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Extended Enterprise Governance, the new Management Imperative

By Rajiv Advani, Diligent LLC

In today’s increasingly outsourced / extended enterprise environment, proper Governance requires a broader, more integrated perspective on what needs to be controlled and also requires new capabilities in order to gain proper visibility into what is going on. These capabilities must extend and encompass all the parties involved, where multiple “Service Providers” and their “Client” can govern and operate as a single entity while still maintaining their independence.

Organizations seeking the long term benefits of a flexible extended enterprise business model will need to develop Governance as an internal competency or face the risk of increased failures in the near future.

Overview
Given all the history and thinking around program / project management and outsourcing / in-sourcing, it is surprising the question of how to effectively program manage and mitigate the risk of these initiatives is still a largely open issue. Gartner research has concluded that nearly 80% of outsourced IT projects do not meet time or budget requirements or deliver on expected results. On the in-sourcing side it is the same story - our client interviews of various Fortune 500 financial services and pharmaceutical companies put internal project failure rates around 60-70%. Given IT budgets can easily exceed a billion dollars, hundreds of millions are at stake in most large companies.

With today’s increasingly complex world where projects are delivered with a mix of in-sourced and out-sourced resources the problem only compounds. Gartner recently said it best:

“Under ideal circumstances, outsourcing results in business benefit through reduced costs and higher performance through specialization. You may even see a short term benefit. But in the long term it's not so simple.

R. Mogul, Research Director

To solve this age old problem and to address the added complexities of today’s “extended enterprise” business models, leading edge companies are re-focusing on developing Governance as an operational capability within their organizations.

The term “governance”, however, can be interpreted in many ways. A common dictionary defines Governance as:

“The exercise of authority; control; government; arrangement.”

Whereas a practitioner describes Governance more operationally as:

“The distribution of rights and responsibilities among different participants in the corporation, and spells our rules and procedures for making decisions on corporate affairs. It is inclusive of the structures, process, cultures and systems through which the company sets out its objectives and defines the means of attaining those objectives and monitoring its performance. It is the system by which companies are directed and controlled.”

As you can see “Governance” is certainly not a new issue. In its most basic form it is just another word for management, and is typically used to define management oversight at the Corporate / Board level.

When defining Governance it is equally important to describe what it is, how it will get done and also where in the organization it is happening. For the purpose of this discussion the competency we are referring to is “Extended Enterprise Governance” which can be described as: “Integrated management oversight with real-time performance visibility and control over the organization’s in-sourced / out-sourced project activities.”

Our perspective is that in today’s increasingly outsourced / extended enterprise environment, proper Governance requires a broader, more integrated perspective on what needs to be controlled and also requires new capabilities in order to gain proper visibility into what is going on. These capabilities must extend and encompass all the parties involved, where multiple “Service Providers” and their “Client” can govern and operate as a single entity while still maintaining their independence.

Organizations seeking the long term benefits of a flexible extended enterprise business model will need to develop Governance as an internal competency or face the risk of increased failures in the near future.

Backdrop - Business Transformation Creating Management Risk
In nearly every type of company today, there is a fundamental shift that is taking place in how executives view what competencies are core / non-core to their business and as a result how they structure and govern their operations. The implications are global in nature and have been the foundation for the continued growth of the IT Outsourcing and BPO markets.

These companies are essentially becoming “extended enterprises” that seek out best in class capabilities from internal and / or external service providers. In the end, this shift is creating a new organization where the driver to outsource is not simply cost reduction but the need to be more competitive through operational flexibility and best-of-breed capabilities.

The new model is clearly compelling, but there is a catch. The approach is difficult to manage and potentially more risky.

- Financially: Strategic decisions are being made to outsource larger more complicated programs / projects that are of higher strategic and financial value. As a result, the organizational costs of everything from small delays to complete failure are getting bigger.

- Operationally: Increasingly “core” processes are leaving the enterprise and going to third parties making it more difficult to switch vendors and maintain control. Additionally, the structure of these new models often requires multiple service providers (internal and external) to work together as a team. The result is that Management (Executive, Program and Project) is becoming extremely complicated and more critical, all at the same time.

