Getting More Out of Your Outsourcing Relationships
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Companies are increasingly looking to extract greater value from their global operating models for business services through scope expansion and digital transformation of end-to-end processes. Our last article outlined key considerations for companies seeking to fulfill this objective by transitioning from a Global Capability Center (GCC) to a Global Business Services (GBS) model largely through internal captive service delivery. Similar considerations exist for those who want to adjust their outsourcing relationship from a staff augmentation to a managed services model to achieve a similar objective.
Outsourcing as a Transformative Partnership
A common scenario for companies is that they have an outsourcing relationship for Information Technology Applications Development. Or they have an outsourcing relationship for a narrow set of tasks within a business process to provide resource flexibility or fill capability gaps. Now these companies are looking to outsource a broader scope of Information Technology or business processes. These companies are typically looking to shift the focus of their outsourcing relationships to more of a partnership to drive transformation and innovation.
This relationship shift most often implies moving from a staff augmentation to a managed services model. Understanding the differences in the models and their applicability is critical as they permeate all relationship elements from how the contract is structured to how the relationship is governed. The key distinctions between each model are outlined below:
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Staff Augmentation |
Managed Services |
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Client assumes primary responsibility with greater resource commitment for overall process and service performance |
Client and service provider jointly managed process and service performance with strong accountability placed on the service provider for both delivery and transformation |
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Well-suited for projects and discrete activities to fill shorter-term needs |
Well-suited for longer-term ongoing process operations and transformation |
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Staff tenure is shorter, with an emphasis on skills |
Staff tenure is longer, with an emphasis on both skills and institutional knowledge |
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Transactionally focused relationship with emphasis on how work is performed |
Continuous improvement and transformation-focused relationship with emphasis on outcomes |
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Cost-focused based on labor rate arbitrage |
Cost, service, experience, and business outcome focused based on pulling multiple improvement levers across geographic boundaries |
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Higher life cycle costs with less predictability |
Lower life cycle costs with greater predictability and price-down and transformation commitments |
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Risks largely assumed by Client |
Significant risks transferred to the service provider |
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More susceptible and open to change requests |
More bounded change request process |
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Lower levels of process integration |
Greater focus on end-to-end process performance and accountability |
Success Factors to Consider
We recommend that before transitioning from a staff augmentation to a managed services model companies adhere to three critical success factors:
- Actively educate internal stakeholders on the differences between the models. Internal stakeholders accustomed to “buying a body at an hourly rate” in a staff augmentation model will find they need to adjust their behaviors and expectations. Confirm and then re-confirm the model best suited to your needs and to which you can manage. For example, a managed service model requires internal buyers of outsourced services to be more active in forecasting longer-term demand changes. There are more structured governance processes for changing scope. While a service provider will take active accountability for transformation, a managed services model asks the internal buyer to be an active partner.
- Structure the outsourcing contract to match the model. Don’t assume you can simply add new scope to your existing staff augmentation contract. A wide range of provisions in the contract will need to be changed including the pricing model, transformation terms, service level methodology, and governance processes. A managed services model shifts more accountability for risk and performance to the service provider and the contract will need to be structured in new ways to ensure a sustainable relationship.
- Implement a new governance model. A managed services model will require changes to almost every element of how you manage the ongoing relationship. Staff augmentation governance is largely centered on projects. Managed services governance focuses heavily on ongoing services performance and its link to the broader enterprise. A change in model will require you to outline how decision rights and accountabilities will work differently for items such as change in scope and delivery model. It will necessitate a re-design the structure and protocols for governance committees, working groups, and organizational roles. Information exchanges including how process performance is reported will be new. Lastly, core governance processes like contract change control will need to be updated to reflect the changing nature of the relationship.
Expanding the scope and transformational objectives of your outsourcing relationships can add significant value. However, to avoid significant erosion in this value pay attention to how the relationship model must shift starting with internal stakeholder alignment to the preferred model and its implications and extending into contract and governance model restructuring.
