity between the parties’ joint “business” and service delivery.
It enables a service provider and its client to mutually oversee and manage:
•
Expectations for each other’s actions
•
Expectations surrounding how the parties will work together to achieve their agreed-upon objectives
•
Contractual obligations and dependencies
•
Information sharing
•
Service performance
•
Overall strategic direction of the relationship
pg_0004
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HP works outside the box to give you a robust, relationship-
focused, partner-based structure for managing your
outsourced operations.
Without effective governance, outsourcing arrangements can be plagued by poor communication
styles, causing defensive (or even adversarial) behaviors. Such behaviors are likely to negatively
impact both parties’ possible ROI, and outsourcing cannot be successful without achieving mutually
beneficial gains.
An effective governance structure, on the other hand, provides the basis for eliminating value-
shrinking communication styles—or even a lack of communication.
It establishes processes that provide the framework for an open, honest, proactive communication
style that:
•
Operates from an appropriate number of defined internal and external touch points
•
Ensures that people understand the goals and will be able to take action when necessary
•
Ensures that issues do not fester but are discussed and resolved on a timely basis and at
appropriate levels
•
Creates decision-making protocols
•
Promotes meaningful communication between the parties
•
Enables the parties to measure and monitor the health of the relationship through an organized
approach rather than hearsay and opinions
•
Increases responsiveness
•
Ensures flexibility
•
Enables understanding and review of costs and service impacts from change
•
Eliminates ad hoc decision
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HP’s unique governance model
In HP’s model, governance is more than establishing and adhering to processes, ground rules and
ongoing management procedures. HP recognizes that each party enters an outsourcing arrangement
with certain expectations. Therefore, its governance model addresses intrinsic elements, going beyond
the parties’ broad, written contract regarding service performance and objectives in that it includes
key methods for managing and enhancing the relationship.
While it is composed of written documents, processes and tools and is a component of, as well as an
addition to, the overall contract, the governance framework completely expresses the approach to
dealing with the intrinsic elements of each party’s expectations and commitment.
Numerous industry studies reveal that outsourcing arrangements fail even when both parties strictly
adhere to meeting contractual obligations. The fact is, the relationship aspect is crucial to achieving
desired outcomes in outsourcing arrangements. As the degree of change necessary to achieve
objectives rises, so does the importance of the partnership aspect.
While a client and HP may have had an excellent relationship for years as customer and supplier, the
new outsourcing paradigm in which both companies find themselves requires a formalization of this
new relationship; this is facilitated via the governance model.
To HP, relationship and governance are tightly linked. Thus, HP’s governance model focuses on
ensuring that a relationship is sustainable and beneficial to both parties over a long term.
pg_0006
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The governance structure in HP relationships is not only built
for a particular client, but it is also built by collaborating
with a particular client.
Partner-based, collaborative approach
A partner-based approach is a crucial aspect to success in outsourcing. At HP, relationship building
and partnering begin early in the procurement process or other initial discussions and are dependent
on both parties collaborating on designing a governance structure that meets both parties’ needs and
fosters a partner-based relationship.
Cognizant of the relationship aspect, the model focuses on clearly understanding not only each
other’s business objectives but also how both parties will be working to achieve them. Because clients
are involved in the decisions affecting their relationship and are actively involved in shaping
components of the governance structure, the model is also more robust and client-centric.
Proven best practices
Governance in HP arrangements is jointly implemented. This approach provides transparency and
helps to build trust.
Building the governance structure begins with the baseline model and both HP and the client working
to customize, scale (up or down) and supplement components for the client’s specific needs or
requirements.
The baseline is sourced in proven successful engagements and has continued to evolve over recent
years with client input on essential actions for success. The best-practice baseline structure for
meetings, for example, would be customized to meet client needs and expectations with details
surrounding types and frequencies of meetings, attendees and decisions from those meetings.
The Customer Management Office component would, for example, be customized regarding
headcount (one or several people, with dedicated or part-time responsibility for managing the
relationship), functions and accountability, communication touch points and methods, as well as
compliance for HP and client internal matters and external regulatory and compliance issues
(such as Sarbanes-Oxley).
