Best Practices in Vendor Management

A White Paper produced by Firstsource Solutions

Executive overview

Setting the right expectations

Enterprises in many industry sectors have

successfully outsourced business processes,
delivering not only cost reductions, and efficiency
improvements, but also
enhancing customer
service, and enabling improved focus on their key
competences.

There is a number of different drivers for business

process outsourcing. Enterprises may wish to cut
costs through labour arbitrage, or by moving from
fixed to variable costs. Equally, they may be
looking to improve service and improve efficiency,
or to remove non-core activities from their
business. More often than not, the motivation for
outsourcing will encompass all of these drivers,
as different parts of the enterprise will typically
have different goals.

As the practice of outsourcing matures, many

enterprises have identified a growing challenge in
managing multiple outsourcing contracts with
different vendors. To ensure that each contract
delivers long-term business value without putting
undue pressure on management resources,
organisations are looking to consolidate and
rationalise their supplier lists. The aim is to identify
partners who can deliver lasting value to the
business relationship. This is possible only with
outsourcing partners that can truly understand their
clients business objectives, rather than simply
focusing on SLA adherence.

This paper proposes that, used in isolation, SLAs are

a blunt tool for measuring the overall success of an
outsourcing
relationship. They
should
be
complemented by careful pre-migration planning,
rigorous governance structures on both sides,
ongoing performance reviews and continual
refinement of the top-level goals of the outsourcing
contract.
As you consider which - if any - of your existing
outsourcing partners can grow into strategic
partners, important factors to bear in mind are their
commitment
to
building
and
maintaining
relationships, and their ability to understand your
changing business requirements and deliver the
appropriate services.

By choosing an outsourcing partner who can

understand the business goals behind the SLAs,
and puts in place effective governance structures to
meet them, you can outperform against your
expectations while reducing the management
overhead.

At every stage in creating and running an

outsourcing relationship, enterprises need to
achieve a balance between the interests of the
various internal stakeholders. Realistically, some
compromises will always need to be made,
especially between the requirements of
procurement and the business users.

Where there is any degree of mismatch between

the outsourcing contract and the actual goals of
the business owners, two problems emerge. First,
it is unlikely that the outsourcing contract will be
able to satisfy the requirements of all stakeholders
on the client side. Second, it will be a challenge for
the client to find the time and resources to
manage
stakeholder
expectations
and
communicate them to the outsourcing vendor. For
enterprises that have multiple outsourcing
contracts with a number of vendors, the impact on
management time and resources will be
considerable.

Outsourcing has moved into the next phase of

maturity, as enterprises look to do more than just
transfer existing processes and asking vendors to
achieve the same SLAs at a lower cost. There is a
growing awareness of the potential to tap into
external expertise and produce a real
transformation in outcomes for outsourced
processes. After all, organisations outsource
processes either because they dont have the
internal competences that an external specialist
has, or because they dont want to maintain these
competences internally.

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In this next generation of outsourcing, enterprises

are looking to manage their outsourcing relationships at a higher level of the business outcomes,
leaving their specialised vendors to handle the
lower level execution. This will require a shift on
both sides of the outsourcing relationship: the
vendor must be willing and able to gain a more
holistic view of their clients business, and the client
must be ready to communicate and explain their
broader business goals.
In an outsourcing relationship that looks beyond
SLAs to consider the broader business outcomes,
the outsource service provider must have its own
clearly defined internal governance models if it is to
successfully adapt to a less prescribed way of working. This is not to say that SLAs are to be abandoned
- they are a vital tool in ensuring day-to-day control
and performance - but that they are just one element
in a broader set of controls and measures.
To extract the greatest possible value from any
outsourcing relationship, enterprises must first
identify a vendor that is prepared to commit time
and effort to the creation of a long-term relationship.
It is then crucial for both sides to take a structured
approach setting up the contract, including detailed
assessments of the potential benefits and risks in
outsourcing any given set of business processes,
and strategies for avoiding disruption during migration.
This paper will now consider the principal stages in
creating and running a successful business process
outsourcing partnership, demonstrating how a clear
focus on contract definitions, relationship management, service delivery and governance will pay rich
dividends in the long term.
Defining the contract
The first steps in the relationship are often the most
important: the selected outsourcing vendor should
conduct pre-contract, pre-operations research,
following a standardised methodology. Instead of
merely aiming to define SLAs, this stage enables the
vendor to gain a real appreciation of the business as
a whole, rather than just the portion earmarked for
outsourcing. By understanding the levers for

success, the vendor can ensure that its own

approach to the outsource contract will support
the long-term business goals.
Both sides should take a rigorous approach to
defining the ways in which success will be measured, to set the stage for the later definition of
precise SLAs. There should also be an in-depth
discussion on the creation of a shared governance
structure, including detail on the escalation
processes and on the change control mechanisms, to ensure the appropriate level of discipline around the outsourced processes.
When it comes to a decision about governance,
there are no right or wrong approaches. Its all
dependent on such elements as
1.
2.
3.
4.
5.

