ValueLed Governance Framework 1.0

Value-led

A framework for effective sourcing governance

Managing and directing successful
service provider relationships with Value-led

GUIDE TO GOVERNANCE OF SOURCED SERVICES AND SUPPLIER RELATIONSHIPS
BEYOND THEORY: A PRACTIONER’S PERSPECTIVE

Leadmark does not accept any liability to any party for any loss, damage or costs howsoever arising, whether
directly or indirectly, whether in contract, tort or otherwise from any action or decision taken (or not taken)
as a result of any person relying on or otherwise using this document or arising from any omission from it.

© 2017 Leadmark b.v. | www.leadmark.nl | [email protected] Page 2
Value-led sourcing governance framework

Together you make the difference

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Table of Contents

Preface..................................................................................................................................................... 1

Leadmark and the Value-led Governance Framework............................................................................. 2

Value-led Governance Principles ............................................................................................................. 6

Use of the framework .............................................................................................................................. 7

1. Value Realization............................................................................................................................. 9

Principle 1.1 Managing for value ................................................................................................ 10
Principle 1.2 Risk-based thinking ................................................................................................ 11
Principle 1.3 Independent audit and oversight........................................................................... 12

2. Contract Management................................................................................................................... 15

Principle 2.1 Quality Management by the Service Provider ....................................................... 16
Principle 2.2 Eyes on – Hands off control by the client .............................................................. 17

Principle 2.3 Continuous business alignment ............................................................................. 18
Principle 2.4 Risk control ............................................................................................................ 23
Principle 2.5 Performance control.............................................................................................. 29

Principle 2.6 Financial control..................................................................................................... 34
Principle 2.7 Change control....................................................................................................... 35
3. Supplier Relationship Management............................................................................................... 39

Principle 3.1 Collaboration ......................................................................................................... 40
Principle 3.2 Trust....................................................................................................................... 41
Principle 3.3 Partnership ............................................................................................................ 43

Principle 3.4 Dispute Resolution................................................................................................. 44
4. Oversight and Control................................................................................................................... 46

Principle 4.1 Joint governance boards and meeting structure ................................................... 48

Principle 4.2 Roles and responsibilities....................................................................................... 63
Principle 4.3 Information management and record keeping...................................................... 65
Appendix A - 18 Health check points ..................................................................................................... 68

Appendix B - Glossery of Terms ............................................................................................................. 70

Literature list.......................................................................................................................................... 80

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Preface

1. The Value-led framework addresses the post-contracting governance of service provider relationships.
It is a system of well-knit strategies that focuses on maximizing the value from sourced services
engagements. The framework is based on many years of experience in managing sourced services
engagements and inspired by research and market best practices.

2. The Value-led framework is aimed at organisations that have entered into a long term contractual
engagement for the delivery of services. One of these organisations is the recipient of the service
– the client – and the other(s) are the providers of the services. The parties to the engagement are
expected to strive for value creation and a long term business relationship.

3. The Value-led framework focuses on supplier relationships that involve the delivery of services.
A service is defined as a valuable action or intangible product such as accounting, banking, cleaning,
staff augmentation or consultancy.

4. The purpose of this framework is to provide guidance on high quality sourcing governance with inbuilt
flexibility for companies to adapt and take into account their particular circumstances. While companies
do not need to follow this guidance in its entirety, it is intended to assist them when implementing the
relevant provision to effectively govern their sourcing initiatives.

5. Best practice requires that every company should consider in detail which governance arrangemen is
best suited for its particular circumstances. Governance functions need to be proportionate to the task,
and will vary according to the size, value, complexity and risk profile of the sourcing engagement.

6. Use of the framework will contribute to the transparency, effectiveness and efficiency of governing
sourced services and third-party engagements. The framework can be used by clients and service
providers as a guidance to define, implement or review their sourcing governance function.

7. Sourced services engagement are highly dynamic and subject to change. Organisations therefor, both
clients and service providers, must continue to think comprehensively about the effectiveness of the
engagement and how they can optimize their govenance capabilities to improve the realization of their
intents and objectives.

Absolutely key in these endeavours are the members of the leadership team, the support they give
eachother, and the frankness and openness of mind with which issues are discussed and tackled.

8. One of the key roles for the senior management of the parties to the engagement includes establishing
the culture, values and ethics of the relationship. It is important that the leadership sets the correct
‘tone from the top’. Senior managers should lead by example and ensure that good standards of
behaviour permeate throughout all levels of the respective organisations. This will encourage
collaboration and trust, and drive long-term success of the relationship.

9. To successfully govern a sourced services engagement should not be underrated. Constraints on time
and information, combine the need to maintain mutual respect and openness in a dynamic commercial
setting with potentially conflicting interests. To achieve good governance requires clear compass and
continuing and high quality effort.

10. The ValueLed governance framework contains principles and best practices to navigate sourced
services engagements. The priciples are aimed at accountability for value creation, control of risks,
contract management, relationship management and effective oversight and control. The principles
and considerations are not to be interpreted as a rigid set of rules, but rather as a set of guidelines on
effective governance. The principles are set out in detail in best practice provisions.

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Leadmark and the Value-led Governance Framework

Many companies have put significant investments in shaping and implementation a sourcing strategy but these
strategies have not always yielded the anticipated value. Nowadays a lot of companies enter into multi-sourcing
strategies to reduce risk and to optimize value. We however have not seen a clear correlation between the
diversification of a sourcing portfolio and business success. We believe that value realization is not a function of
the degree of diversification in the sourcing portfolio but of how the portfolio is managed.

A good contract is necessary but not sufficient for a successful sourced service relationship. It is just impossible
to forsee all possible events, risks, opportunities and change while drafting out a contract. Therefore, a formal
contract, regardless of its length or level of detail, should be supported by an effective management system to
keep the engagement on track, manage risks and realize its value. These management efforts, captured in a
comprehense governance framework, are fundamental to the success of the sourcing contract and realization of
its objectives for both the client and service provider.

During our many years in managing sourcing engagements, often for large international companies, we never
came across a usefull comprehensive framework for the governance of these relationships. Despite the wide
range of outsourcing, other then perhaps on a local level within organisations, there has been no development
of principles and best practices specifically focused at the operational (post-signature) stage of sourcing.

As a boutique firm, specialized in the run stage of sourcing, Leadmark aims to help organisations get more value
from their sourcing initiatives. We believe that effective governance is a critical successfactor to that aim.
Sourcing governance has to be clearly focused on delivering business value and drive productive collaboration.

The intent and objectives of a sourcing engagement are captured in the contract, but the expected value is only
realized when risks are controlled and the benefits of these objectives exceed the costs associated with it.

Value-led builds on this logic by focusing on:
a) how obligations underpin the intents and objectives of a contract;
b) how risks to these obligations are controlled; and
c) how costs are aligned to obligations.

When properly and collaboratively executed, it is a proactive and efficient approach that aligns the way the
engagement is controlled and how everyday management decisions are made, to business objectives.

The Value-led framework outlines the principles and best practices on risk and value management we apply in
our work. It covers the aspects that we consider critical in governing sourced services and third-party
relationships. These aspects should be carefully considered for any engagement big or small. Think for example
about the focus control of risks, the integration of hard contractual matters and soft relationship aspects, the
management structure and critical roles, and not to forget performance and cost management.

The framework reflects our current thinking of sourcing governance principles and best practices based on many
years of experience, written down in plain language. The model can be underpinned by our innovative cloud
based governance platform TRAC which further optimizes the use of the framework and drives new – more
productive – ways of collaboration between clients and service providers.

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The Value-led framework interconnects value and risk management and is designed to align with starting points
from market standard models like the ISO 37500:2014 lifecycle model and the ISO 9000:2015 quality
management standards. Other referenced models and research can be found in the literature list at the end of
this document. The framework builds on the logical functional structure of a contract to optimize value and
control risks and on collaborative decision making at all levels. It recognizes that top-down command-and-
control structures do not work well, especially in large complex multi-sourcing environments. Value-led calls on
managers to apply a prudent and proactive approach, facilitate collaboration, information sharing and trust, and
focus on business value and risk for making better decisions.

The Value-led framework is based on the following value realizing levers:
a) prudent collaborative governance;
b) service obligation are well focused on business intents and objectives;
c) risks to services are well controlled;
d) payments are clearly aligned to services received;
e) shared data and transparent reporting.

These levers are common sense and not radical at all, but when implemented well, will bring tremendes benefit.

The Value-led governance framework is developed by Leadmark to provide a comprehensive way of governing
service provider relationships. It provides guidance to effectively steer and control the engagement in an
efficient and collaborative way, based on partnership and trust. The approach includes value creation, contract
management, relationship management and, oversight and control. Because it is a principle based approach, it’s
applicable to a wide range of companies and sourcing engagements.

Basic attributes of Value-led are:
a) it’s focused on value creation and risk-based thinking;
b) it’s independent of the types of services being sourced (e.g. IT, BPO, Facility Management);
c) it’s applicable for both single sourcing and multi sourcing engagements;
d) it’s independent of organisation structures;
e) it’s aligned to the client’s and service provider’s internal management and control systems;
f) it’s facilitates collaboration, trust and partnership; and
g) it’s flexible to adapt to particular circumstances.

We do not regard this document to hold the last word on the subject. There is always room for improvement,
both in terms of making sure that the framework represents best market practices and improving the quality of
governing specific engagements. As we expect the framework to continually evolve, your feedback is most
welcome.

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Why does governance matter to my organisation?

Sourcing provides client organisations access to a broad range of specialised skills, the ability to control and
manage operating costs, and the realisations of improved efficiency, speed and agility to deliver services.
Getting through contracting and into the operational stage of transition and service delivery is the first major
milestone. However, the journey to maintaining value does not end there. Contract durations typically are
anywhere from three to seven years. During this time, organisation realignments can occur, leadership can
change, new services can be offered, company strategy can change - the dynamics of a firm do not change
simply due to somewhat static sourcing contracts.

Even though sourcing governance and supplier management are recognized as critical factors, they do not
always get the priority required. Studies by advisory firms like Alsbridge, Ernst & Young, KPMG and the
International Association of Outsourcing Professionals (IAOP) indicate that the ability to sustain high value
realisation over the full operational stage of the agreement is a major challenge. They report value losses
between 17 and 40 percent of the potential value of the engagement caused by operational, performance
and portfolio challenges. Some even say value loss can grow to a staggering 70 percent. At Leadmark we
conservatively estimate the gap between strong and weak governance at 30% of the annual contract value.

