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Outsourcing Delivers Value Companies Demand

Compliance: Finance's Bridge to the Enterprise

Is Your Resource Commitment to Outsourcing Governance Sufficient?

Have you ever wondered why outsourcing relationships that appear to have so much in common deliver such variable value to the buyers? Some become high value strategic partnerships while others are viewed as merely a fee for service relationship.

The reason for this discrepancy is that a successful outsourcing relationship has many more components besides price and service levels. Buyers who also are concerned about strategic alignment and governance -- the ability to manage the relationship and redirect it, if needed -- end up having significant influence over their service providers' conduct. Buyers who move a step back to take in a broader view of the relationship are better able to determine its health and then prescribe the proper prescription for any ills that occur.

Everest Group has developed a new tool that tests how effectively buyers and service providers apply the value creation practices that we find in all successful outsourcing deals. This tool, called the "Health Check^SM," measures a deal's "health" across a number of success-driver attributes to identify the opportunities to maximize value creation. In addition, the Health Check^SM provides a comparative analysis of peer group deals to measure how the health of a particular deal ranks within the group. The new tool identifies specific elements of the deal that both sides need to revisit to align their interests in a more strategic way. These improvements can provide enhanced opportunities for value creation to the mutual benefit of both buyer and service provider.

Focusing on High Impact Areas for the Buyer

An added bonus of the Health Check^SM tool is its capacity to focus the service provider's energy on high-impact areas for the buyer. By using probing trade-off questions and sophisticated analysis of the responses, the results assist service providers in identifying those service areas that are most important to the buyer. By targeting areas of under-and over-achievement for the buyer, the service provider can take steps to improve the alignment of effort and return.

On the positive side, the Health Check^SM underscores the relationship strengths that both parties can continue to build on. It highlights the relationship's strategic alignments, which can bring more value to the relationship than lower prices.

The Everest Health Check^SM is fundamentally different from benchmarking as it does not introduce tension into the relationship. In our view, benchmarking creates conflict because it comes with an agenda and usually has only one dimension: it's all about price. The Health Check, on the other hand, measures the success of the deal and provides constructive guidance on ways to create greater value on all aspects of the outsourcing relationship, including price. Most importantly, it recognizes that the buyer and service provider have joint ownership of the responsibility for making the relationship work better than beforehand.

Good for Rebalancing Long-Term Relationships

The Health Check^SM is a particularly useful aid for rebalancing relationships after they have been exposed over time to stresses caused by changes to the buyer's business environment and to the parties' respective interests. This is comparable to realigning the wheels of a car after it has traveled a fair distance. At the outset of the outsourcing transaction, the buyer and service provider have a strong strategic alignment. However, over time a drift in goals occurs. Buyers continue to want lower cost, speed to market, and strategic business value. Service providers want to grow their business and improve their margins. At the same time, the external world is changing too, especially in the area of technology improvements. The Health Check^SM assesses the extent to which the relationship is out of balance at a particular point in time and provides guidelines for realigning interests.

Deals that have been around for more than two years are ideally suited to the Health Check, although younger deals could also benefit from the tool's ability to highlight any weaknesses that are already hard-coded in the relationship. Given the high costs of an outsourcing divorce, it's cost-effective marriage counseling!

Measuring Value Creation Drivers

The goal of the Health Check^SM is to measure all aspects of the value created and the extent to which value creation drivers are being applied. It also identifies the actions required to rebalance the relationship, where applicable.

Some of the important focus areas of the Health Check^SM include:

• Continuing validity of the deal. How effectively does the relationship maintain the strategic alignment of the parties?
• Effective communication. Is the governance effective?
• Alignment of interests. Are the service provider's financial goals aligned with the buyer's objectives?
• Impact on enabled business processes. Has the service provider leveraged its expertise to improve the buyer's processes?
• Service quality. How much has the outsourced process improved and how satisfied is the buyer?
• Collaboration. How does the deal adapt to changed circumstances? How do the parties resolve differences?
• Competitiveness. Does the buyer consider the fees to be competitive? Is the buyer shopping for other service providers?

This article begins a four-part series that describes in detail how the Health Check^SM tool helps buyers and service providers create value in outsourcing relationships. Next month we will discuss how the Health Check^SM determines the strategic health of an outsourcing relationship. In November, we will discuss one of the most challenging areas of outsourcing: governance. We will conclude the Health Check^SM series in December, discussing how the tool assesses the price and service levels issues.

Lessons from the Outsourcing Journal:

• The Everest Health Check^SM is a new tool designed to assess the way buyers and service providers use value drivers to create a successful outsourcing relationship.
• Buyers and service providers must take a larger view, including strategy and governance, to create a long-lasting outsourcing relationship.
• Unlike benchmarking, the Health Check^SM does not introduce tension into the outsourcing relationship and is a constructive aid to increasing deal value.
• The Health Check^SM points out the strengths of the relationship and offers suggestions to build on that strength. In areas that need work, the Health Check^SM provides a road map of actions to improve the relationship.

Publish Date: September 2003

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Copyright © 2003 - Everest Partners, L.P.

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