Lack of Supplier Governance? Sometime you lose money, sometime reliability.

“The know-how of Supplier Governance and corresponding tools are essential in making outsourcing engagements successful.”

Every organization engaging suppliers knows that value leakages occur in outsourcing contracts, which can vary anywhere between 10% and 25% of the Annual Contract Value (ACV). There are two types of value leakages – hard dollar and the soft dollar. Hard dollar leakages are the low hanging fruits of the two – easily visible, whereas the soft dollar leakages are difficult to measure and get consensus on.

Hard Dollar Leakages

Hard dollar leakage is like continuing to drive a car despite knowing that it has a flat tire or accidentally hitting a parking meter while you park your vehicle. In these cases, you can see the damages soon enough, and they are visible.

Similarly, in outsourcing engagements, when you do not put the effort in managing SLs/KPIs, or use non-contracted or premium rate cards for work orders to get things done quickly, and make frequent changes to contract scope resulting in invoice errors – you create the conditions for hard dollar leakages. It is easier to detect them as they have the following characteristics:

• They are measurable
• They have direct financial impact on the annual spend on outsourcing engagements
• They can be reduced by having appropriate controls on critical processes like Invoice Management, Service Level Management, Work Order/SOW or Contract Changes, etc.

Soft Dollar Leakages

Let us assume that you regularly drive your car with low tire pressure for a prolonged duration and you driving style is rough, and you do not get it serviced on time. You may not realize it, but you are always reducing the life of your tires and the car as the wear and tear do not show up immediately.

Likewise, in outsourcing engagements, lack of Supplier Governance practices often result in spending more time in tactical events than strategic planning. Additionally, more efforts from both parties are needed to maintain the relationship, and substantial degradation of performance with time occurs. These are referred as Soft Dollar Leakages, and they are not perceivable right away. They have the following characteristics:

• They are not measurable, but they have very high perceived value
• They Impact trust and predictability of performance resulting in increased risk of outsourcing
• Soft dollar leakages can be minimized by managing Action Items and Issue, sharing CSAT and VSAT scores, common interpretation of contract language and so on

Addressing soft dollar leakages requires sufficient effort on vendor management or supplier governance, along with the implementation of the right tools to realize full value from your outsourcing engagements.

Ignoring soft dollar leakages can lead to substantial unrealized savings and loss of credibility as the expected outcome from contracts degrades with time. So, it is imperative for enterprises to not only address hard dollar leakages but plug soft dollar leakages too. The know-how of Supplier Governance and corresponding tools are essential in making outsourcing engagements successful.