Working in a sourced services environment is not trivial and simple things sometimes seem to take longer
and cost more than what you would typically expect. So, what’s missing? Is it leadership, innovation,
knowledge or collaboration? After working for many years in sourcing we come to learn that most sourcing
performance issues are actually governance issues in disguise.

The simple fact is this. Work gets done through and with people from the client and the service provider.
It is build on numerous personal interactions using processes and information, that are held together by the
sourcing contract and a balanced set of governance principles. Therefor in sourcing there is nothing more
impactful on people, their work and their performance than smart, collaborative, balanced and harmonious
day-to-day management of the engagement. The symptoms of poor governance can be seen everywhere.
They show up as exhausting communication, poor execution, disputes and escalations, lack of collaboration
and trust, disengagement and attrition, erosion of the business case and failed relationships.

Given the high stakes, it is clear that sourcing relationships are strategic assets that demand on-going senior
executive investment and attention commensurate with their importance. Ignoring the value of properly
managing sourcing relationships is tantamount to corporate negligence – simply because it has such a huge
impact on return on investment and the potential value gained from sourcing. Governance consists of more
than simple contract management. It encompasses the entire spectra of management: financial, contract,
consumption, performance, risk and issues, and relationship and change issues. The goal of governance is to
ensure accountability, transparency and information sharing between the parties to the engagement.

Robust governance interconnects value and risk management and can help companies achieve cost savings
of up to 30% and add value beyond contract compliance. It provides a common language, shared processes
and data transparency to facilitate a balanced and trusted relationship. It clearifies roles and responsibilities
to reduce duplicy, highlights objectives, risks, activities and results aligned with contract terms. Effective
governance stimulates engaged and productive collaboration, decreases operational cost, minimizes legal
and regulatory non-compliance, promotes performance quality and reduces risks and business disruptions.

For organisations to realize the full value of sourced services, governance is a must. Not a nice to have.
It must be a priority to successfully realize business value and comply with regulatory requirements.
You can unknowingly ignore, underestimate or neglect the challenges inherent to sourced services and
supplier relationships .. .. but they will not ignore you, as many organisations already have experienced.

Value-Led provides the governance framework and process that drive the performance of service provider
relationships and deliver sustainable results throughout the life-cycle of the engagement.

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Value-led Governance Principles

The tenets of value management are fundamental to sourcing success
Risk based thinking drives continuous improvement and efficient control

Independent supervision facilitates a balanced relationship
The service provider is accountable for achieving and demonstrating service levels

Performance controls are conducted with minimal operational involvement
The engagement will continue to reflect changing business needs

Risk control enables effective and proactive service delivery and control
Performance control based on a dynamic mix of controls
Payments are based on demonstrated performance

The contract acts as a flexible basis for productive collaboration
Success is achieved through collaborative practices and behaviours
Trust grows out of qualified trustworthiness rather than blind acceptance
Partnership results from collaboration, trust and sharing of information, risk and reward
The parties jointly manage the engagement to drive long-term success
Small and responsive governance teams operate with clearly defined and sufficiently mandated roles
Informal, though structured, dispute resolution mechanisms are preferred over litigation
Shared information management and record keeping provide a trusted source of truth

The principles, based on experience and inspired by research and best practices, reflect our current thinking

on service provider governance. For question or suggestions for improvement please contact Leadmark.

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Use of the framework

1. Value-led sourcing governance can be best understood as a marriage between:
a. An interconnected value and risk management mindset and;
b. collaborative balanced management systems and processes that are necessary to translate the
mindset into action.

Taken alone, either element is insufficient. Taken together, they can have a huge and sustainable
impact on the realization of sourcing objectives during the operational stage of the engagement.

2. The Value-Led governance framework can be used to establish an effective model for the governance
of the sourced service provider relationships. The framework can be used fully or in part which is the
foundation of its flexibility. This flexibility allows organisations to deviate from certain principles and
tailor it to their needs.

3. The application of the Value-Led governance principles depends on the size and complexity of the
contracts and organisations. For smaller engagements, organisations may judge that some provisions
are disproportionate or less relevant in their case. Such a decision can be made on a number of criteria
like, specific business needs or market circumstances, complexity, term and value of the engagement,
risk or regulatory requirements. Organisations may nonetheless consider that it would be appropriate
to adopt certain elements of the framework and they are encouraged to do so.

4. The Managing Board, responsible for managing the engagement issues an annual report to the
Supervisory Board on compliance with the governance framework, including an explanation of any
deviations from the principles and best practices.

In providing the explanation, the organisation should aim to illustrate how its actual practices are
consistent with the principle to which the particular provision relates, contribute to good governance
and promote delivery of business value. It should set out the background, provide a clear rationale for
the action it is taking, and describe any mitigating actions taken to address any additional risk and
maintain conformity with the relevant principle. Where deviation from a particular provision is intended
to be limited in time, the explanation should indicate when the company expects to conform with the
provision.

Both the Supervisory Board and the Managing Board should be open to discussing deviations from the
framework. In their responses to explanations, the supervisors should pay due regard to the
engagement’s individual circumstances and the nature of the risks and challenges it faces.
Whilst supervisors have every right to challenge Managing Board’s explanation if the are unconvincing,
they should not be evaluated in a mechanistic way and departures from the framework should not be
automatically treaded as breaches. Supervisors should be careful to respond to the statements from the
Managing Board in a manner that supports the “comply or explain” process and bearing in mind the
purpose of good governance.

5. Productive cooperation between the members of the Managing Board and their respective Supervisory
Board member is crucial to a balanced and effective governance regime. Both the Supervisory Board
and the Managing Board have responsibility that “comply or explain” remains an effective alternative to
a strict rules-based system.

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1. Value Realization

The main objective of the operational stage of sourcing is to delivery the value outlined in the contract.
To realize this objective it is critical that the returns, or value of the services provided, exceed the cost of those
services and that risks are effectively monitored and controlled.

Value realization however does not happen just because a contractual agreement has been signded. It requires
effective governance using a clear compass and effective navigation. Value-led governance provides a clear
focus on value and risk and a strong management and oversight structure for value realization.

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Principle 1.1 Managing for value

A value management approach helps with decision making at all levels. The concept of value relies on the
relationship between satisfying many differing needs and the resources used in doing so. The fewer
resources used and the greater the satisfaction of needs, the greater the value. Stakeholders may all hold
differing views of what represents value. The aim of value management is to reconcile these differences and
enable the client to achieve the greatest progress towards its stated goals with the use of minimum resources.

The Value-led framework uses seven tenets of Value Management:

1. Focus on business outcome
In addition to building a system and culture that ensures the realisation of business results. Value-led
structurally assesses the outcomes, risks and costs of the services provided. It then constantly seeks to
minimize risk and cost and improve the value of the services provided to customers.

2. Provide effective leadership to the engagement
The leadership of the engagement establishes unity of purpose based on the contract. The leadership team
ensures that all strategies, policies, processes and resources are aligned to pursue common direction and
achieve engagement objectives.

3. Engaged and collaborative people
The engagement is managed by a team of competent, empowered and trustworthy people who engage
and collaborate to optimize the results of the engagement.

4. Use a process approach
Performance, risk and costs are managed using a process approach; success in sourced success is not the
result of a single transaction. It is an ongoing learning process where, if one way doesn’t work, other ways
are explored. It means that processes are structurally managed and controlled, the interactions between
processes, and the inputs and outputs that tie them together. This also means that governance processes
are managed as a coherent value management system.

5. Encourage improvement
Regular risk assessments facilitate a structural focus and promotion of improvements . An ongoing focus on
improvements is essential to maintaining and optimizing performance levels, respond to a rapidly changing
business environment and to identify, create and succeed in new opportunities.

6. Fact based decision making
Informed decisions are data driven. This involves gathering multiple types of data and evidence from trusted
sources, objectively analyse data, examine cause and effect relationships, evaluate options and consider
potential unintended consequences.

7. Manage our relationships
Relationships with service providers and other interested parties are carefully managed. Collaboration and
trustworthy partnering are advanced, to drive performance and strengthen success of the engagement.

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Principle 1.2 Risk-based thinking

Service quality and contract compliance are critical to the success of every sourcing endeavour, and
organisations need to apply a comprehensive and effective way to achieving and measuring the achievements of
sourcing objectives. Risk-based thinking provides an effective option for this. Risk-based thinking refers to a
coordinated set of activities and methods that organisations use to treat and control the risks that affect its
ability to achieve objectives. Risk-based thinking is an basic element of Value-led governance and a key part in
the ISO 9001:2015 quality management standard. It provides the service provider a fact based foundation for its
quality management, service delivery and control system, and allows the client to apply an efficient approach to
assessing and managing supplier performance.

The Value-led framework uses seven tenets of Risk Management:

1. Creates and protects value
Risk management contributes to the achievement of objectives through continuous review of its systems,
processes and services. Value-led structurally assesses possible failures that may impact engagement
outcomes. It allows the parties to implement effective treatment approaches and comprehensive Controls.

2. Integral part of governance processes
Risk management needs to be integrated with the organisation’s governance framework and be a part of its
planning processes, at both the operational and strategic level. Value-led interconnects risk and value and
risk management with key governance processes like performance, financial and change control.

3. Integral part of decision making
The process of risk management assists decision makers to make informed choices, identify priorities and
select the most appropriate action regarding risk treatment and performance control.

4. Explicitly address potential failure modes
By identifying potential failure modes affecting people, processes or tools that are instrumental to
outcomes of the engagement, the parties can implement treatments and Controls to maximise the chance
of gain while minimising the chance of loss.

5. Systematic, structured and timely
Risk assessments are conducted consistent across the engagement to ensure efficiency, consistency and the
reliability of results.

6. Based on the best available information
To effectively manage risk it is import to consider all available information relevant to the system, process or
product being assessed and to be aware that there may be limitations on that information. Recognising that
information, consultation and communication is key to identifying, analysing, treating and controlling risks,
Value-led aims to include a broad team of subject matter experts.