- Personally: On top of all this complexity, government regulations are creating new personal risks for Executives requiring that they have greater visibility and control over both financial and operational activities – Sarbanes Oxley is likely just the start.

Given the potential benefits and risks the critical question that needs to be answered is not just “should we do it” but if we do, “how will we govern and manage it”.

A Holistic Governance Model, Requires Integrating Points of Control
As we look at what needs to be governed and managed for a program / project to be successful most thought leaders have been recently pointing to topics such as strategic alignment, SLA/contract structuring and compliance. Certainly these issues need to be managed but the question really needs to first be answered more holistically because the topics span organizational, functional and process boundaries. Each organization then needs to review these topics and set their own priorities.

As such the topic is complex, and it is often unclear who is responsible for making it all happen resulting in a lack of action. If the answer is a “C” level, there is a probably a governance breakdown. Likewise if it is the Sourcing Organization or similar lower level functional group there is probably insufficient cross-functional governance and coordination.

Starting with a Governance framework is helpful to determine what areas need to be managed and integrated, what information is required, and in the end who needs to make sure it all comes together. As an example, our analyses found that integrating four areas of management control were critical to program / project success:

- Financial Management: Business case development, portfolio management, sourcing strategy, budgeting, actual spend, invoicing and billing, credits/penalties.

- Sourcing Management: RFx development, partner selection, contract / SLA management and signoff.

- Execution Management: Program management, resource and project planning, status management, scope management / change requests, customer acceptance.

- Service Provider Management: Qualification / decision support, contract management, customer satisfaction, SLA and service provider performance monitoring.

In the example above, it does not take long to recognize that many management and operational disconnects exist within and across these four areas. For example: do Business case objectives get revisited during project execution when scope changes or the project falls behind schedule; does purchasing / legal have any responsibility for successful delivery of a project after the contract is signed; do PMO’s get measured on customer satisfaction during and after the project is completed; do contracts get renegotiated based on actual historical project performance; does data and knowledge get shared effectively between these areas?

Given the lack of integration across these areas, it is surprising that the IT industry can still claim a 30-40% success rate for its projects.

Effective Governance, Requires Real-Time Management Visibility & Control
The difficulty with bringing all these activities together can be traced back to a variety of organizational structure, process, and system issues, but regardless the result is a lack of management visibility into what is going on. This is true for management in all parties involved on a project – both “client side” and “service provider side”, and becomes increasingly complicated when activities are being performed by multiple external organizations (multi-service provider projects). Management on either side simply does not have the right data, at the right time, to ask the right questions, to make informed decisions. Governance cannot be effective if visibility is not enabled, requiring organizations to take a closer look at their operations and determine the gaps that deter management visibility:

- Organizational Structure: Operations are decentralized, reporting relationships are siloed impeding coordination and communication.

- Processes: Processes are not standardized, roles and responsibilities are unclear.

- Systems: ERP type systems do not extend to support governance with external parties, 3rd party applications’ functionality are not integrated / holistic, or systems simply do not exist.

- People / Cultural: Information is not shared real-time among different organizations or levels of management (e.g., project / program / executive), Clients and Service Providers do not view each other as partners.

However, the most typical gaps result from a combination of the above - the lack of standard frameworks and processes, and the uncoordinated use of applications and tools to capture data and report on performance (i.e., points of data capture are not connected). For instance: Project plans are kept in MS Project, actual resource time is tracked in Excel, Status Reports are done in Word, issues are tracked in Excel, Change Requests / Approvals are handled by email. This issue is complicated when multiple projects are being executed simultaneously with a number of external parties - the data from all these activities and documents simply cannot be manually integrated. And even when data is available it is not often shared. Without this data being aggregated and presented in real-time, effective Governance will be difficult, if not impossible.

Extended Enterprise Governance, Developing the Capability and Lowering Risk
As companies continue to outsource larger and more core activities they will inevitably recognize existing activities are insufficient and Extended Enterprise Governance is an issue that needs to be addressed.

