Offshore Outsourcing Vendor Governance Organizations

So, I’ve definitely been stirring the pot over the last few weeks.  I’ve exposed the errors in the much celebrated Black Book of Outsourcing, shown that the business of outsourcing certification is big business, and explained why vendor management organizations are a bad idea.  This much skepticism could be a bit karmically unhealthy, so let’s turn the attention onto something you actually really need: a vendor governance organization.

Simply put, you need a vendor governance organization to centralize the biggest decisions confronting companies that chose to outsource.  The type of decisions that you shouldn’t decentralize.  For example, aligning outsourcing with corporate strategy, identifying outsourcing opportunities, sourcing vendors and negotiating ensuring outsourcing projects deliver their intended value, mitigating outsourcing risks, and driving innovation.  All the local, day-to-day decisions should be made by resources tasked with vendor management in operations and IT departments (not VMOs, for these reasons).  Here is a table that compares the responsibilities of a VGO and vendor management resources based on Bain’s RAPID decision making model, published in the Harvard Business Review:

Vendor Governance Roles and Responsibilities

Task	Vendor Governance Organization	Operations	Procurement	Legal	Human Resources	Communications
Establish Outsourcing Strategy	R,D	A,I,P	I	I	I	I
Define Requirements	A, I	R, P, D	I	I	I	I
Distributing the RFP	A, I	I	R, P, D	I, A	I	I
Vendor Selection and Negotiation	R, P, D	I, A	A, I	A, I	I	I
Developing Business Case	R, P	I, A, D	I	I	I	I
Implementation and Transition	A, I	R, P, D		I	A, I	A, I
Forecasting	A	R, P, I, D
Day-to-Day Operations Management	A	R, P, I, D
Vendor Training	A	R, P, I, D
Business Continuity Preparation	A	R, P, I, D
Reviewing Vendor Performance (Daily, Weekly)	A	R, P, I, D
Reviewing Vendor Performance (Monthly, Quarterly, Annually)	R, P, I, D	A, I	I
Paying Vendors	A, P, D	R, I
Developing Vendor Management Staff	R, P, I, D	A			I
Tracking Vendor Performance	R, P, I, D	A, I
Managing Innovation	A	R, P, I, D

As you can see, a vendor governance organization should be fairly small, as the activities it manages are relatively small.  In larger organizations, where there are numerous vendors and regular RFPs, the VGO could be moderate in size.  Still, the operations teams should take the primary responsibility for a wide variety of activities.

Thoughts on the Vendor Governance Organization

• Leadership – Despite the small size, the vendor governance organization should be run by a very experienced, very senior leader.  At minimum, this is a senior director role, but should more properly be a vice president role.  The seniority is necessary due to the interface with senior leaders, interface with operations leaders who are often directors and vice presidents themselves, external perception of the vendors, and external communications/networking organizations.
• Structure – The team should be also fairly flat, filled with senior level individual contributors, except where multiple sourcing functions exist (ITO, BPO, F&A, HRO), where leads may represent governance of each of these functions.
• Organization Size – Generally speaking, a single senior individual contributor can manage 1 large vendor’s single outsourcing function or 2 moderately-sized vendors (if the vendors have been established for a reasonable period of time).  If there are multiple outsourcing functions with a single large vendor, one FTE should be assigned for each function.  If there are numerous small vendors, consider limiting span of governance to 1 FTE  to 3-4 vendors, assuming there is little effort required to govern the vendors and the vendors are of inconsequential importance to the company and have longer tenure.  Newer vendors require more attention.
• Organization Reporting Structure – A vendor governance organization should report to a direct report of the CEO.  In other words, it should report to a COO, CFO, or other CxO, except in very large organizations which have regional or product line structures without matrix support (e.g., North American Operations is self contained with its own finance, HR, and legal function and directly reports to the CEO).
• When Other Organizations Lack Skills – In situations where the internal organizations lack certain skills, it makes sense for a governance organization to temporarily provide the necessary talent.  This can be done using outside resources (advisory firms, outside law firms, consulting companies) or by hiring talent with the right skills.  If using outside resources, be sure to obtain buy-in from partner organizations you are supplementing.  For example, if your procurement team lacks the skills to run an outsourcing RFP, check with them first – it may be that the talent is there, but you’re not aware of it.  If you’re hiring talent, be sure there is a long term career objective that the resource and the company agree upon.  For example, hiring a skilled resource that wants to run RFPs, but there are no RFPs in the future, it doesn’t make sense to bring that resource onboard.

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Related posts:

1. Another Tale from “When You Don’t Have Vendor Management Governance”
2. In the Absence of Outsoucing Governance or Vendor Management
3. Vendor Management Organizations Are a Bad Design
4. Good Vendor Managers: A Scarce Commodity
5. Outsourcing Governance and “Who Owns Supplier Performance Management?”