7. Be dynamic, iterative and responsive to change
The process of managing risk needs to be flexible and iterative. The dynamic business environment we
operate in requires organisations to consider the context for controlling risk as well as continuing to identify
new risks that emerge, and implement treatments and Controls to mitigate those risks.

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Principle 1.3 Independent audit and oversight

The engagement will be subject to independent audit to provide core assurance around business process,
risk and control critical elements of the engagement will be regularly audited with the aim to. The aim to review
the effectiveness and reliability of the internal organisation and governance of the engagement. The audit
function can include different types of auditors such as an operational auditor, IT-auditor, financial auditor and
quality auditor. The Managing Board is responsible for the audit function. The Supervisory Board, possibly with
the support of an Audit Oversight Committee, oversees the audit function and has regular contact with the role.

1.3.1 Putting it into practice
The Managing Board is responsible for providing core assurance around business process risk and control.
For this the Managing Board will design, implement and maintain an adequate audit function to assure fair,
unbiased, fact-based and transparent reporting and governance.
These systems are, where relevant:

a) integrated into the work and governance processes of the engagement;
b) subject to guidance from an independent Audit Oversight Committee;
c) integrated into the general audit functions of the client’s and service provider’s companies;
d) well documented and comply with a generally accepted norms and standards framework;
e) known by those for whose work they are relevant.

Subject to contractual provisions, the Managing Board appoints and dismisses the auditor(s) to the engagement.
To prevent biased or unbalanced revies the parties may consider a joint or independent composition of the audit
function. Both the appointment as the resignation of members of the audit function, together with an advice
from the Audit Oversight Committee, are issued for approval to the Supervisory Board.

1.3.2 Monitoring
The Managing Board monitors the functioning of the audit function. The Managing Board shall evaluate annually
the performance of audit function in which it involves the judgement and advice of the Audit Oversight
Committee.

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2. Contract Management

Contract management covers all day-to-day activities by the client organisation, during the operational stage of
the contract, aimed to ensure supplier delivers the services according to the terms in contract and to ensure that
associated risks are effectively controlled. This includes managing ambiguity, omissions and changes or revisions
to the contract to realize the overall intents and objectives of the engagement.

The aim is to perform these activities as efficiently (with the lowest possible effort) and effectively (focusing on
high risks and impacts) as possible. Contract management will also ensure just and fair payment of delivered
performances.

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Principle 2.1 Quality Management by the Service Provider

The service provider is accountable for being in control of its operation and deliverables and meeting its
contractual duties and obligations. The service provider gives account for what they have done and of their
successes and failures through tests, metrics and audits. This principle is based on the NEN-ISO 9001:2015
approach which is simply put, “say what you do”, “do what you say”, “prove it”.

A critical element in support of this principle is the service provider’s quality management system (QMS).
This refers to a formalized system (e.g. ISO 9001) that documents processes, procedures, and responsibilities for
achieving service outcomes. This includes the shared processes described by the service provider in the DAP
which dovetail with client processes. It helps coordinate and direct the provider’s activities to meet client needs
and contractual obligations and to proactively improve its effectiveness and efficiency on a continuous basis. The
service provider will inform the client of its quality management system and demonstrate how it is applied to the
engagement. If the quality management system is ineffective it can lead to extra control – and cost – by the
client or even suspension of payments which is for both parties an undesirable situation.

The quality management system is expected to include:
a) a description of objectives and strategy;
b) a description of the management and control processes;
c) a reference to the working procedures;
d) a periodical review which addresses;
o current use of the processes;
o effectiveness of the processes;
o deming circle to monitor and improve process quality.

The service provider is expected to apply a structured risk based approach for identifying service risks and
opportunities which are included in the relevant service improvement / project delivery plans. The service
provider and the client will periodically align their risk dossiers. The parties will not use a joint Risk Register.

Continuous improvement cycle

The supplier is expected to use the Deming-circle to improve processes and optimize outcomes.
 Plan - The objectives of the process are described in a SMART way.
 Do - The process is executed and the results are measured.
 Check - The results are compared with the process objectives.
 Act - The process is improved based on findings.

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Principle 2.2 Eyes on – Hands off control by the client

The client aims to manage the contract on the basis of ‘eyes on – hands off’. This means that the client aims to
have good visibility on the service provider’s overall performance, whilst minimizing interference in its quality
management and delivery processes. The approach will be described in the sourcing governance plan.

Contract management is a dynamic process, for which the client will perform using a mix of risk based Controls.
This dynamic mix of Controls is aligned with the dynamic risk profile of the engagement which can change based
in new insights from performance reports, risk assessments, operational issues or customer satisfaction surveys.
Although a draft of the sourcing governance plan may already have been drafted during the contracting stage, it
is for the client’s contract manager to complete and maintain the plan. The plan is signed off by the Managing
Board and will include the following:

a) general purpose, scope and usage of the plan;
b) summary of the business objectives for the contracted services;
c) indentification of key contract management team members, incl. authorities and limitations;
d) identification of the contract documents;
e) contract governance structure;
f) identification of milestones and key deliverables;
g) risk management apporach

a. risk assessment scope, approach and update frequency;
b. structure and maintenance of Risk Register;
h) scope, structure and maintenance of the Performance Control Plan;
i) performance review process;
j) invoice review process;
k) contract change process
l) information management and the use of technology.

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Principle 2.3 Continuous business alignment

Every sourcing engagement is meant to realize a business objective. The contract is a mean to this end, and for
the ongoing success of any sourcing engagement it’s critical that it stays aligned to changing business needs.

Demand management is the process that deals with the forecasting, planning and management of the demand
for products and services. This can be at the tactical level and at the operational level of the engagement.
To optimize service performance and minimize costs it is recommended to implement an effective demand
management process.

2.3.1 Operational demand
Operational forecasting is a critical component in demand management as it begins the process that drives
rationally inventory and supply chain performance. This type of demand deals with the forecasting and delivery
of already contracted services. These typically relate to operational service requests and supporting processes.
In most cases these activities are coordinated by the service manager and do not require involvement of the
contract manager.

2.3.2 Tactical demand
Demand at the tactical level deals with new or obsolete services. These changes to the contracted service
portfolio are typically initially identified by the service owner or service manager. They require the involvement
of the contract owner and contract manager to adjust the contract (including the service and cost model) and
inform the service provider.

New services require new service levels to be defined, which for business critical services, also may require a
change to the engagement’s Key Performance Indicators. For every service the service levels or requirements
have to be defined in terms of quality, cost and time. These are the value attributes on which service
performance will be evaluated.

2.3.3 Performance Indicators, metrics and measures
The Value-led framework makes a difference between performance indicators, metrics and measures.
These terms are often used synonymously but it’s important the set them apart to not use them erroneously.

a) A performance indicator is a measurable value that demonstrates how effectively critical business
objectives are achieved. Clients use performance indicators to evaluate their success at meeting service
requirements and achieving deal objectives. They are Controls, used by the client, to assess the
effectiveness of the engagement as a whole and supplier performance in particular. The performance
indicators are selected based on value and risk priority number (RPN) for the service or deliverable.
The Controls are documented in the client’s Performance Control Plan and evaluated and adjusted over
time to stay tuned to supplier performance and risk profile of the engagement. Performance indicators
are compared against past performance metrics, service requirements or deal objectives.

b) A metric is a quantifiable measure used by the supplier to track, assess and report on its performance
of specific services, processes and activities. Metrics are reported in the supplier’s service accountability
report used to demonstrate compliance with contract obligations and requirements. The service
provider reports on all it’s obligations and committed requirements. A metric in itself is not normative.
It is just a factual report of performance on QPDC requirements. (i.e. number of incidents, average
resolution time, cost of a service). A specific dynamic set of metrics is used by the client as
performance indicators to assess how effectively objectives are realized.

c) A measure, is a value that can be summed and/or averaged, such as durations, distances, temperatures,
and weight. Measures are the building blocks of a metric. The resolution time of an individual incident
for instance is a measure. The average incident resolution time is a metric, the supplier reports to the
client. The client, to it’s own discretion, decides if the incident resolution time is to be regarded as a
(key) performance indicator.

Value-led sourcing governance framework Page 18

Measures, metrics and performance indicators are critical for monitoring, assessing and managing the success of
a sourcing arrangement. While traditionally they mostly had an operational inward focus, we advocate a focus
against service requirements and business objectives. Although operational inward focused measures may still
very relevant to the service provider’s internal management processes, metrics and performance indicators used
by the client should be service and business focused.

It is up to the service provider to decide on which measures it uses to manage its delivery processes and
activities. The metrics reported in the service performance or accountability reports should be complete and
cover the full scope of the service provider’s commitments. The scope of the report is independent of the
client’s focus to review and control the engagement. Splitting the client’s selection of performance indicators
from the full set of metrics reported by the service provider, increases flexibility for both parties. It allows clients
to change its mix of Controls without the need to discuss metrics of reporting with suppliers as these remain
unchanged.

Performance indicators are used by the client to assess and control supplier performance. Organisations should
aim to limit the number of performance indicators and focus on deliverables with the highest value and highest
risk priority ranking. (see also: Dynamic mix of Controls.) An excess in performance indicators results in an over-
complicated and costly bureaucratic control system. Also if everything is important then nothing really stands
out as critical which reduces focus of efforts.

Organisations are better of by using a limited primary set of really high impact key performance indicators,
complemented with a variable dynamic set of secondary Controls which are periodically evaluated based on
performance and risk. As a rule of thumb, it’s suggested not to have more the 9 KPIs. This is based in the idea
that for each of your top 3 priorities you have no more than 3 KPIs, which is about the maximum one can
effectively manage. In addition one can use a top-level indicator like the Net Cost-Performance Score (NSCP),
described further in this document, which provides a single key performance indicator across suppliers.

When choosing KPI’s organisations should take the following 7 characteristics for successful KPI’s into account:
a) a KPI is aligned to a critical services;
b) a KPI echoes organisational (business leaders) goals;
c) a KPI creates meaning on all organisational levels;
d) a KPI has contractual implications;
e) a KPI is achievable and easy to understand;
f) a KPI is measurable based on legitimate data;
g) a KPI is actionable and can be changed.

Value-led sourcing governance framework Page 19

What does QPTC stand for?

