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Vendor Management Best Practices For Successful IT & BPO Outsourcing

The 4th article in the Vendor Management series by Gary S. Venner and Marianne Bays.

By Gary S. Venner, SVP & Director of Outsourcing, TBI, and Marianne Bays, Ph.D., VP & Measurement Services Director, TBI

This installment covers:-- Goals of Outsourcing Program Management -- Outsourcing Program Management Implementation -- Goals of Outsourcing Program Management

Effective outsourcing program management leverages the benefits of existing vendor services agreements by assuring: continuous improvement activities; change of agreements to meet changing business needs; vendor and client adherence to contract terms; open communication between the business and the service provider; and quick response to and resolution of any service delivery problems.

The day-to-day activities of outsourcing program management include the management of approvals, requests, notices or other communications required in connection with services; the conduct of regular performance and cost reviews with service providers; and the management of day-to-day service delivery issues, including problem resolution/escalation processes and coordination of services to be delivered by multiple parties.

Organizations using best practices in vendor management establish outsourcing program management offices with the capabilities to:

-- Regularly gather, analyze and communicate information about costs and performance. -- Develop and recommend strategy for improvement of existing outsourced service operations. -- Support extension of service delivery, as well as changes in service delivery, through new contract development and contract renegotiation. -- Manage customer and vendor relationships, assuring effective communication about business requirements and service delivery issues. -- Establish/promulgate standard processes by which service delivery will be managed and performance and cost will be measured. -- Perform knowledge management and transfer activities; assuring that what has been learned in initial outsourcing actions is utilized to assure smoother implementation in future extensions; providing guidance to business unit management in managing transitions, implementing new standards and processes, conducting baseline performance assessments, measuring performance, etc.

Outsourcing Program Management Implementation

The first challenge in implementing an outsourcing program management structure is convincing company management to devote resources to these necessary functions on a continuing basis. All too often, in the search for cost savings that drives most outsourcing arrangements, senior management shows a tendency to scrimp on post-deal management resources and structure. The simple truth is that outsourcing deals don't run themselves. Without an effective governance and service management structure, deals can easily get out of sync with business needs, and problems can develop in the working relationships between the business customers and their service providers. The result is often that service value declines while costs increase.

The second challenge is in determining the program management size and structure that will work best for the organization. Estimates of resources needed to manage outsourced services range from 1%-7% of contract cost. In TBI's experience, staffing requirements for effective outsourcing program management do vary, depending upon the ease with which outsourced service agreement support functions can be integrated into existing positions and the specific organizational structure that is chosen for program management.

In some cases, for example, organizations' current job and unit structure for financial analysis, contract negotiation and management, service delivery management, performance analysis, and/or customer relationship management need only minor restructuring in order to support outsourced services. In other cases, more radical job and organizational structure change is needed. Another consideration is whether the program management office should be centralized or decentralized. In some cases, a centralized outsourcing program management office, structured to manage a variety of outsourced services for a variety of customers is very feasible, offering optimal economies of scales. In other cases, "customer intimacy" goals or highly diverse service offerings or geography justify a more decentralized program management structure, with local resources focused on operational activities and immediate business needs, while centralized resources drive strategic planning and tactics for enterprise-wide standards and improvement initiatives.

Despite the potential difficulty in gaining the cooperation and support to implement an outsourcing program management office, the effort is worthwhile. Lack of effective program management will put the organization at risk of not fully capitalizing on the investments and opportunities for savings from even the best-constructed outsourcing deal.

This paper was developed to provide general background to assist insurance industry clients in decisions related to implementing vendor management best practices.

This is the fourth installment to be published on the Insurance & Technology Web site. The first installment covered Critical Success Factors and Key Inhibiting Factors; the second installment covered Vendor Management, Communication and Relationship Management, and Issue Resolution; the third installment covered Service Levels, Performance Analysis and Improvement, and Customer Satisfaction Measurement.

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