Thursday, March 17, 2016

Managing Service Risks in the “As A Service” Economy

The rule of thumb for services contracting, proven over the past 20+ years, was that companies tended to spend 3-5% of their services contract value on “governance.” 
When a company awarded a $100M services contract for outsourced IT or Business Process operations, they typically spent $3-5M on the people and processes focused on service management and governance.

What did these expenses provide?

  • Financial Management – handling the authorizations and verifications of the financial obligations of the parties;
    • Invoice Management
    • Performance Credits, Earnbacks, & Critical Milestones
    • Financial Analysis & Planning
    • Contract Pricing Adjustments
    • Chargeback
  • Performance Management – reviewing service level and other reporting artifacts that track attainment of committed qualitative performance;
    • Performance Analysis & Service Delivery Management
    • Service Requests and Authorization
    • Change Management
  • Relationship Management – ensuring tight alignment among the buy-side and provider-side expectations
    • Forecasting and Demand Management
    • Project Spend Pool Manager
    • Service Catalog Management
    • Customer Satisfaction Measurement
  • Commercial Management – accountable for the formal terms among the parties
    • Contract Administration
    • Contract Change Management
    • Contract Issue Management
    • Dispute Resolution
    • Service Provider Audit
    • Governance Library

Invariably, this level of expense and organizational construction resulted in debate on the value returned for such investment, the buy-versus-build alternatives, and the tendency to meddle in the delivery of the contracted services.

I am being asked more frequently about the effect that “As A Service” contracting places on the Service Management & Governance competencies of companies.  In my experience, the level of investment is holding steady, but there is a shift among the functions embodied in the progressive “vendor management” function of companies looking to subscribe to market-defined offerings as a preferred alternative to directing the build of solutions that are specific to the buyer.

The most visible new competency being promoted in this context is Vendor Risk Management (VRM).  Many companies are deploying organizations and processes for continually monitoring the viability of their supply base through the lens of “what if” analyses.  If you think about the “As A Service” fabric of internal and external service participants, the modularity features of “plug replaceable” services is an essential feature that requires active monitoring.

Regulated industries, such as Financial Services and Healthcare, in particular, are experiencing dramatic increases in the requirement to monitor and manage 3rd-party risks.  These disciplines are analogous to the rigor that other industries, such as manufacturing, have applied commonly to their supply chain for tangible materials. 

Now, these inspections are being applied to information-based services with greater rigor.

The increased investment in VRM within the Service Management framework is being offset, to a degree, by adoption of more automation in the conduct of performance management, financial management, and commercial management.  The functions identified are still required, but the implementation alternatives are more varied under a subscription-oriented arrangement.

As we see companies shift their services strategies to take advantage of the growing portfolio of market-based “As A Service” offerings, I think we will see an accelerated maturity in the professional disciplines around vendor risks, including adoption of automation, analytics, and friction-less switching among service participants.


Peter Allen applies many years of operating experience as a top executive and strategic advisor for companies of all shapes and sizes, with focus on technology-enabled business services. He is now Chief Evangelist at Peter Allen & Partners and Senior Advisor for Alvarez & Marsal.







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