QPTC requirement categories

Quality Quality requirements define the client-perceived attributes of the engagement /

What do I get? service that will determine whether the engagement / service meets expectations.

Process Process requirements define the processes and related timelines that the service

How is it delivered? provider is expected to follow in managing the engagement and delivering the service.

Tools Tooling requirements define the inputs and resources the service provider is expected

How is it made? to use in managing the engagement and delivering the service.

Cost Cost requirements define the financial factors of the engagement / service that the

How much do I pay? service provider is expected to comply with.

Examples of requirements on the engagement level and on the service level

Engagement Engagement requirements refer to all aspects of the service provider relationship that
Requirements relate to the engagement as a whole and are not specific to an individual service
 Service provider (quality) management control
Quality  Social responsibility and code of conduct
 End-user satisfaction score / perceived quality
Process  Policies on safety, security, privacy and IP. Legal and regulatory requirements
 Governance processes, procedures and meetings
Tools  Flexible contract change management supporting changing business needs
 Service / project management standards (e.g. ITIL, Prince-II, Agile, ISO)
Cost  Invoice procedure, complaint handling dispute resolution
 Senior management involvement
 Governance and reporting tooling
 Staff experience, knowledge, competence development and certification
 Operational efficiency
 Pricing transparency
 Competitive pricing and benchmarking
 Sharing risk and reward
 Indexation and cost reduction efforts

Service Service requirements refer to aspects of a specific individual service. They do not refer
Requirements to the engagement as a whole.
 Functions, capabilities and benefits
Quality  Availability, accessibility and reliability (e.g. number/percentage of defects allowed)
 Performance – primary operating characteristics (e.g. response time, aesthetics)
Process  Serviceability, customizability and maintainability
 Frequency and reliability of delivery (incl. service window)
Tools  Delivery lead time and process duration (e.g. incident resolution times)
 Service request handling process and speed requirements
Cost  Flexibility – the ability to handle varying demand volumes (variability)
 Effective service delivery tooling
 Proven technology
 Continuous service improvement
 Fixed costs for running the service
 Unit price for individual service requests
 Software licenses
 Invoice frequency and accuracy

Value-led sourcing governance framework Page 20

Seven deadly (key) performance indicator sins

1. Greed
Metrics that are aligned to personal performance / incentives. If personal remuneration depends on
performance metrics their main purpose changes from optimize the engagement to optimizing personal
benefit. This could result in people adding more metrics or to lower the threshold to increase the
chance of success.

2. Ingorance
Not knowing why you are measuring something. In many cases performance indicators are agreed
during the contracting stage, but during the lifecycle of the engagement people often lose sight of
whate the reason for selecting these metrics was.

3. Stupidity
This refers to having performance indicators that drive unwanted behaviours. Metrics that drive
supplier activities typically lead to extra work (and costs) while they do not optimize value for the
service recipient. This typically happens with transaction-based sourcing models where the service
provider is paid for every transaction.

4. Excess
An excess in performance indicators increases the time and money spend on monitoring. It also reduces
focus for both the client and the service provider which implies that the chances of being realized
significantly reduces. It underlines the old saying, “too much of a good thing is bad”. Organisations that
try to measures everything end up measuring nothing.

5. Short-sighted
Performance indicators that are reactive may look tough but they are often not smart. Reactive
indicators focused in things that have gone wrong (speed of resolution) may allow organisations to
punish the service provider but they don’t contribute to risk reduction and continuous improvement.

6. One-sided
Performance indicators that are too much focused on the functional aspects of the sourced services.
In IT this would refer to indicators that are aimed at the output of the service providers such as the
number of resolved incidents or uptime of a service. These are however often not recognized by the
service recipient. It leads to ‘watermelon’ KPIs : green on the outside, red on the inside.

7. Sloth
This is the saddest of the seven sins. It refers to organisations that do not actively manage the
Engement although they might have access to performance information. This behaviour can result not
having a structured performance control process in place or from having lenient thresholds. This can be
the case with KPI’s with success window of let’s say between 95 en 99 percent. Emotionally a score of
over 95 percent feels very good but converted to for instance loss of productivity it doesn’t look so
good.

Value-led sourcing governance framework Page 21

2.3.4 Contract Calendar
After the contract is signed, one of the first steps is to operationalize the contract and turn it from a legal
document into a working document. In this step all contractual obligations (explicit and implicit), milestones,
key deliverables, audits and key decisions are made actionable and captured in the contract calendar.
Some of this work may have already taken place during the contracting stage to smooth the handover into the
operationals stage of the engagement. The contract calendar should be completed at the start of service
delivery. Typically the contract manager is accountable for the contract calendar but he can choose to delegate
it to the contract administrator.

For each obligation or activity contract calandar holds the following information:
a) who is accountable for execution / delivery;
b) who is accountable of acceptance;
c) schedule and due date.

The contract calendar provides a current overview of all the work in progress and future deliverables. It is a living
document which is frequently updated to contain changing deliverables and milestones, newly agreed delivery
and due dates or rescheduled decision dates.

2.3.5 Contract alignment
A critical activity during the term of a contract is that of a contract alignment assessment. The aim of this activity
is to understand the extent to which the contract is still align with its dynamic business environment.
In a perfect world the contract is fully aligned with customer demand and the services delivered.

In the real world however we see that what the business needs (required services), what the supplier delivers
(provided services) and what is agreed (contracted services), quickly drift apart after the contract is signed.
These mismatches can be the cause of under or over payment and lead to user dissatisfaction and stressful
client / supplier relationships. They therefor need to be identified and resolved as soon as possible.
The contract manager is responsible for conducting the assessment and drafting an action plan in close
cooperation with the client’s service owner / service manager and the service delivery manager from the
supplier. It is recommended to conduct a contract alignment at least once per year.

The contract alignment identifies 7 service categories:

a) Irrelevant services - The service is still part of the contract but no longer required or delivered.

b) Under performance - The service is required and contracted but not (sufficiently) provided.

c) Obsolete - The service is contracted and delivered but no longer needed.

d) Opportunity / Conflict - The service is contracted but not delivered and not contracted.

e) Redundant - The service is delivered but not required and not contracted.

f) Free extra - The service is required and delivered but not contracted.

Value-led sourcing governance framework Page 22

Principle 2.4 Risk control

The risk profile of the engagement will be monitored and updated at regular stages throughout the life cycle of
the agreement. To ensure the success of the engagement it is critical to understand and be in control of its risks.
As not being aware of the risks can quickly spin the engagement out of control resulting in substantial value loss
for both the client and service provider.

A basic principle to the treatment of risk is that risk is allocated to the entity in control of the source of the risk.
With the service provider being accountable for the delivery of services he should therefore also be in control of
the risks associated with the people, processes and tools/technology that deliver these services. Other risks are
managed by the client’s contract manager. The figure below provides a schematic overview of how risks are
allocated and which risks are input to the Performance Control Plan.

2.4.1 Failure Modes and Effects Analyses
Value-led uses Failure Modes and Effects Analyses( FMEA) as the method to identify and evaluate risks.
FMEA was founded by the National Aeronautics and Space Administration (NASA) and is now used across many
industries. We use FMEA as one of the best ways of analysing potential problems that may impact results to take
quick actions to treat the risk. The ability to anticipate issues early allows practitioners to optimize service
designs and drive continuous improvements.

FMEA is a qualitative and systematic tool to help organizations anticipate what might go wrong with a product or
process. In addition to identifying how a product or service might fail and the effects of that failure, FMEA also
helps find the possible causes of failures and the likelihood of failures being detected before occurrence. Each of
these 3 factors (impact, likelihood of occurrence and probability of detection) is given a 1 to 5 score which
results in a single risk priority number ranging from 1 to 125. The analyses allows organizations to timely
implement appropriate Controls. A control is a process, policy, device, practice, report or action that acts to
minimise a threat. A control can be focused on reducing the threat’s impact or likelihood of occurrence, and/or
to maximise the likelihood of detection. An overview of the 8 risk treatment strategies used in the Value-led
framework can by found in paragraph 2.4.3 Risk treatment.

The FMEA starts with the identification of potential failure modes (i.e. risks or threats), the way in which an
obligation, action, product or service can fail. A team of experts reviews every requirement asking themselves:
“what could go wrong?” The result of the FMEA is a prioritized list of potential failures that impact the value of
the engagement when they occur. This information is captured in the Risk Register and input to the Performance
Control Plan which documents the Controls to treat the most critical risks.

The FMEA results for each of the risks identified in a risk priority number:
a) RPN 1 to 35 - Low risk
b) RPN 36 to 75 - Moderate risk
c) RPN 76 to 100 - High risk
d) RPN 101 to 125 - Critical risk

Value-led sourcing governance framework Page 23

2.4.2 Sources of risk

Within Value-lead we identify 6 main risk categories:

Engagement risks:
1) Strategic risk arises when the service provider’s services, products or activities no longer align with the
client’s strategic intent, requirements or expectations. This also included longer term risks, such as
losing the capability to execute sourced processes in-house due to loss of talent and knowledge.
2) Provider risk arises when the service provider operates in an unsustainable manner (i.e. insufficient
access to knowledge) or when service delivery is not in compliance with applicable laws and regulations.
3) Relational risk arises from poor communication and management of the engagement.

Delivery risks:
4) Service risk arises from services, products or activities of a service provider which do not align with
contractually defined requirements.
5) Financial risk arises when services, products or activities of a service provider generate higher costs or
when financial processes are not executed correctly and conscientiously.
6) Coordination risk arises from the complexity of the arrangement which refers to the number of entities
(e.g. contracts, processes, people, technologies, risks, issues) and relationships that have to be
managed simultaneously to realize engagement objectives.

For every risk one of the following sources is identified people, process, tools or external.

2.4.4 Risk treatment
Having completed the risk analyses, risk treatment involves selecting and agreeing on one or more relevant
options for changing the frequency of occurrence, the effect of risks, the likelihood of detection, or all three and
implementing these options.

Risk treatment involves identifying the range of options for treating risk, assessing these options and the
preparation and implementation of these treatment plans. Once implemented, treatments provide or modify
existing Controls. The decision to progress on a risk treatment actions is in first instance taken by the service
provider or the service owner on the client’s side. The service provider can decide, whether or not after
consulting the client, to take proactive measures to mitigate the risk and improve the quality of service.
Actions by the client to strengthen Controls in order to address a risk are captured in the Performance Control
Plan.

