Vested Outsourcing and Defining Governance

Vested Outsourcing’s Rule No. 5 says the governance structure of a Vested agreement or partnership should provide continuing insight, not merely oversight.

Obviously it’s really important to have the right governance framework in place to enable the needed insight and to implement the other four rules of Vested Outsourcing. It’s how to achieve an effective, collaborative outsourcing agreement.

For example, it is really hard to optimize pricing model incentives for cost and service trade-offs (Rule 4) or agree on clearly defined and measurable outcomes (Rule 3) without an effective governance structure in place from the start.

But what does governance in this context really mean?

As I’ve delved into this question for books and articles, I’ve discovered that the answer is not so straightforward.

For instance, my research reveals there’s not much consensus on what constitutes a good governance framework, or even how to define the term.

My book, The Vested Outsourcing Manual, which will be published by Palgrave Macmillan in June, features a chapter on governance and how to implement a Vested governance framework.

So by way of a teaser, I’ll offer some points on governance now and in subsequent posts.

A sound governance structure will provide consistent management along with cohesive policies, processes, and decision rights that enable parties to work together effectively and collaboratively. The governance framework enables the parties to manage performance and achieve transformational results throughout the life of the agreement.

There is increasing recognition that there are benefits to reaching deep collaborative relationships with service providers, but many companies lack clear direction on how to build and govern effective partnerships.

Oliver E. Williamson, the Nobel Prize–winning economist, says “all complex agreements will be incomplete—there will be gaps, errors, omissions and the like.”  He adds, “The surprise is that a concept as important as governance should have been so long neglected.”

A flexible, collaborative agreement and governance framework can address Williamson’s points by crafting mechanisms that can cope with gaps and with unanticipated disturbances as they arise.

I believe that a good governance structure should include mechanisms to enable the parties in a relationship to better adapt to business changes—in effect, to keep everyone involved aligned and working toward their desired outcomes. Mutually agreed-upon desired outcomes are in essence the mechanism the parties can use to redirect their efforts as problems arise.

But who can blame practitioners for not adopting something so clearly needed when there is not even a clear definition of governance and guidance on what they are supposed to do?

That’s where I’m happy fill that definitional void.

I define governance insight as the process of governing an organization, enterprise, or agreement through learning and understanding. A Vested governance structure uses a relationship management structure and joint processes as a controlling mechanism to encourage the organizations to make proactive changes for the mutual benefit of all the parties.

A good governance structure creates the chance to understand the business better and to make the changes that will help the company and the service provider reach their desired outcomes.

So don’t neglect a governance framework for your outsourcing agreement!  There’s much more to come on Vested governance.

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