Our experience has shown that companies have attempted to build capabilities in many ways: Corporate restructurings, formalizing Program Management Offices (PMO’s), implementing 3rd party applications. But even with these additional capabilities, risks are still high because management visibility and control into activities is still limited - data integration may have improved but management still continues to operate independently. For instance, one Fortune 500 Financial Services firm transformed their IT organization and created a centralized strategic sourcing function, consolidated PMO activities and imposed strategically driven standards into the different activities. In contrast another Financial Services organization deployed a 3rd party “IT ERP” application to better manage their project activities. Both moves improved Integration and to a limited extent improved management visibility.

However, the missing element in both these transformations was the bringing together of the Client and Service Provider management into a “single” extended enterprise. In the former example, the new organization had no clear mechanism or capability to track performance and provide visibility to management. It also represented an internal process solution that did not involve integrating governance efforts with their external service providers. In the latter example, the 3rd party application was installed within the Client’s internal environment, again limiting their Service Provider’s access and involvement. In the end, both parties continue to operate as distinct entities with their own processes, systems and approaches to governance and risk management. The result may have been a better situation but still had more risk than necessary.

Realizing Extended Enterprise Governance, Getting it Done
It is clear that what most companies are doing to today is still not adequate to effectively manage program / project risk. Industry failure rates are a clear indicator and the analysis in Figure 2 is also indicative of existing gaps. The question remains what do companies need to do to address these issues?

As we have discussed there are two major levers to effectively managing program / project risk in an extended enterprise environment: Integration and Visibility & Control. As our previous examples indicated, organizations are at different stages of addressing these points but we have not seen any that have truly excelled. To elaborate, some of the key points are:

1. Integrate Points of Control around a Holistic Governance Model

Strategic Alignment
Clearly define objectives and targets – align to business needs Develop SLA’s and Contracts that support objectives and share risk
Deploy PMO’s to manage related projects
Process Standardization
Define and integrate management processes and points of control (Sourcing, Financial, Execution, Service Provider Mgmt)
Clarify management roles and responsibilities
Develop templates to support integration and standardization
Compliance
Proactively address emerging regulatory requirements (e.g., Financial, Operational, etc.)
Develop financial / non-financial metrics to monitor and inform


2. Enable Real-Time Management Visibility / Control

Data Collection
Connect related PM systems (e.g., ERP, Databases), 3rd party point solutions (e.g., Ticket Tracking, Dashboards) and desktop tools (e.g., MS Office, MS Project, file)
Consolidate data across separate organizations / programs / projects
Communication and Collaboration
Establish collaborative workflow processes between Clients and Service Providers (e.g., status reviews, change management, issues/risks management, resource management, knowledge management, performance management) Provide process / delivery visibility to both Client and Service Provider management (i.e., project, program and executive levels)
Reporting and Analysis
Proactively alert team and management of issues (e.g., automate KPI’s, notifications)
Simplify status reporting / ad-hoc report generation
Accomplishing these points within an organization and extending it externally to encompass its services providers is clearly complex but still a doable task. It will take organizational commitment for change and will require innovative systems to enable it. But given the business trends and resulting risks it really cannot be avoided.

Conclusion
Our perspective is that in today’s increasingly outsourced / extended enterprise environment, proper Governance requires a broader, more integrated perspective on what needs to be controlled and also requires new capabilities in order to gain proper visibility into what is going on. These capabilities must extend and encompass all the parties involved, where multiple “Service Providers” and their “Client” can govern and operate as a single entity while still maintaining their independence.

Organizations seeking the long term benefits of a flexible extended enterprise business model will need to develop Governance as an internal competency or face the risk of increased failures in the near future.

For additional information and questions:

www.diligentsolutions.com

About the Author:

Rajiv Advani is a co-founder of Diligent, LLC – an ASP offering innovative solutions to managing program / project risk through improved governance (visibility and control). Rajiv currently leads Client Services and Product Development

 

 

 

 


 

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