Risk treatment is a cyclical progress of deciding that current risk level are not tolerable, generating new risk
treatment(s) and assessing the effect of that treatment, until a level of risk is reached which is one that the
organisation can tolerate, based on its risk appetite. Not all risks require (immediate) treatment. Some, with
lower risk priority numbers, will be acceptable when measured against the risk tolerance or risk appetite
statement, or when lowering the ratings is deemed insufficient to justify the treatment costs, and only required
additional monitoring throughout the period.

Treating risks involves the following steps:
1. Identify possible risk treatment options;
2. Select the most beneficial treatment option(s);
3. Assign treatment ownership (typically to the entity in control of the source of risk);
4. Prepare and implement risk treatment plans;
5. Monitor and review treatment actions on a regular basis;

Preparing and implementing the risk treatment plans, and monitoring and reviewing treatment actions (step 4
and 5) are part of Performance Control. These activities are part of the Performance Control Plan.

Value-led sourcing governance framework Page 24

The Value-led framework identifies 8 risk treatment options:

a) Avoid - Change activity processes or objectives to avoid the risk.

b) Pursue - Pursue the risk or enhance its opportunity of occurrence.

c) Remove - Remove the source of risk (people, process or tools).

d) Change impact - Undertake actions aimed at reducing the impact of the threat

e) Change occurrence - Undertake actions aimed at reducing the probability of occurrence

f) Change detection - Undertake actions aimed at increasing the likelihood or speed of detection

g) Share - Share ownership and liability with a Third Party (e.g. supplier or insurance)

h) Retain - Accept the impact of the risk through informed decision

2.4.4 Risk Register
The Risk Register is a document resulting from the FMEA. It provides an overview of the risks identified in the
assessment and its aim is to allow mitigating actions to be taken and to act as a basis for a risk based
performance management approach. The Risk Register is the result of a team session in which all possible risks
and failures are identified, and ways to get around that are discussed. This session provides team members an
opportunity to talk openly about concerns and possibilities to make errors which then can be addressed to clear
the path to success.

The Risk Register resulting from the session is expected to contain the following informantion on each risk :
a) Description of failure mode / risk;
b) Impacted requirement category - (quality, process, technology, cost);
c) Description of impact;
d) Risk source category - (people, process, tools, external);
e) Description of risk source;
f) Current control for detection;
g) Severity score (1 to 5)
h) Likelihood of occurrence score (1 to 5)
i) Probability of detection score (1 to 5);
j) Risk Priority Number (RPN = S x L x D) | Severity, Likelihood, Detection;
k) Suggested risk treatment option;
l) Owner of the risk treatment action.

The Risk Register provides guidance to the risk owner for risk treatment actions. The basic idea is that a risk
(i.e. potential failure mode) is balanced with a control to reduce the likelihood of occurence or increase the
change of detection.

Value-led sourcing governance framework Page 25

An explaination of FMEA on the basis of a coffeepot

A simple example of failure modes on the basis of the process to deliver a cup of hot coffee in a restaurant:
 One of the inputs of the process is a clean coffeepot. What could go wrong?
Perhaps the dishwasher isn’t finished, or the water in it isn’t hot enough whereby the coffeepot isn’t
available in time or not clean enough.
 The first step in the process is to fill the pot with water. What could go wrong?
Perhaps the water isn’t hot enough, or the staff didn’t put enough water in it.
 The service is expected to result in a hot cup of coffee delivered at the customer’s table. What could go
wrong? The coffee could get cold before it is delivered, the waiter might trip over a loose plank in the
floor, or the coffee may be too bitter.

Clearly this is just a simple example compared to much more complexed sourced business services.

However it illustrates a key element of FMEA which is to analyse three failure characteristics:

 What is the impact on the result? - Severity of impact

 How often do they occur? - Likelihood of occurrence

 What is the chance they are noticed? - Probability of detection

The question “what could go wrong” can be approach from two angles.
One is to approach it from the source of the risk. This refers to the inputs required for the service being
successful (source of risk). The assessment question than is: “what could go wrong with the people,
processes, systems or environment needed to be successful?”. The second approach is to look at the outputs
required for the service to be successful. (effect of risk). The assessment question than is: “what could go
wrong with the quality, process, technology or cost requirements of the service?”.

The assessment team rates each risk with a score of 1 to 5, resulting in the Risk Priority Number (RPN)
 RPN = (Severity of business impact) x (Frequency of occurrence) x (Likelihood of detection)

This idea is to identify risks and opportunities for improvement that have the biggest impact on business and
customer value. In other words; get to what matters most. Failure modes with the highest risk priority
ranking are the ones that have the biggest impact when they occur and are the hardest to detect, and should
therefor be treated with the highest priority.

Based on the coffeepot example a complete set of FMEA data for a single risk would be:

Process step: Fill the coffeepot with water

Potential failure mode / risk: Not enough water

Impact of the failure: Coffee too strong

Impacted requirement: Quality

Severity score: 4 (major)

Source of risk: Vague measures on the pot

Frequency: 3 (likely)

Risk source category: Tools

Current control for detection: Visual inspection

Likelihood of detection: 2 (likely)

RPR: 4 x 3 x 2 = 24 (low risk)

Recommended control: Replace the coffeepot

Action with: Bob Jefferson

Value-led sourcing governance framework Page 26

What are the risk areas to sourced services and supplier relationships?

Clearly there is a wide range of risks that may affect the value anticipated from the engagement.
The table below provides some aspects to consider per risk category. The character and volume of risks are
unique to an engagement and are expected to be identified by the experts involved during a risk assessment.
If required Leadmark can assist by providing an extensitve list of over 350 common risks to sourced services.

Engagement risk

 Senior management and stakeholder involvement in governance of the engagement.

 Compliance with (changing) (international) regulatory requirements.

Strategic  Clarity of engagement scope, services and business case.

Risk  (remaining) technical expertise and/or intellectual property with the sourcing company.

 Level of experience with governance approach, methods and tooling.

 Supplier dependency and power balance.

 Service provider’s organizational stability.

 Service provider’s understanding of objectives and direction.

Provider  Service provider’s senior management involvement and management structure.

Risk  Service provider’s experience in delivering the requested services.

 Service provider’s quality management, control and audit system.

 Service provider’s quality of staff, processes and tooling.

 Service provider’s relationship with other service providers (multi-sourcing).

 Service provider’s alignment with competitors.

Relational  Service provider’s trustworthiness in terms of capability, reliability and honesty.

Risk  Service provider’s communication, proactiveness and ownership of risks and issues

 Governance meeting discipline and effectiveness.

 Effectiveness of dispute resolution process.

Delivery Risk

 Service provider’s staff knowledge of engagement obligations and responsibilities.

 Delivery of services in a professional manner or at requirements.

Service  Integration of services (across service providers).

Risk  Quality, maintenance and documentation of service delivery processes and tooling.

 Sustainability of services.

 Auditability of service provisioning processes.

 Knowledge of financial objectives and terms of the engagement.

 Financial impact from reduced / increased service volumes.

Financial  Quality of invoicing processes.

Risk  Correctness and completeness of invoices.

 Alignment with market pricing.

 Ability to change prices and pricing conditions.

 Organizational and information complexity.

 Contract calendar / contract administration / governance meeting effectiveness

Coordination  Complexity of service design / infrastructure.

Risk  Volume and frequency of change (vs stability).

 Knowledge of the services and underlying technology, processes and tooling.

 Reporting/information transparency.

Value-led sourcing governance framework Page 27

FMEA scales for Impact, Likelihood and Detection

Discriptor Value impact Broad definition of value impact of the events (failure modes) Priority
ranking
Substantial Over 75% Event(s) make it difficult, if not impossible, for the engagement / service to fully deliver
Major 50% to 75% on its objectives / requirements, resulting in a severe permanent delivery / value loss. 5
Medium 25% to 50%
Minor 5% to 25% Event(s) require significant management involvement and decision-making. Events may 4
5% or less also require respective stakeholders to assist in stabalising delivery (e.g. rework) of the
Very low engagement/service to deliver on all its objectives. Events shape delivery of the 3
engagement/service.
Event(s) do not destabilise the core delivery or strategic approach of the 2
engagement/service to deliver on all of its objectives/requirements. Event(s) impact
smaller numer of staff/work streams and can be managed by the project/service delivery 1
manager.
Event(s) can be managed so the the engagement/service delivers all of its Priority
objectives/requirements. The project/service delivery manager manages within existing ranking
budgets, timeframe and quality requirements. Event(s) are isolated to a small number of
employees and/or to one or a small number of work streams. 5
Event(s) can be managed so that the engagement/service delivers on all of its
objectives/requirements. Brought to the project/service manager only for attention only.
Managed by the project/service delivery manager within existing resources and as
business as usual.

Discriptor Occurence Broad definition of likelihood of event(s) to occur
likelihood
Almost Will undoubtedly happen / recur, possibly frequently. History of frequent occurrence.
certain Over 75% The event is expected to happen in most circumstances

Likely 50% to 75% The event is likely to happen / recur, can be viewed as a persisting event or 4
circumstance. Likely the event will occur within the current review period.

Possible 25% to 50% Might happen or recur occasionally. Possible to occur at least within the next review 3
period

Unlikely 5% to 25% Do not expect to happen / recur, although it may do so. Unlikely to occur within a one or 2
two year period and, if it was to occur would not be in the next review perio

Rare 5% or less This is unlikely to happen / recur. Event may happen in exceptional circumstances. No or 1
minimal history of occurrence.

Discriptor Detection Broad definition of probability of detection through current Controls Priority
probability ranking
Almost Current Controls almost certain detect the event(s). Reliable detection Controls are
certain Over 75% known with similar events. Process automatically prevents further processing 1

Likely 50% to 75% Controls are likely to detect the event(s). Process automatically detects event(s) 2
3
Possible 25% to 50% Controls have a fair chance of detecting the event(s). Theree is a history of detecting 4
Unlikely similar events. 5

Rare 5% to 25% Controls are not expected to detect the event(s), although it may do so. There is a poor
history of detecting similar events.

5% or less Controls are highly likely to detect the event(s). Detection may happen in exceptional
circumstances. No or minimal history of detecting similar events.

