People – ‘Quantity and Quality’

The People element of sourcing governance is best described as having the right quantity and quality of resources to extract the maximum value from the sourcing relationship[1]. What is required is the right organisational and account team structures and resources. What does this mean? It means having clear accountabilities and clear financial delegation within the firm’s retained organisation and the providers account team. Here is the first formula or heuristic; the customer (C) must ensure that it has invested a minimum of 5% of the annual contract value for the management of the sourcing relationship. Gartner has observed that firms invest between 3% and 17 % of the annual contract value (ACV) in the management of the sourcing relationship. The Carnegie Mellon eSourcing Capability Model for Client Organizations (eSCM-CL) states that governance costs should be between 2% and 12% ( eSCM-CL v1.1 Part 2, p. 262). I have selected 5% as a minimum. Customers must be aware that this investment will need to be higher for the following conditions; smaller relationships or deals, inexperience in the management of service providers (P), and where the relationship is transformational. This is expressed as;

GOVERNANCE Customer Annual Spend Percentage (GOVcas%)

Where GOVcas% is the percentage of ACV that you should invest in governing your sourcing relationship, expressed as an integer (INT)[2]. The first element of this formula is basically capped at 6.75% for deals with a monthly contract value (MthCV) of $5,000. If your retained IT sourcing resources, typically referred to as the Vendor Management Office (VMO), have no experience make the second element equal to 5. If your VMO has only one year of experience make the second element equal to 4. In all other cases, apply the formula for the second element expressed in total cumulative years of experience of your VMO (CumYrsEXP). The final element is a flat overhead for the type of deal. I have used Gartner’s sourcing deal types. The customer should apply an additional 2% to the cost of governance if the deal type is Creation or Optimisation. (There are only four Gartner sourcing deal types [a 2 X 2 matrix] and they can be found on-line - http://www.gartner.com/it/content/507100/507130/newrealitiesaug16.pdf , see slide 13)  These deals are characterised by business value add rather than the more straight-forward IT efficiency deal types, which I refer to as, ‘Your mess for less’.

Examples:

1. Base end: MthCV = $5,000;  CumYrs EXP = 5 years; Deal Type = standard (IT efficiency)

·         GOVcas% = INT(5(1.35) + (1.43) + (0)) = 8

·         In this scenario the customer should be spending 8% on the cost of governing the provider or $4,800 per annum, which equates to approximately one FTE @ 0.5 day per month.

2. Large end: MthCV = $100,000;  CumYrs EXP = 20 years; Deal Type = standard (IT efficiency)

·         GOVcas% = INT(5(1.0) + (0.77) + (0)) = 6

·         In this scenario the customer should be spending 6% on the cost of governing the provider or $72,000 per annum, which equates to approximately 40% of an FTE or two staff investing one day per week managing this relationship.

Customers must also recognise that this investment must be added to the total cost of Services to assess the true financial benefit of the sourcing relationship. Without a clear and compelling financial benefit, firms must not outsource. Otherwise, they are violating Coase’s Law.

The other heuristic for the People element is to have invested in the minimum number of roles. Specifically, the customer must have three functions in its retained organisation. For smaller sourcing relationships these functions can be performed by one resource. The three functions are;

Minimum Best Practice Customer (MBPc):

1. Business Relationship Manager – to manage the relationship between the firm and the service provider, often called Vendor Manager, and to manage the interface between the business units and the service provider

2. Performance Manager – to manage the quality (SLAs), commercials, and value from the sourcing relationship

3. Finance Manager – to manage the cost of the Services

Translated into a formula this MBPc is:

Customer Sourcing Account Management (SAMc) Formula:

Subscript ‘c’ denotes Customer.

The service provider must have the following four functions. For smaller sourcing relationships these functions can be performed by one resource. The four functions are;

Minimum Best Practice Provider (MBPp):

1.      Account/Client Manager – to manage the overall relationship between provider and customer
2.      Delivery/Service Manager – to manage the delivery of contracted Services.
3.      Business Manager  - to manage all the corporate functions associated with the relationship.
4.      Finance Manager – to manage the billing and invoice function.

Translated into a formula this MBPp is:

Provider Sourcing Account Management (SAMp) Formula:

Subscript ‘p’ denotes Provider.

Depending upon the deal scale and scope, the customer and service provider must ensure they have the 5 Rights. The right;

1. Number of resources

2. Type of resources

3. Organisational structure

4. Decision authority for each resource

5. Accountability for the governance processes

So far I have provided guidance on the number and type of resources. Specifically, stick to more than 5% of ACV for your customer team and ensure you have owners for each of the functions listed above.

In terms of bullet point three, the organisational structure, the best tip is;

Tip:  ensure your organisational structure is clear, current, documented, communicated for both the customer and the provider Account team, and that it makes sense.  

Guidance on bullet points four and five is provided in the Processes section below. In terms of people, both parties must ensure that the resources actively participate in the account governance structure. That is, each functional owner must participate in at least one governance forum.

Ratio: 1:1 functional ownership to governance forum participation.

What does this mean? If you are a Business Relationship Manager you must meet with your counterpart, the Client/Account Manager at least once a month, covering specific terms of reference.

In this section, I have discussed the ‘who’ needed for effective sourcing governance. I have introduced the link between who talks with whom. This will be expanded upon in the discussion on Tools.

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[1] I discuss the dimensions of sourcing value in another blog.

[2] Rounding up to an integer is appropriate given the level of reliability.