The business management component would be customized according to procedures and processes
to meet client needs and expectations in such matters as invoicing, asset management, contract
management, change order management and reporting.
pg_0007
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Case in point: Telecommunications company
Business challenge: Seamlessly and affordably maintain high levels of
customer satisfaction (24x7customer service and billing operations,
WAN management of over 140 systems, data center and numerous
business partners) while adding new services and new customers;
reduce escalating costs.
Solution: Strong outsourcing relationship and governance that evolves to
reflect changing business needs; risk-sharing component; predictable costs.
Joint governance responsibilities:
•
Align around goals associated with the work
•
Be committed to delivering its part of the agreement
•
Consider the long-term relationship, even during difficult times
•
Communicate
•
Work to sustain the relationship before working to undermine it
•
Don’t damage the relationship on daily “potholes” (waste of time)
operate with mutual respect
Flexibility is not just a buzzword
Businesses are not static, so effective governance structures must also be fluid. In order for both
parties to be successful in an outsourcing arrangement, an agile system must be in place to balance
proactive change with operational controls.
Thus, a key component of the HP governance model is periodic collaboration around improvement
that allow the parties to rapidly adjust appropriately to the client’s changing business environment at
any point in time. This has proven to be a cornerstone of client satisfaction, but it is ultimately
beneficial to both parties when they can leverage governance to change their priorities,
accommodate emerging needs and develop new value in the relationship.
What to expect, end to end
From the initial RFP process, through transition and ongoing service delivery, to the point of renewal,
HP’s end-to-end governance model is structured each step of the way to ensure six critical success
factors:
•
Relationship management
•
Smooth transition
•
Delivery on service promise
•
Proactive partnership
•
Financial benefits to both parties
•
Linkage, where appropriate, to the client’s corporate governance model
Relationship management
HP’s concept of relationship management moves away from the traditional customer-supplier
relationship where information is limited. When open communications do not exist, the relationship
becomes under-valued and under-utilized. This discourages mutual risk-taking, stifling creativity and
value-creating opportunities.
pg_0008
8
HP embraces developing trust and respect early in the engagement. A relationship that improves
mutual understanding encourages sharing of information on each other’s interests and improves trust
through communication and results. This creates valuable options for each party in reaching its
business objectives.
Smooth transition
For example, it aligns with and supports HP’s Transition and Transformation Methodology.
Governance processes manage the transition, from taking critical actions to mitigate against risks and
communicating the risks of deviating from the plan, managing change, tracking transition progress,
and developing a steady state beyond the transition.
Proactive partnership
This is how HP works with the customers to help them be more innovative with technology and
services to enhance their business goals. HP assesses the environment, identifies opportunities and
makes recommendations for improvement. Key people are accessed within the customer
organization to help HP better understand the major business issues and then work together to build a
living roadmap. This in turn leads to a better relationship.
Delivery on service promise
Similarly, in a transformational project, the governance structure achieves this critical success factor
by taking steps to ensure business continuity throughout the project.
Financial benefits
Critical success factors include opportunities for reduced operational costs through increased account
and delivery efficiencies realized by predictable and consistent application of standard governance
practices. Effective governance also results in opportunities for long-term gain through cost avoidance,
efficiency gains, improved processes and increased productivity.
Linkage to the client’s corporate governance model
This is an emerging requirement within the IT marketplace. As more focus is provided on management
and effective business controls posture around the corporate financial date and performance, both the
IT component of the client and the service provider are now required to certify the efficacy of the
client’s financial data.
Governance extends across multiple dimensions of delivering services. The end-to-end model allows
HP to fulfill its contractual obligations, increases the quality of the relationship; thus, it enhances the
total experience and ROI for the client.
The processes within HP’s end-to-end governance model are segmented into four pillars:
1)
Relationship management is how HP addresses the total client experience, oversees the
execution of contractual obligations and adapts to changes in the business environment.
This is a fundamental—and crucial—factor in a successful outsourcing arrangement.
2)
Operational control includes rigorous ITSM standards and processes, which are then customized
for client requirements and escalation, notification and management of operational issues
dovetailing with requirements.
3)
Demand management involves agreements on how HP responds to and manages client requests,
both in and out of the scope of the contract.