Value-led sourcing governance framework Page 28

Principle 2.5 Performance control

Under the Value-led framework performance control efforts are balanced with the value and risks associated
with the obligations or services under review. If the value is low and the risk is trivial, then only the cheapest and
easiest Controls should be considered. If the value is high and the risk significant, then more elaborate and
perhaps costly Controls can be considered. When the supplier continuously demonstrates strong results the
level of trust in its performance will rise and would justify lower and cheaper levels of control. Typically the
volume and frequency of Controls is inversely proportional to the service provider’s risk profile. Better
performance and more trust result in a lower rsik profile and will allow the client to reduce the intensity of
control.

2.5.1 Performance Control Plan
Having completed the FMEA and updating the Risk Register, the Performance Control Plan involves selecting and
agreeing to the risk the client wants to control. From the risk assessment the service provider may already have
taken measures to appropriately treat the risks identified. In addition to this, the client will want to monitor /
review if deliverables are meeting the standards and requirements agreed in the contract. It should however be
understood that it is not desirable, nor feasible, to validate all deliverables. The client should place Controls with
care and focus on those deliverables that hold most value or the ones that are at risk. For the other deliverables
one has to rely on the service provider’s trustworthiness.

The Performance Control Plan is a practical and dynamic translation of the sourcing governance plan. It contains
the mix of Controls to be applied by the client to assess the service provider’s performance. It includes both the
primary Controls (KPIs) as the secondary Controls. The plan is drafted by the contract manager in close
collaboration with the risk manager and service owner and/or service manager. Both the Risk Register and the
Performance Control Plan will be kept up to date during the term of the contract in compliance with the
agreements made in the sourcing governance plan. The Performance Control Plan provides practical guidance
for service controllers to conduct service performance reviews and includes the following information:

a) what are the risks to be controlled;
b) what services are potentially impacted;
c) what is the scope of control (system, process or product review);
d) what is the control approach;

o how will it be conducted?
o what data (performance notices / service reports) will be used?
o when will it be conducted?
o who will conduct the review?

Value-led sourcing governance framework Page 29

Principle 2.5.2 Dynamic mix of Controls
Verification of the service provider’s compliance with the agreement is conducted through a dynamic mix of
performance Controls. These can be system, process and product Controls. These performance Controls are
activities – often reviews – to provide the client with a judgement on the performance of the service provider.

Performance Controls are focused on those supplier duties or obligations that have a high risk priority number.
The Risk Register and performance reports are the basis for the Performance Control Plan which describes which
performance reviews are to be conducted and how they are conducted. The control strategy allows, based on
positive results of previous reviews, to reduce the number Controls in future terms. So it is feasible that certain
reviews are not being conducted during one or multiple review periods. This might for example mean that
certain invoice line items, work packages, delivery processes, utilization of licences or final products are
reviewed in one period and not in another.

2.5.2.1 System control
A system control addresses the quality of the management system the service provider has in place to manage
the engagement as a whole including all contractual duties, obligations and deliverables. A system control
focuses on the management activities conducted by the service provider to ensure that all obligations are met in
an effective and efficient way and in compliance with client requirements. A system control for example can be
applied on the level of the overall engagement, on a specific project. (E.g. transition project) or a specific service
cluster (e.g. application development). A common way of conducting these reviews is through interviewing key
employees of the supplier and analysing supporting documents. The emphasis of the review is to assess the
working of the Deming circle.

2.5.2.2 Process control
A process control addresses the working of primary service delivery processes or supporting administrative
processes used by the service provider. A process control for example can be applied to service management
processes like incident management, problem or configuration management. In software development
engagements a process control might address requirements management or testing. Also supporting processes
like the invoice process or the contract change process can be reviewed. These processes are typically described
in project plans or the Daily Agreed Procedures (DAP).

A process review includes the following:
a) a description of the process;
b) input – output relations to other processes (interdependencies;
c) timing and speed
d) process management;
e) use of underpinning tooling;
f) a reference to the working procedures;
g) a periodical review which addresses;
o current use and effectiveness of the processes;
o Deming circle to monitor and improve process performance.

A common way of conducting these reviews is through interviewing key employees of the supplier, observing
the execution of processes and analysing supporting documents.

2.5.2.3 Product control
A product control inspects if the products and services meet quality requirements, with the objective to verify
the correctness of the service provider’s service performance / quality reports. A product review is conducted
through a test or measurement of the product or service and the results are compared the with verification or
test reports of the service provider. The review does not imply the client taking over accountability for quality.
For complex product or services the client may want to consider the use of expert third-party reviewers.

It should be noted that all deliverables are regarded as a product here. It is not limited products or services used
by the end-user. Deliverables like a customer satisfaction report,a benchmark or audit report are also considered
to be products.

Value-led sourcing governance framework Page 30

2.5.2.4 Observations
An additional tool is the use of observations to provide insight in the way the service provider operates.
In some cases the activities of the service provider are so critical to the client that he wants to attend the work.
This for instance might be the case when business critical ICT systems are being implemented or when complex
data migrations take place. Observations can also be used to further specify or judge findings discovered through
system or process Controls. The client and service provider will agree up front when these critical activities take
place, whom from the client team will be present and how the monitoring and approval process takes place.

Observations can take place in three forms:
1) a standard observation in which the client observes the normal way a service provider performs its
activities without any active involvement;
2) a step-point observation in which the client monitors every individual step the supplier takes to perform
its activities.
3) A stop-point observation in which the supplier stops its activities after every individual process step
until the client gives his approval to take the next step in the process.

2.5.3 Performance review
With the Performance Control Plan ready the review of service provider performance can start. The
Performance Control Plan includes both primary and secondary Controls. Primary Controls are executed in every
review cycle. Secondary Controls are executed at variable intervals. Performance reviews are typically conducted
by client subject matter experts with a firm understanding of the domain in scope of the review. Alternatively
the client can choose to involve an independent third-party to assess supplier performance. An external auditor
for instance can be used to assess supplier performance at a system or process level and a specialized third-
party can provide a statement on the technical quality of a product or service. Such a statement is referred to as
a TMP or Third-Party Memorandum. Service controllers are expected to be mandated by the service owner.

The review results are captured in a performance notification, including a factual report of the findings and
registered deviations which is issued to the contract manager. The contract manager will, based on findings and
advice of the service controller, decide if a deviation should be regarded as performance shortcoming.
All deviations are registered in a deviation register used for improvement by the service provider, re-checks by
the client and as input to the risk assessment.

Service providers that fail to meet requirements in any of the QPDC requirement categories, (i.e. demonstrate
performance shortcomings) will receive a performance notification with a strong encouragement to take
adequate measures to bring its performance up to par again. Those providers scoring lower than 3 (out of a
maximum of 5) on three or four of the four QPTC categories are submitted to an additional review with a focus
on the under-performing categories. Not meeting requirements will not lead to a termination of the contract
with the provider, unless they fail to make sufficient efforts to achieve improvements over a longer period of
time. In addition to this the client may decided to withhold or defer the payment of fees related to the under-
performing deliverables. On the other hand, if the provider demonstrates strong performance and we expect
them to continue to do so, we can decide to reduce the intensity of performance Controls.

Value-led sourcing governance framework Page 31

How Controls and requirements align

Supplier duties, obligations Performance Control by the Client
and requirements
System Control Process Control Product Control
Quality
Review of the service Review of key
provider’s deliverables and
outcomes with a
overall engagement high risk of under-
management system
performance

Process Review of support
processes with a high

risk of under-
performance

Relationship Review of services
requirements with a high risk of
ineffective use of
Tools management, delivery,
and reporting tooling

Cost Review of the overall
pricing and spend

Quality Review of services Review of services
with a high risk of with a high risk of
under-performance on under-performance on
product quality
business value
requirements

Services Process Review of primary
requirements Tools delivery processes
with a high risk of
under-performance on

requirements

Review of services
with a high risk of
under-performance on
the use of delivery

tooling

Review of services Review of services
Cost with a high risk of over with a high risk of
incorrect pricing
spending

Value-led sourcing governance framework Page 32

Performance review process flow

 After drafting the contract, the services to be delivered and the associated service levels,
a risk assessment will be performed. The risks to the services are allocated to one of the parties and
captured in the Risk Register.

 To minimize the risks, the service provider will explicitely address and mitigate them in its service
delivery plans, verification plans and audit plans.

 Based on the risks and mitigating actions taken by the supplier, the client will define the Controls it will
use to monitor the engagement. These Controls are captured in the Performance Control Plan.

 With the plans and Controls in place, the service provider will manage the service delivery in
accordance with the service delivery plan and execute the delivery processes. The results or outcomes
of the delivery processes are verified / tested based on the verification plan which is embedded in the
suppliers overall quality management system.

 The service provider will periodically perform an audit on its overall management processes and the
service delivery processes.

 The service provider will register and evaluate its performance and report on it to the client according
to the agreed schedule. (it’s the supplier’s obligation to demonstrate its compliance with the contract)

 The client will monitor / review performance using the three types of Controls captured in the
Performance Control Plan. For conducting the Controls the client makes use of the performance reports
provided by the supplier.

 The client will evaluate and capture the findings of the reviews, on the basis of which a performance
notification will be drafted. The performance notification will be used in the financial process as an
acknowledgement that the services are delivered.

 The supplier performance reporting and the outcomes of the client’s review are used as input to the
next risk assessment. On the basis of the risk assessment the parties will adjust their way of working,
mitigating actions, verifications, audits, Controls and reports. It is the starting point of a new cycle of
continuous improvement of effectiveness and efficiency.

Value-led sourcing governance framework Page 33

Principle 2.6 Financial control

Traditional fee for service models make if difficult to link payments to the performance of individual services.
In these models service providers receive a basic fee for the provided services. These fees are the result of a
negotiation between the client and supplier, often containing bundled pricing and lump sum constructs.

The aim under Value-led governance is to have a minimum of 80% of all costs directly related to specific services.
This increases cost transparency and allows for an effective ‘pay for performance’ approach where payment is
directly related to the quality of service provided. Payment for performance uses 3 payment models.
Under each model, payments are only made after the service owner has issued a performance notification,
acknowledging that the service was delivered to expectations.

