Some may think that after the contract is signed they can sit back and let the service provider and customer get on with it. But unlike a sale-purchase, long services contracts are long-term relationships where each party has responsibilities that continue, and changes (and problems) are inevitable.
A properly structured and faithfully executed governance model is essential to provide the means to deal with them efficiently, amicably and fairly, thereby enhancing trust in the relationship.
In general terms, governance is the overall process by which the customer and the service provider oversee and regulate their relationship. A governance schedule outlines the framework within which they should:
- meet and report to discuss the progress of implementation projects and/or the performance and future direction of the services, as appropriate; and
- resolve any commercial, operational or technical issues that might arise as part of the project.
The right governance model
A successful governance model addresses all transition, transformation, services delivery and exit issues. The following should be considered:
- Ensure both parties agree how to engage with each other, at what level and when. Often the customer seeks to manage the relationship by focusing on the contract terms while service provider people ignore the contract and try to manage the contract through the relationship.
- Define how the service provider management team aligns and responds to its customer counterpart. While some customers want to describe these roles and responsibilities in the contract and assign oversight of service provider's efforts, the service provider is likely to need sufficient flexibility to manage the supply of outputs. The concern from the service provider's perspective is that they should not give the customer oversight which is so wide ranging or at such a deep level that the customer is tempted to micro-manage inputs.
- Ensure customer executive sponsorship throughout the contract term. Without the right stakeholders, the deal will lose critical focus.
- Build in flexibility for major changes in the parties' respective rights and obligations, such as those generated by the customer's strategic priorities and demand. The deal structure and contract should not assume a steady state business environment.
- Review the service level reports and agree on the actions and required changes to improve quality and effectiveness of services.
- Ensure both parties fulfil all commitments and provide agreed inputs or properly manage the delivery of the contracted services.
- Establish a meeting schedule to discuss innovation and changes in technology and processes.
The governance structure should have the following specific guiding principles:
- Stable, equitable and flexible decision-making structures to avoid delays in time-critical opportunities.
- Delegation of decision-making within a predefined set of guidelines.
- Clear, highly communicative processes that encourage information sharing and enable efficient, effective business decisions.
- An organised, focused communications mechanism to encourage collaborative discussion of issues and ideas critical to ongoing success.
- Specific and defined escalation points and participation of executives with appropriate levels of strategic and operational responsibilities.
Key features of a typical governance structure
The following illustrates an example of a governance structure for a long-term services contract (the names of groups are provided for illustrative purposes only – different terms can be used, it is the concepts which are useful to understand):
Joint Review Board (JRB)
The JRB is comprised of key service provider and customer executives. The purpose of the JRB is to shape strategic direction, resolve major issues, approve strategic changes, and promote leadership and commitment. The JRB guides the overall activities and phasing of the outsourced services so that the mission and objectives satisfy customer leadership's strategy. The JRB should provide information and guidance to the relationship by:
- identifying critical business imperatives with input from key executives;
- confirming strategic objectives;
- confirming schedule based on strategic objectives;
- resolving major escalated issues;
- deciding key service and investment challenges, including the approval of major scope, contractual, or service delivery changes; and
- matching service provider's capability to emerging customer needs.
The Service Management Team (SMT)
The SMT is comprised of contract relationship managers, service provider and customer functional managers and leads. The purpose of the SMT is to address typical service delivery issues, discuss and approve changes and agree on process improvements. The SMT acts as the primary liaison between the customer and service provider and is responsible for understanding the customer's overall business needs and communicating those needs to the service provider service delivery organisation. Integral to managing service delivery is managing:
- the scope as defined in the Statement of Work(s);
- the level of service as defined by the Service Level Agreement;
- customer satisfaction as defined by the customer survey process results service provider issues with how the customer performs its responsibilities; and
- changes that do not alter the agreed rights and obligations of the parties under the contract.
The function of the SMT is pivotal in establishing and maintaining ongoing communications and a positive relationship with customer groups, as well as being the primary interface with (and source of information for) the JRB.
The Operating Group/Service Delivery Team (OGSDT)
The OGSDT comprises of functional leads from service provider and the customer. The OGSDT oversees day-to-day operations, monitors and reports volumes and quality, and identifies and resolves tactical operational issues. This team is the first point of contact for issue resolution and escalates unresolved issues to the SMT using the issue management process. The OGSDT:
- manages daily operations;
- addresses operational issues;
- delivers to service levels and dependencies;
- identifies continuous improvement opportunities; andF
- initiates work requests.
When the service provider and the customer personnel collaborate, transition and delivery succeed. Experienced service provider and customer employees from related areas should be identified in the contract and assigned to support each other and work together to manage specific aspects of transition and delivery.
The list of key service provider personnel should be short, because usually the service provider cannot reassign them without the customer's permission. If a customer wants all service provider personnel to be named as key, the service provider will request that the customer focuses on the critical few. The customer needs to be aware that the service provider will ask for a reciprocal obligation from the customer. The service provider may also consider suspending risk/reward arrangements if the customer's main sponsors of the deal depart.
Timing for agreeing the detail of the Governance schedule
For some projects the governance framework will be fully developed and set out when the contract is signed. An alternative approach is for the contract to specify a procedure under which formal rules can be established. These rules are then commonly embodied in a Service Code of Practice (SCOP) which details the operational and management processes by which the services are delivered. However, as a document, this SCOP is non-contractual as it is an "agreement to agree". Therefore, if a formal and robust arrangement is required, the former approach is recommended as best practice.