4)
Proactive management and strategic planning (a) revolves around HP proactively reviewing,
improving, and enhancing processes and technologies used in providing services, and (b)
defines how both parties will quickly adapt to meet new or changing business requirements.
pg_0009
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At the base of the pillars are three foundational steps:
•
Management of change and communication. The model ensures an integrated, yet segregated,
communication plan. While the way a message is framed and communicated may be good news to
one group of stakeholders, it might be received as bad news to a different stakeholder group. An
effective governance plan’s communication structure frames messages according to a particular
segment of people.
•
Business tools and methodology, standards and policies. These are keys to managing the
relationship and delivery proactively.
•
Account team and linkages. The linkages (touch points) create effective communication/interaction
channels between the client and HP. This is especially important, on a global basis, to ensure that
regional politics and cultural issues of a large organization do not get in the way. In addition, these
linkages foster strong bonds between key players at different levels of the two organizations and
between similar roles.
The outcome of these foundational steps and pillars is a strong relationship, with the parties
equipped, aligned and empowered to quickly and efficiently move through joint business challenges.
pg_0010
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Case in point: Fortune 100 financial services firm
The following case in point illustrates a challenged relationship and how
HP’s governance model changed the potential unsatisfactory outcome to
a mutually valuable and growing partnership.
Business challenges
•
Reduce costs using utility pricing.
•
Impose operating disciplines through firm service level agreements and
provider reporting requirements.
•
Reallocate more expensive direct labor to higher-value projects and tasks.
How the relationship developed
The client retained HP as its service provider because of its regional
presence, past performance, cost, and depth and breadth of resources.
The parties encountered the following challenges during the early stages:
•
The statement of work did not fully represent expectations. The client’s
business-driven measures were unclear and interests were not well
defined.
•
A client-retained organization was not stable.
•
Decisions and actions were dominated by a people vs. process-oriented
culture.
•
HP’s performance was dependent on client’s deliverables
(e.g., application process reengineering).
•
There was a lack of trust. The client was micromanaging HP and moving
toward a body-shop relationship.
Role of governance model in enhancing the relationship
Despite the challenges, both parties were willing to continue to invest in the
relationship. The client and HP chartered a joint management team to turn
around the situation in two to three months. One of the team’s key
initiatives was to implement HP’s governance model to help manage the
relationship and introduce structure.
Key results included:
•
The customer management office’s delivery team was restructured.
•
The business management office implemented a quality management
system and a joint communication strategy.
•
Critical core process reviews were jointly implemented. Reviews
encompassed incident management process, issue and escalation
management, change management, and service request management.
•
Touch points and linkages were identified and documented.
•
Structured meetings were established, building and strengthening the
relationship
Outcome
HP now understands and meets expectations consistently. Regular meetings
are held, during which problem areas are discussed and joint decisions
are made on how to address issues. The client has since awarded HP
additional services. Without establishing the governance model, this would
have been an extremely unlikely prospect
pg_0011
Conclusion
Successful outsourcing requires effective governance to manage execution on shared commitments
and to achieve mutual benefits. Success, therefore, depends on the willingness of both a provider
and client to engage in the governance process.
Anything not specified in a contract (and many aspects that do have contractual clauses) must be
discussed before the parties go into business together. The parties must work through their
psychological expectations, which may differ from what is specified in the contract. They must also
identify risks for all concerned and discuss how to mitigate them.
Without these steps, the parties cannot manage through to a win-win arrangement.
HP takes governance to the next level. More than governing operations, its model sustains and
enhances the relationship. The tone is set early on for a collaborative relationship and a proactive
approach from the outset. It leads to:
•
Increased trust
•
Greater mindshare
•
A strong relationship that stands the test of time
•
Mutual business growth
Just performing to contractual clauses will not result in
a successful relationship.
For more information
To learn more about HP’s relationship governance model and methodology for outsourcing, visit:
http://www.hp.com/hps
© 2004 Hewlett-Packard Development Company, L.P. The information contained
herein is subject to change without notice. The only warranties for HP products and
services are set forth in the express warranty statements accompanying such
products and services. Nothing herein should be construed as constituting an
additional warranty. HP shall not be liable for technical or editorial errors or
omissions contained herein.
5983-0087EN, 12/2004