The governance of outsourcing
Outsourcing is $180 billion industry with more than 75 percent of organisations using it in some form or another. Outsourcing of some or all of the services within many companies is seen as a way to contain, if not diminish costs and to improve efficiency and specialty.
Outsourcing is a mechanism that allows organisations to transfer the delivery of services to third parties. As a strategic resource or decision, outsourcing must be governed accordingly. This is not just about the initial cost and process, but about effective management and ensuring that both parties benefit on an ongoing basis.
Governance of outsourcing comes with a set of responsibilities, roles, objectives and oversight, which is required to anticipate change and manage the performance costs and control environment of the third providers. It is a pro-active process that both the client and the service provider must adopt to ensure a consistent and effective approach that identifies necessary information, relationships, and exchanges across the arrangement.
Outsourcing governance is increasingly coming under scrutiny internally by audit and externally by regulators. Until recently, outsourced functions were often overlooked during budget cuts or productivity initiatives, however the current challenges of both Covid-19 and the climate crisis have forced organisations to reconsider their outsourcing arrangements.
The Information Services Group (ISG) report that companies are entering into the third generation of outsourcing governance. They suggest that many are viewing it through the lens of business operations, and creating the same level of scrutiny as any other part of their organisation.
But what is this third generation outsourcing governance?
According to ISG "During the first generation, governance was focused around measuring the service providers' cost and performance alone. During the second generation, companies focused on improving isolated elements of internal governance."
The third generation, however, takes a more holistic and overarching view of outsourcing governance and seeks to "optimise the governance processes end-to-end." Companies should start with a top down view to get a clear, single and holistic perspective of managed outsourcing activities. Then they should establish a common view with their service providers and measure key performance indicators to be able to better understand where efficiencies and improvements are needed.
Companies are developing a clearer view of the importance of reviewing their outsourcing arrangements and the tasks they want to perform themselves. This developing third generation of outsourcing review carries with it a significant and exciting change in the way companies manage their outsourcing, but brings with it challenges too.
Outsourcing partners should be aligned in culture, purpose and values, as well as behaviours and ethics. Where previously, it was simply about performance and cost, now it is also about value alignment and reputation.
This blog was written with the support and insight of one of our contributors. Thank you, Divya. As an MBA student specifically interested in marketing and culture, she is a contributor to the Perrin Carey blog. If you would like to contribute to moving governance forwards towards a more ethical and human centric framework, please contact Perrin.