The type of company

The markets in which it operates
Company structure/organisation
The processes to be outsourced
Who the end-users are, and their needs

Throughout the definition stage, the vendor

should be capturing each element in a standardised way, with all the dependencies clearly
listed (across personnel, systems, change management, and so on). From the governance point
of view, the vendor should seek a sign-off from
the client at every major stage to ensure that the
scope has been defined to the satisfaction of both
parties. Simultaneously, the vendor should be
able to report back with a detailed business
requirements document showing every element
of the project, to avoid the chance of any subsequent mismatch between expectations and
outcomes.
The vendor should be willing and able to work
with the client to define a robust and comprehensive governance structure, with the appropriate
communications, reviews and reporting around it.
This governance structure should span everything
from the migration phase through to business-asusual, and plans should be made for regular
reviews and refinement of the governance
processes.

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Typical governance structure

Customer Relationship Management and Governance

Executive Sponsors

CEO / COO

Outsourcer
Client

Client Exec Sponsor

Quarterly / Half-yearly detailed review of program

performance and identifying new key initiatives

Steering Committee
EVP Operations

Global Head Business Development

Relationship Council
Client director &
relationship manager

Client Operations &

Business Leader

Monthly / Quarterly reviews to assess overall program status,

review risks and issue logs, approve changes and plan next steps

Client's Business &

Procurement Team Leads

Account management and Identification of other

potential opportunities, monthly reviews

Program Team
Delivery and account
management team

Client Business
& Operations Team

Daily dashboards and reports

Weekly / bi-weekly conference calls
Actively manage operational delivery and relationship

Transition phase

Operational delivery

Any outsourcing vendor that is capable of acting as

a strategic partner will have a well established
approach to the transition phase, including workshops led by a dedicated transition team and
supported by vendor management from operations
and technology. At this stage, the SLAs will be
defined in absolute detail, with baselining exercises
to determine the status quo.

SLAs are naturally the first measure of success or

failure, but they should be treated as a baseline
rather than as the sole and final word on performance. Once the outsourcing vendor has
achieved the baseline SLAs, they should then
continually improve performance over time - and
they should proactively propose new or changed
SLAs as appropriate to help their client achieve
the broader business outcomes. A structured,
repeatable approach is critical: the vendor should
make use of methodologies and tools such as Six
Sigma and Lean to create a rigorous way of measuring and improving process management.
These methodologies should also feed into training and education for vendor teams, whilst
making sure the right controls are in place to
ensure client intellectual property or processes
that provide them with a competitive advantage
are not compromised.

The transition process should include full process

mapping, linked to a rigorous review of the available documentation. Where process documentation
is missing, incomplete or otherwise of unsuitable
quality, the chosen vendor should have a specialist
in-house team capable of filling in any gaps and
creating appropriate documentation.
Each step in the transition process should incorporate a set of reviews and measurements, with a
defined output. As each phase of the transition is
passed, stakeholders on both sides should sign off
this checklist of requirements. Time and effort spent
in this phase and in the earlier definitions phase will
help ensure better outcomes and will create a structured framework for continual process improvements.

Firstsource 2009

Communication will often be the deciding factor in achieving performance and process improvements: when
the channels of communication between the vendor and the client are fully open, and when the right people
are in place on each side, it will be possible to constantly challenge the results that are being achieved and
push to match higher results achieved in other sectors. Domain expertise has an important role to play here:
an outsourcing vendor with experience in the clients business sector will be able to add value by suggesting
areas for improvement. The vendor should also have internal procedures for taking practical lessons learned
for one client and applying them across others.
Key factors in Vendor/Client relationship
Scope of services
Contract structure
/ terms

Governance
structure and
staffing levels
Roles and
responsibility
Policies and
procedures

Services levels
Contract flexibility

Contract
Governance

Service delivery

Relationship

Common goals
and vision
Alignment of
expectations
Communication
Partnership
Cultural fit

Experience

Savings versus the

business case
Pricing versus the market
Performance
Innovation and Optimization

Access to full resources of

SUPPLIER
Experience of:
- BUYER customer
- BUYER employees

Diagram based on material provided by Everest Group

SLAs by their nature will be focused on specific objectives, whereas overall performance measurement
across multiple factors is also essential. Finding the right mix of governance, contract, relationship, experience and operational delivery will contribute to total value creation, and somehow this must be measured,
too. For the client, the measures are simple: stock price, profits, turnover or P/E for example. For the outsourcing vendor, traditionally measured only on SLAs, the link between operational performance and value
creation may be missing. Beyond operational SLAs and soft factors such as culture and vision, for example
it is critical to find an outsourcing vendor prepared to share value creation goals, which may mean participating in both risk and reward.
Its all about the people
To build and retain a highly skilled workforce, it is vital for the outsourcing vendor to have a strong support
infrastructure across recruitment, HR, training, and performance management. The vendor should also be
looking to build up domain knowledge and competence across specific business functions, with the goal of
achieving the desired business outcomes as well as meeting SLAs.

