Ensuring Optimal Governance and Relationship Management Between Parties

Ensuring Optimal Governance and Relationship Management Between Parties 16 th October 2012 Noel Cullen Head of Sourcing, Financial Services

Who KPMG Financial Services sourcing are The FS sourcing team are part of the 400+ sourcing professional across KPMG globally Dedicated practice to the Financial Industry vertical Over 400 plus FS engagements, with OS transaction value 30 billion plus More than 90 clients based in 16 countries Specialist team of FS advisors with knowledge in Retail Banking, Investment Banking, Asset Mgmt., and Insurance In-depth knowledge of the FS industry including, market pressures, regulations, tax implications, risk management, peer analysis Advise on all aspects of the Financial Institution enterprise Comprehensive portfolio of services including; Information Technology (IT) Business Process (BP) Full Sourcing Lifecycle Capability Strategy Solution Finance & Accounting (F&A) Human Resources (HR) Procurement & Supply Chain Governance Optimisation Implement 1

KPMG have been externally validated as market leader for sourcing advisory The International Association of Outsourcing Professionals (IAOP) has ranked KPMG International number one in the 2012 ranking of the World s Best Outsourcing Advisors. 2

Contents 1 Introduction 2 What does effective governance look like? 3 How do you effectively manage multiple Providers? 4 Summary 3

Sourcing Lifecycle The greatest value leakage within the sourcing lifecycle is typically in Strategy and in Governance Value leakage in Strategy A practical solution, a sound contract, and strong implementation but fundamentally flawed strategy. Shared Services & Outsourcing Value leakage in Governance The right strategy, a practical solution, a good contract successfully implemented but then poorly managed. 4

Governance Value Leakage Significant loss of Outsourcing value from ineffective Service Provider Governance Loss of Outsourcing Value from Ineffective Service Provider Governance Efforts Duplicated 10% 20% Value Loss Operational Challenges Resources Wasted Problems Not Managed Performance Not at Expected Levels 20% 30% Value Loss Performance Challenges Vendors Deployed Against Conflicting or Wrong Goal Opportunities Untapped 5% 10% Value Loss Portfolio Management Challenges Total Potential Value Gained From the Outsourcing Relationship Net Value Gained From the Outsourcing Relationship 5

Governance Capability A UK perspective How would you qualify the overall skills/competencies of your organisation to manage your existing outsource providers? 10% 2008 9% 16% 2009 5% 39% 29% Weak 42% Average 50% 13% 2010 8% Good Excellent 13% 2012 8% 31% 26% 48% 53% Source: KPMG/EquaTerra UK IT SPPS 2012 6

Governance Capability - A European Perspective How would you qualify the overall skills/competencies of your organisation to manage your existing outsource providers? Belux 9% 2012 5% 6% 2012 6% Nordics 50% 36% Weak 49% 39% Average UK 13% 2012 8% Good Excellent 4% 2012 10% Netherlands 26% 33% 53% 53% Source: KPMG/EquaTerra SPPS, Jan 2012-July 2012 7

Governance Value Strong correlation between governance effectiveness and satisfaction with Service Provider(s) 80% Satisfaction level with Service Provider 70% 60% 59% 69% 72% 73% 50% Weak Average Good Excellent How an organisation rates their management of the relationship Close linkage between perceived strength of Governance organisation effectiveness and the general satisfaction with the service provider(s) Source: KPMG/EquaTerra UK IT SPPS 2012 8

Governance Operating model Don t forget the basics SSC-governance Role Topics Supervisory committee Monitoring the management. Testing and reporting duties. Governance committees Controlling committee Representatio n committee Coordination committee Regulation of collaboration across the group. Clarification of budget queries. Strategic orientation of SSC. Regulation of collaboration with the business (SLA, definition and customisation of services, KPI etc.). Platform for exchange with the business Interface between SSC and the business. Operative level. Governance process Coordinated roles and responsibilities for the individual committees. Clearly defined escalation process. 9