2.6.1 Payment on planning
Payment on planning is based on a linear distribution of costs over the expected period of time for the work to
complete. This payment method also applies to service provided on an ongoing basis. (E.g. service desk or data
centre facilities). For a positive validation of the payment criterion the work package has to be on planning and
for an ongoing service the expected service level has to be met.

2.6.2 Payment on progress
Payment on progress is based on a series of measurable work packages. (E.g. software development or
constructions work). The basis for the payment is an accepted term-sheet and the work being completed.
In case of payment on progress, a positive validation of the payment criterion means that the notification by the
service provider is in accordance with the performance reported by the service owner.

2.6.3 Payment on product
Payment on product is based on the delivery of the final product. (E.g. delivery of hardware or other goods)
In case of payment on product, a positive validation of the payment criterion means that the notification of
delivery by the service provider is in accordance with the notification of performance by the service owner.

2.6.5 Performance notification
The service owner issues a performance notification if the work is delivered in accordance with requirements.
The purpose of the performance notification is two-fold. For the service provider it is a confirmation that the
invoice can be issued. For the client it is the internal clearance for the invoice to be paid.

The contract manager sends the performance notifications to accounts payable. The service provider also sends
the invoice and a copy of the performance notification to accounts payable. Accounts payable checks if the
documents match in which case they can release the payment.

2.6.6 Suspension of payment
When there are open shortcomings, payments can be suspended fully or in part. The full or partial suspension of
the payment will be lifted by the contract manager when the shortcomings are resolved. The lifting of a payment
suspension always requires a performance notification from the service owner confirming service restoration.

a) A payment is partly suspended if an open shortcoming is related to a specific cost element or invoice
item. In this case a performance notification can be provided for a part of the work or the service owner
can issue a ‘yellow card’.

b) The term will be fully suspended if:
o there is no performance notification issued for the work;
o a follow-up review indicates that a shortcoming is not resolved or a ‘red card’ is issued;
o there is an open shortcoming on the quality system of the provider.

Value-led sourcing governance framework Page 34

Principle 2.7 Change control

The assumption that the engagement will not change after the contract is signed, reduces the chance of success.
Sourcing and business reality is that events occur which may or may not been anticipated. The business situation
changes. Market conditions may change requirements and/or prices, and technological developments may open
new and unforeseen avenues. Acting as if the engagement, as captured in the contract, is to deny reality and to
set up the engagement for failure.

The contract therefore needs to be a flexible and dynamic basis for effective collaboration and as such subject to
change. The logic behind this is fairly straightforward. The parties must be able to adjust to unforeseen
situations that can’t possibly have been included in the original contract; thus, organisations should strive for
contract flexibility and build a relationship that would enable adjustments to changing conditions.

2.7.1 Contract change
Both the client and the service provider can initiate a change to the contract. Each change needs to comply with
contractual, legal and regulatory provisions.

2.7.2 Change request by the client
The Service Owner can propose a change to the Service Delivery Manager. When the Service Owner and Service
Delivery Manager agree on the change, the contract manager will issue a formal Contract Change Request.
The service provider will, based on the service requirements, return the Contract Change Request with a
commercial offer. If the proposal is accepted by the service owner, the contract manager will start the contract
change procedure.

2.7.3 Change request by the service provider
The service provider is entitled to issue an investment or service improvement plan in the form of a request for
change. The request is presented to and discussed with the service owner or service manager who may involve
other functions like risk, finance or legal to advice them. If the proposal is accepted the contract manager will
start the contract change procedure. If the proposal is rejected it will be logged and the service provider will be
informed.

2.7.4 Impact on the risk profile
Every contract change can have an impact on the risk profile. It can eliminate or change an existing risk or
introduce a new risk to the engagement. This effects need to be taking into account with every contract change.
When a contract change is implemented also the Risk Register needs to be updated. The contract manager is
responsible for this process in close cooperation with the risk manager and the service manager.

Value-led sourcing governance framework Page 35

What is Net Cost-Performance Score?

A single anchor for your sourced services and third party relationships

Net Cost-Performance Score, or NCPS, measures supplier performance and predicts engagement success.
It provides a single top-level key performance indicator for sourcing initiatives across diverse portfolios.
The value from using Net Cost-Performance Score, or NCPS, flows from your focus on cost and supplier
performance and ability to internally benchmark your sourcing initiatives. It enables you to improve supplier
performance and optimize your sourcing portfolio. NCPS, a leading indicator of supplier performance, helps
you measure success along the way.

The NCPS Calculation
Calculating your NCPS using the answer to a single key question: What percentage of cost goes to
successfully delivered services?

Outcomes are categorised into 3 groups:

WPC : Well Performing Cost % of cost spent on services delivered to requirements
Question mark
UPC : Under-Performing Cost % of cost spent not allocated to services or services of
which performance is unknown
% of cost spent on services not meeting performance
requirements

Subtracting the percentage under-performing cost (UPC) from the percentage of successfully performing
cost (SPC) yields the NCPS, which can range from a low of –100 (if every service is under-performing) to a
high of 100 (if all services are meeting performance expectations (NCPS = WPC – UPC). With most cost being
clearly allocated to a service a NCPS that is around 45 is felt to be good, and a score of 70+ is excellent.

A Core Metric for Supplier Performance
Use your NCPS as the key indicator of your sourced services and supplier relationships. As a leading indicator
for supplier performance NCPS provides a single uniform anchor for your sourcing initiatives. Complement
NCPS with other performance and risk indicators, and you have a comprehensive, actionable view of supplier
performance. Use you focus on raising your NCPS on individual service contracts or your sourced services
portfolio as a whole to drive improved business performance.

Trusted by your stakeholders
NCSP is straightforward and easily understood by everyone from the corner office to the front line.
It provides a touchstone for engaging your management in your sourcing initiatives.

NCPS predicts success
NCPS gives you a good prediction of long term success of the engagement. The economics of NCPS spring of
the differences in behaviour of client organizations and service providers when dealing with strong and weak
performing services.

When confronted with a low NCPS, clients generally are not satisfied with value provided and will seek for
improvements. This means that they will push for lower prices – harming supplier’s profitability –, or demand
better quality of services. These actions are typically combined with stricter monitoring and control of
supplier performance which will have a negative affect on collaboration and trust. If not successful in these
efforts, clients will take action to reallocate services to more favourite suppliers. At the same time, when
experiencing a high NCPS, clients will put more trust in the supplier, become less price-sensitive and open to
buying additional services.

Value-led sourcing governance framework Page 36

What is Risk-Adjusted NCPS?

A grounded forecast of future service and supplier performance

The Net Cost-Performance Score, or NCPS, provides a single measurement on supplier performance based
on demonstrated (historic) performance. Although this critical performance indicator allows you to make a
judgement on future success of the engagement, you have to be aware of possible changes that may affect
future performance. Past performance holds no guarantee for the future.

To improve the quality of the performance outlook, beyond the NCPS, we make use of the Risk Priority
Number, or RPN. This number, resulting from the FMEA assessment, allows us to take into account known
or expected changes in the service provisioning. These, for instance, can result from changing service
requirements or alternative service delivery processes. The RPN ranges from 1 to 125. A score of 1 is the
result of a no-impact event, combined with a rare probability of occurrence and almost certain discovery.
On the other side of the spectrum, a 125 score results from a catastrophic impact resulting from an event
which is almost certain to happen and a rare chance of being detected.

This means that a RPN of 1 is expected to yield a NCPS of 100, where all services are delivered as required.
On the other side of the spectrum, a RPN of 125 is expected the yield a NCPS of -100, where non of the
service are delivered as required. A RPN of 27, which is the result of all risk factors (impact, likelihood,
discovery) being scored at a neutral 3, would result in a 50/50 chance of service requirements being met,
with an equivalent NCPS of 0 (zero). These data points result in a function allowing us to make a mapping of
risk to expected performance referred to as risk-adjusted NCPS (RA-NCPS).

RA-NCPS = 373,7725/(1+(RPN/83.15097)^0,7276825)-259,3684

The function allows you to integrate risk-related information into forecasts and plans to improve your ability
to forecast future service outcomes. It can be used to facilitate the development of service and supplier
strategies, priority setting and, for meeting performance targets under a number of scenario’s.

Value-led sourcing governance framework Page 37

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Value-led sourcing governance framework Page 38

3. Supplier Relationship Management

Sourcing does not just involve a formal legal contract between the parties but also a less tangible psychological
contract which is at least evenly critical to the success of the engagement. It is a critical element of a balanced
and harmonious sourcing relationship. A psychological contract is referred to as: the contractual party’s mental
beliefs and expectations about their mutual obligations in a contractual relationship, based on perceived
promises of a reciprocal exchange.

To develop a productive relationship the parties need to acknowledge that collaboration, trust and partnership
quality is not only critical to assure a balanced and harmonious relationships, but also a key predictor for service
quality and business satisfaction. It’s only when the parties work in concert with eachother best results are
realized.

Value-led sourcing governance framework Page 39

Principle 3.1 Collaboration

Sourcing is about a bilateral relationship in which parties work together with to realize a set of objectives.
Although the parties may not share every inidividual objectives to the engagement, they need each other to
maximize their own outcomes. It means that the parties, in order to realize their own objectives, have to do
what is good for them and what is good for the relationship. In other words, it requires constructive
collaboration to optimize the cumulative payoff. This approach was proven by John Nash’s Nobel Prize-winning
research in the area of game theory. The basis premise of Nash’s game theory is that when individuals of
organisations work together to solve a problem, the results are always better then if they had worked separately
of palyed against each other.

Constructive collaboration – the process of two or more people working together to achieve something
successfully – is an essential element of every sourced services engagement as services only come into existence
at the same time that they are produced and consumed. It requires the participant to acknowledge that the
delivery of services always requires at least a basic level of collaboration between the service provider and
service recipient. More complex services require more complex levels of collaboration.