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A global outsourcing vendor has a critical advantage: Domain knowledge acquired across multiple clients,
operating across many countries in each sector. Domain knowledge which can be used, for example, to bring
best practice from an innovative company in Australia to the UK or from the UK to the US and so on. If the
outsourcing vendor has expertise across multiple industries, there can be a high degree of cross-industry
synergy as well. This tends to provide an attractive nurturing environment for key managers, helping to
retain staff as they develop their skills and gain in-depth knowledge of not only the clients business, but that
industry across multiple geographies.
Likewise, training should reflect the requirement to understand the fundamentals of each business type
rather than simply the fragmented set of outsourced processes that the vendor actually handles on a day-today basis. To ensure knowledge absorption, your vendor should be able to provide evidence of continual
review and testing to check that training is being retained. This is another aspect of governance: how the
vendor measures the effect of training, and feeds the results back into the design and delivery of future training initiatives.
Managing the vendor relationship will become more important as clients look to simplify and improve their
outsourcing arrangements. Without effective communication between the two parties, it is unlikely that the
outcomes will be good - even if the vendor is capable of hitting the SLAs. In addition to ensuring that managers with the appropriate skills are in place on both sides, organisations need to be confident that their chosen
vendor is employing people with the right skill sets to handle the outsourced business processes. When
choosing a vendor, it is important to look for clear evidence of their ability to understand functional roles,
design accurate job specifications, then recruit the right people.

Well Managed Outsourced Relationships Yield Four Key Benefits

Alignment
Ensuring your business priorities are
reflected in service performance across
all suppliers

Communication
Rapid and effective
dissemination of feedback
and information to effect
positive change and
business alignment

Optimized
Results

Consistency
Single point of contact for
all facets of support
across programs,
vendors, technologies,
and geographies

Results
Monitoring, reporting, and optimizing
enterprise performance data to improve the
cost and quality of customer experience
Diagram provided by Everest Group

Firstsource 2009

Conclusion
This paper has defined the key characteristics of an
outsourcing vendor capable of delivering long-term
benefits. Across preparation, definitions, transition,
operational delivery, training and performance
management, there is one common factor: The
outsourcing vendor will have a documented, structured, methodical approach to every aspect of managing client relationships.
With its well-established approach to governance
and its ability to see the bigger picture, Firstsource
creates long-term outsourcing partnerships that go
beyond SLA adherence to deliver ongoing process
improvement and innovation.
As an expert in business process outsourcing with
deep domain knowledge, Firstsource can act as an

enabler of business transformation. Working from

an understanding of each clients larger business
goals, Firstsource can determine the appropriate
process re-engineering and deliver ongoing
improvements to the outsourced processes.
Firstsource combines global delivery capabilities
with process excellence and a culture of innovation. With structured pre-sales research tools, a
documented transition methodology, and Six
Sigma, Lean and COPC frameworks for continuous improvements in operations, Firstsource has
the rigour and discipline to build successful longterm outsourcing relationships. By outsourcing
business processes to Firstsource, enterprises can
reduce their supplier management overhead
while achieving the desired business outcomes.
Equally, Firstsource has the scale to take on business processes that are currently outsourced to a
number of different vendors.

This paper is based on discussions from Firstsources regular Client Forums which debate topics that concern our
clients. The Client Forum on Vendor Management was facilitated by Peter Bendor-Samuel, CEO of Everest Group and
the content of this paper contains input from Everest Group, our clients viewpoints, as well as best practice from
Firstsource, as one of the leading global Business Process Outsourcing companies.

Firstsource (NSE: FSL, BSE: 532809, Reuters: FISO.BO, Bloomberg: FSOL@IN) is among Indias leading BPO
(business process outsourcing) service providers. Firstsource provides customized business process management to global leaders in the Banking & Financial Services, Telecom & Media and Healthcare sectors. Its
clients include Fortune 500 and FTSE 100 companies. Firstsource has a global delivery model with operations in India, U.S., UK, Argentina and Philippines.
For more information, please visit www.firstsource.com
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Tel.: +1 (716) 564 4400
Fax: +1 (716) 564 4440

Firstsource 2009