Governance Operating Model Governance is more than setting up a bunch of meetings... Committee Structure Governance Organisation» Strategic Direction and Decisions» Linkage to Business Strategy» Business Representation» Reporting Structure» Roles and Responsibilities» Aligned with Service Provider Decision Rights Governance Processes Governance Tools» Responsibility for Key Decisions» Documented RACI-type Diagram» Guide for Client and Service Provider» Performance Management» Change Management» Contract Management» Risk & Compliance Management» Financial Management» Stakeholder Relationship Mgmt.» Enables Key Processes» Supports Governance Team» Management Information (MI) 10

Contents 1 Introduction 2 What does effective governance look like? 3 How do you effectively manage multiple Providers? 4 Summary 11

Outsourcing Governance Purpose The purpose of governance is primarily to mitigate risk and to realise the value of the outsource Risk mitigation Value realisation Meet contractual obligations. Ensure delivery of expected savings. Ensure effective management. Rapid resolution of issues. Ensure management control. Provide consistent direction to SSC or outsourced service provider. Ensure market pricing. Manage demand. Create optimisation through standardisation. Leverage and focus provider capabilities. Institutionalise process improvement. Governance must effectively balance these objectives while bringing the intent of the deal to life 12

Outsourcing Governance Many of the best laid buyer plans have been compromised by weak governance capabilities Service level and contract management 3.48 Recognition of the role and importance of outsourcing governance 3.00 Outsourcing governance processes and procedures Translating business needs into outsourcing requirements for Managing the strategic aspects of the service provider Timely provisioning of information (e.g., forecasts, potential Outsourcing governance budget Dedicated and appropriately skilled outsourcing governance Outsourcing governance software tools 2.68 2.64 2.57 2.56 2.41 2.39 2.16 1=Very unskilled/unprepared, 5=Very skilled/prepared 1.00 2.00 3.00 4.00 5.00 Source: KPMG / Pulse Survey 2010 The respondents to the KPMG Pulse survey when asked to consider aspects of governance rated preparedness /skill poor. However it is encouraging that the recognition of the role and importance of outsourcing governance was at the higher end of the spectrum (albeit only touching the midpoint!). 13

Governance issues know the likely pitfalls What is causing issues for governance? Issue Key stakeholders in the company are not bought into outsourcing Impact Predisposition to resist the relationship and/or not support changes needed, especially for transformation; disputes over cost allocation. The provider and stakeholders are not in agreement regarding governance roles and responsibilities More frequent escalations; disputes over invoice accuracy, out of scope change orders. The provider is viewed as a vendor versus a trusted advisor and is considered an additional management constraint Resistance to new constraints breeds creative bypasses that cost some of the anticipated savings; standardisation is resisted. Internal stakeholders do not understand how to collaboratively manage a service provider in the new outsourcing relationship Governance team becomes overwhelmed in their new role and either down-scope their function (become checkers) or burn-out. 14

Governance Organisation Structuring for Success Enterprise level Governance is taking hold - but what form is right for you? Centralized Decentralized Service Performance Management Issue & Problem Management Change & Project Management Change & Relationship Commercial Compliance Management Communication Management Relationship Management Financial Management Contract Management» Timely and accurate performance tracking» Consolidated reporting» Escalated performance issues resolution» Planning and PMO for Transformation and Transition» Project initiation, approval, oversight» Change readiness assessment» Change management resolution» Stakeholder & expectation management» Demand mgt & forecasting» Timely and accurate payment of service provider invoices» Compliance with contract commitments» Contract change communication» Internal compliance groups liaison to Service Provider» Gap and root-cause analysis to correct performance» External benchmarking/analysis» Resolution of other issues» Quality assurance and consistency across approved projects» Value proposition messaging to BUs & partners» Relationship issues resolution» SP relationship management» New business requirements» Business case and value tracking» Other O/S financial reporting» Drafting and properly processing all contract changes and amendments» Compliance assurance with statutory, regulatory, security, and internal policy & standards 15