In driving constructive collaboration the parties should strive to uphold the principles and behaviours below.

a) Support
The support of the other collaborators in the process is important, especially at times of crisis or
unforeseen difficulties. The focus needs to be on helping each other on solving problems and realizing
the objectives and not on placing blame for things that went wrong. The team needs to work on the
basis of the trust in what is called a psychological safe workplace. It’s an environment where it’s safe to
take risks and where, if someone has questions or is in need of help, that support would be available.

b) Structure and clarity
Clear goals, roles, strategies, communication and decision paths are critical to keep all parties focused
and aligned. These mechanisms are critical to allow team members act in a structured and coordinated
way to achieve objectives. A ‘single source of truth’ and a free flow of information and ideas are critical
to keep all parties attuned to everything that is going on.

c) Dependability
Collaboration benefits from a wide range of skills and expertise in the pool of participants.
A diverse team from both the client- and supplier-side that work together in a non-hierarchical manner
and who can count on each other to do high quality work on time is critical to success.

d) Meaning
Motivation is a strong driving force for effective teams. Effective collaboration requires everyone
involved to understand and share common goals and feel that they gain something from the
collaboration and feel that they are doing something that is personally import to them.

e) Solve
The team must be able to solve problems together and team members have to fundamentally believe
that their contribution matters. Effective problem solving involves dealing with uncertainty, assessing
and mitigating risks, evaluating options and solutions, decision making and resolving conflicts. All of this
needs to take place near their origin within the team. However, if conflict solving failed within the team
escalation follows in adherence to the agreed escalation mechanism.

Value-led sourcing governance framework Page 40

Principle 3.2 Trust

Trust is a critical element in every business relationship as it affects every personal interaction. When there is
trust people can put all their energy in realizing the objectives of their association. If there is mistrust things slow
down and energy is lost with monitoring and controlling each others contributions. When there is a lack of trust,
communication is exhausting, time-consuming and often ineffective with words and motives being questioned.
A lack of trust in sourcing relationships is what triggers clients to micro-manage their suppliers, and wonder why
things get over-complicated and inadequate. Whether real or perceived, a lack of trust slows things down,
increases levels of control and cost.

With the debilitating impact on sourcing relationships, the partners should aim to have more trust to maximize
the value of the engagement. Trust however is not a matter of blind deference, but of placing – or refusing –
trust with good judgement. Trust should only be given to those who have demonstrated to be trustworthy and
not to the ones who are untrustworthy.

So what matters in the first place is not trust, but trustworthiness and the ability to judge the trustworthiness of
business partners with respect to their contribution to the engagement. According to the Britisch philosopher
and politician Onora O’Neill we should look for three attributes of trustworthiness in a partner.
Are they competent? Are they honest? Are they reliable? If we find these qualities in a partner, we have a good
reason to trust them. Everyday tests of trustworthiness less explicit. A brief exchange of words, a few questions,
a short meeting and we begin to place some trust, which we then revise, extend or reduce as we observe and
check performance. Building trust starts at home. It starts with your own trustworthiness. You can't have trust
without being trustworthy. So in order to grow a trusting relationship, one should invest in developing the three
core attributes of trustworthiness. Trustworthiness should be put before trust. Trust is the response.

When trust is placed in a partner based on trustworthiness the level of control can and should be softened.
In doing so, the cost of control will reduce and it allows the parties to focus on other value adding activities.
If in a trusted relationship the level of control is not reduced, it will become counter productive as people will
feel their trustworthiness is not recognized or appreciated resulting in disengagement and reduced productivity.

Value-led sourcing governance framework When the relationship is well-balanced,
harmonious and delivering value, it can
develop into a partnership persuing results
beyond the initial scope of the engagement.

Based on trust, well-founded on
demonstrated trustworthiness, the parties
are able to optimize the cumulative result of
the engagement.

Productive collaboration allows the parties
to demonstrate they are trustworthy by
showing competence, honesty and
reliability.

Productive collaboration is the foundation
of every balanced and harmonious sourcing
relationship.

Page 41

What is Economic Value of Trust?

We believe that trust is a critical asset that impacts performance and value. A smoothly operating
engagement is critical to the productivity of any sourcing initiative and trust has a vital role in that. If we
begin our relationships with individuals, organisations, or businesses with a lack of trust, then our
relationships with them may not grow. Why? Without trust, there isn't a foundation to build permanent
cooperation and collaboration. Likewise, if misunderstandings develop, there is little hope that distrusting
individuals will work together to resolve their differences. Instead of talking directly with each other in this
situation, it is common to tell our version of misunderstandings to others in order to justify our position.
Unfortunately, because trust is a perception, it is often a hidden variable that is difficult to understand,
measure and improve. "TRUST is like the air we breathe. When it's present, nobody notices. But when it's
absent, everybody notices." - Warren Buffett.

It however doesn’t have to be that way, particularly when we understand the economics of trust.
The economics of trust simply state that trust always affects two measurable outcomes: speed and cost.
When trust goes down, speed will also go down while the cost will go up. This is referred as a tax.
When trust goes up, speed will also go up while cost will go down. This is a dividend. In this terminology,
coined by the Warwick Business School, the Controls conducted by the client (see mix of Controls),
as a response to the FMEA assessment, can be seen as a tax.

Every interaction, every work project, every initiative, every communication, every strategic or tactical
imperative we are trying to accomplish is affected positively or negatively by trust. If our organization enjoys
a trust dividend, then trust becomes the great ‘performance multiplier’. If, on the other hand, we are paying
a trust tax, then everything we do takes more time, costs more money and the outcome in terms of quality
and effectiveness goes dow. As Columbia Business School Professor John Whitney says, “Mistrust doubles
the cost of doing business.” Because trust is the one thing that affects everything, it is, without question,
a critical strategic lever we can focus on. Since this is the case, it is critical to understand the impact that
trust is having on our organisations so that we can do something about it.

The 7 low trust engagement taxes The 7 high trust engagement dividends
1. Redundancy 1. Increased value
2. Bureacracy and control 2. Accelerated decision making
3. Office politics 3. Enhanced innovation
4. Disengagement 4. Improved collaboration
5. Turnover 5. Stronger partnering
6. Wheel spinning 6. Productive execution
7. Fraud 7. Heightened loyalty

Source: Derived from The Speed of Trust

Value-led sourcing governance framework Page 42

Principle 3.3 Partnership

A sourced services partnership is about the parties working together in a balanced and harmonious relationship
to realize a common goal that may develop beyond the initial scope of the engagement. A study of Australian
CEOs by has identified that well managed sourcing arrangements based on mutual trust can create a 20% to 40%
difference on service, quality, cost and other performance indicators over outdated power-based relationships,
according to a 15 year research study by the Warwick Business School. The report reads: “We found that
contracts with well-managed relationships based on trust—rather than stringent Service Level Agreements and
penalties—are more likely to lead to a ‘trust dividend’ for both parties, critical to partnering. Real trust is not
naive. It…is earned from performance.” This aligns with our believe that trust shouldn’t be placed indifferently,
but on credibility rendered.

Partnering implies trust and a shared commitment, where the partners have a right and desire to participate
and contribute, and will be affected proportionately by the risks and rewarded arising from the partnership.
What the commitment amounts to, and the extent to which risks and rewards are shared, are subject to
contractual provisions. The most essential features of a partnership are hard to draft as guidance or put into a
code of practice as they are often intangible by nature and highly dependable on interpersonal relationships.
However, it is expected that the partners uphold the following principles and behaviours:

a) Shared objectives
The strategic and (long-term) goals and objectives are based on a model that supports the sustainable
vested interests of the parties and balances benefits and risks. This with careful consideration of
interests of the stakeholders to the engagement.

b) Communication
The parties fostering a frank, open working relationship and a high level of mutual respect, particularly
between the engagement’s top managers and key players. The parties will act with integrity, care and
respect and will endeavour to maintain and promote confidence in the partnership.

c) Service quality
Service quality is highly intertwined with relationship quality. Service quality is a basic requirement to
any sourcing engagement. If people are satisfied with the service quality they are more likely to value
the relationship.

d) Trusted collaboration
The parties demonstrating good will and foster a spirit of trusted collaboration to limit the level of
mutual monitoring and control, and work together on a lasting successful relationship.
This includes removing obstacles that hinder the relationship which may include:
o complexity of teams, processes and tools;
o confidentiality breaches;
o rivalry, stereotyping and finger pointing;
o on-going conflicts;
o information islands;
o disputed / unverified data sources.

e) Continuous improvement and innovation
The parties taking unsolicited initiatives to develop and advance the relationship for their own account
and risk.

Value-led sourcing governance framework Page 43

Principle 3.4 Dispute Resolution

No sourcing relationship exists without the occurrence of a conflict. Given the corrosive impact of accumulating
disputes on the relationship and the impact on the business it is extremely important to have effective ways to
deal with them quickly and effectively. Whether dealing with a disagreement between co-workers or breaking
through a contract negotiation standstill, dispute resolution is best approached through a deliberate process.

To resolve disputes quick and effective the will need to be resolved through an informal process near their
origin. Only if the dispute cannot be informally resolved at the point where it emerged, it should be escalated
following an agreed escalation mechanism. If a conflict requires escalation, it is best practice that both parties to
the conflict jointly escalate to a higher level to request for a decision.

Subject to specific contractual provisions, the parties may consider the following dispute resolution approach:

a) Set the scene
o promote good relationships through mutual respect and courteous behaviour;
o keep the dispute separate from the person and debate the real issue;
o be open to exploring all options;

b) Gather information
Work together to gather all the relevant information which may include the cause of the problem,
the consequence, who and what it affects and actions already taken.

c) Agree on the problem
Ensure that everybody has a clear and full understanding of the issue. Remember that different roles,
interests and conflict resolution styles can cause people to perceive problems very differently.
Be sure everyone agrees on what the problem is before moving forward.

d) Agree on alternatives and standpoints
If the dispute is not already resolved through the initial steps of information gathering and clearly
communicating the problem it is time to identify alternative solutions to the problem and what the
arguments are to prefer one alternative over another. Make sure the information is clearly put on
paper including the positions and supporting arguments of the parties.

e) Agree on a solution
To resolve the dispute the following strategies may be applied:
o compromise – where each party gives and takes a little;
o voting – where other people are called in to cast their vote on the alternatives;
o mediation – where the parties agree on an independent third-party to make a decision;
o litigation – the final juridical proceeding in which court ruling is sought.

Whatever the dispute resolution mechanism concessions are bound to occur, but such cooperation
needs to be a two-way street. If a concession is granted to facilitate the other party it is suggested that,
to balance the transaction, a nonbinding IOU is created which, when needed, can be redeemed.

Value-led sourcing governance framework Page 44