Evaluating the benefits of conducting periodic health check reviews of outsourced contracts and service providers.

In brief

• Leading organizations regularly assess the health of their outsourced contracts and service providers to gains insights, identify potential risks and opportunities in the relationship.
• These reviews help CXOs, contract owners and supplier managers to take appropriate actions and decisions to derive long term value.
• Health check reviews are conducted at various stages of contract lifecycle such as after go-live, on contract anniversaries, prior to contract renewal or on specific event.

Managing service providers and outsourced contracts has been an ongoing challenge for most organizations. This is increasingly true in today’s business environment with rapid globalization and digital transformation. Organizations are dealing with an increased number of third parties, and contracts are becoming complex from a commercial, compliance, performance, and outcome perspective.

Outsourcing deals continue to expand its scope to involve more business functions, geographies, and services. Most commonly outsourced services across sectors, include finance and accounts services, IT/technology services, procurement to pay, human resource and payroll service, order to cash services, real estate and facilities management, contact centre services, tax services and legal services, among others.

Emerging trends show that leading organizations with effective governance over their service providers and outsourced contracts are able to realize committed value and benefits from their third–party relationships, enhance service delivery, effectively manage risks, deliver innovation, and improve supplier performance.

Organizations need to effectively manage risks associated with outsourced contracts and service providers – if a service provider fails to perform services as per the contract or is unable to fulfil contractual obligations, it may result in regulatory non–compliance, reputational damage, financial loss and even business disruptions for the organization.

Key questions for CXOs, contract owners and supplier managers

1. Is service provider (and outsourcing contract) aligned with the organization’s goal and vision?
2. Have we realized the committed benefits and agreed value from outsourcing contract?
3. Are services delivered as per the agreed scope and performance standards?
4. Who monitors contractual risks and the fulfilment of commitments?
5. Has service provider delivered benefits through innovation and continuous improvement?
6. Are we charged/ invoiced as per the agreed commercials?
7. What is the customer satisfaction score and experience so far?

1. Importance of a health check review

Health check reviews are intended to help organizations, business functions and supplier managers detect and prevent relationship or contract failures. These reviews help to (a) identify early indicators of risks and potential issues in a contract before these become major; and (b) perform a detailed assessment of specific issues and define an improvement plan for both the parties.

2. Focus areas and periodicity of reviews

Health check reviews are conducted at different stages in a contract lifecycle (such as post– Go–Live, or completion of the improvement phase, or on the contract anniversary, or prior to contract renewal). The review may cover the following: 

• Service provider’s alignment with contractual arrangement and expectations in contracts
• Realization of committed benefits and value in contracts
• Supplier’s performance and quality against the defined standards
• Compliance with contractual obligations and commitments
• Service delivery quality and compliance with the organization’s policy, procedures, and controls
• People and talent management by the service provider
• Commitment to innovation and continuous improvement
• Contract governance and supplier management
• Any other indicators of risks and potential failure

CXOs, business heads and supplier managers should always look for key signs that suggest the possibility of issues or risks in the relationship. The following are some signs that have been observed in outsourced contracts as red flags:

• Unsatisfied stakeholders, despite all performance indicators being met
• Multiple variations or change orders in a contract
• No clear ownership or accountability over fulfilment of the contract or business case
• Ad–hoc or no tracking and reporting of contract and service provider’s performance
• Limited understanding of commercial structure and scope of the contract
• Contract non–compliances
• Contract costs and schedule overruns
• Long pending open issues and disputes

3. Case study

Periodic health checks or diagnostic reviews can be led and performed by the vendor management team, an independent consultant, or the internal audit/compliance team of an organization.

The management of a Fortune 500 company was facing difficulties with the operational performance of their large business process outsourced contract – the internal stakeholders were unhappy. At the same time, the cost of delivering those services had increased through multiple change orders or amendments. They had limited visibility on the fulfilment of contractual commitments and lacked the confidence to achieve the business case for outsourcing those services to a third party.

The company’s management decided to conduct an independent study to assess the health of the outsourced contract. The evaluation team reviewed the current contract and developed a review program that covered critical aspects of the relationship – such as contract performance, financial and compliance management, service delivery and overall risk and governance practices over the contract. 

A detailed study was conducted of the contract structure, terms and conditions, existing processes responsible for monitoring performance and compliance to contractual commitments. The health check review helped the organization identify critical areas of improvement and risks to be managed. Some critical issues or risks identified included:

• Value leakages: Contractual commitments and benefits were not tracked, validated, and monitored for the realization
• Lack of visibility and ownership: Stakeholders had limited visibility into the achievement of the business case, contract consumption, cost compliance, supplier’s performance against agreed standards, and fulfilment of contractual conditions/compliances
• No alert or warning system was in place: No framework was in place to identify, track and monitor risks in contract delivery
• No quality assurance framework: Instances of scope non–compliance to the agreed scope of work, process controls gaps, inadequate talent/resource management, inadequate quality checks and process inefficiencies
• Limited governance and issue management

In addition, the review identified instances of ambiguous contract clauses, change orders not reviewed adequately before execution, service levels not baselined and monitored adequately, vendor invoices not reviewed adequately before processing, and penalties/service credits not computed and adjusted timely.

The outcome of this review helped the management identify risks in the contract and control gaps across the value chain. Together with the management, the service provider defined and agreed to immediate initiatives or action items and a long–term improvement plan. The organization established a framework to govern the outsourced contract and relationship with the service provider, including regular on–site and off–site reviews to effectively monitor the progress and manage risks.