Governance Organisation Structuring for Success How does your governance structure align with your own culture? Independent governance Governance through business units Governance through group headquarters CEO/COO CEO/COO CEO/COO Supervisory organ Management of business units Headquarters GB n GB 2 GB 1 Headquarters Shared Services organisation Business unit Headquarters GB n GB 2 GB 1 Shared Services organisation Shared Services organisation Minimised silos and functional barriers Independent of BU and headquarters Stronger client focus High visibility Proximity to customers Streamlined group headquarters Lesser resistance of BU Simpler, if the BU presently provide most of the services In some organisations it can be the only acceptable structure Simpler, if group headquarters provides most of the services at present Services are available to the entire organisation Independent of BU In some organisations it can be the only acceptable structure Cumbersome supervisory function Considerable reorganisation of BU and headquarters Considerable cultural change Additional top management position Management of BU continues to be guided by core business Separation of services of BU and headquarters Top Management does not have any ownership of Shared Services Silos and potential barriers Considerable cultural change in the group headquarters is required (customer orientation) Low customer proximity Greater resistance of BUs 16

Effective Governance The eight key factors we look for at a macro level 1. A focus on mitigating risk and maximising value realisation 2. All necessary governance processes in place, are effective and adhered too 3. Governance team made up with individuals with the right skillsets and experience for getting the most out of your sourcing arrangements 4. Clearly defined roles, responsibilities, and decision rights 5. Tools/technology as appropriate in place to automate and support the performance of the governance processes 6. An effective committee structure with clear meeting objectives and definitions 7. A governance organisation structured for success right balance for the organisation between a central and de-centralised model 8. Sourcing agreements that are performing in line with both parties expectations, the contractual agreements, and are delivering real value to the organisation agreements that are aligned to the business requirements and are still fit for purpose 17

Contents 1 Introduction 2 What does effective governance look like? 3 How do you effectively manage multiple Providers? 4 Summary 18

Managing Multiple Service Providers» Develop a holistic enterprise wide Sourcing strategy / framework» Ensure any new tactical sourcing initiatives are consistent with the framework /or at worse doesn t inhibit the execution of the sourcing strategy» Categorise your service providers (think carefully about the criteria)» Build a sourcing governance organisation that aligns to your sourcing strategy» Consider the internal operation as a service provider as much as an external third party» Understand the dependencies / key interactions between service providers» Clearly define your approach to service integration 19

Why is Service Integration important? Service Integration can be the key to maximising the value of a multi-sourced operating model Increased Accountability to the End-User» Single point of responsibility / accountability to the end-user» Clear end-to-end ownership of the service» Single point of contact for your lines of business» Services more closely aligned to the needs of the business / end-user Enhanced Service Quality» Reduction in Incidents and Problems e.g. Problem management across landscape» Improved resolution times eg. clarity of responsibility, standardised process» Less ambiguity / grey areas, opportunities for things to fall down a crack» Provides definitive set of Management Information One Truth Reduced Cost» Contributes to the elimination of inefficiency e.g. activity duplication» Standardisation and industrialisation of processes (inc. automation)» More reliable service with less incidents, major incidents, and problems Reduced Risk» More effective Change Control» Less ambiguity / grey areas, opportunities for things to fall down a hole» Improved flexibility through the ability to add or reduce managed Providers» Standardised and industrialised processes based on best practice 20

Contents 1 Introduction 2 What does effective governance look like? 3 How do you effectively manage multiple Providers? 4 Summary 21

Summary Outsourcing Governance is important Effective governance will reduce risk and maximise value realisation Think about your approach to Service Integration if you operate a multi-sourced environment 22

Some final thoughts... Win:Win Relationships are important A good contract is only as good as it is executed and managed Negotiation doesn t stop when the contract is signed Focus on what not the how Just because the KPIs are green doesn t mean it is a success Consider what levers you have available Embed the objectives and spirit of the deal Consider the services in the context of the wider business Think what makes a good client Remember Service Providers are in business to make a profit What you haven t prepared for will happen! Think what makes a good Service Provider 23

For further information please contact: Noel Cullen Sourcing, Financial Services +44 (0)7879 604655 Noel.cullen@kpmg.co.uk 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).