As supply chains become more complex in an uncertain and volatile global economic environment, a sound governance structure is vital for success. Simply put - business happens and companies need to work together with their service providers to determine the best way to manage the business.

Research and field work by the University of Tennessee demonstrates that some of the best outsourcing relationships create a relationship in which the parties have a vested interest in each other's success. We see the most successful companies not just managing the supplier with supplier relationship management tools but managing the business with their suppliers using an insight-vs.-oversight governance philosophy.

The University of Tennessee's research and fieldwork has identified four elements parties should adopt in their governance to keep the agreement in alignment and working toward their desired outcomes.  These are:

• Relationship Management - The relationship management structure formulates and supports joint policies that emphasize the importance of building collaborative working relationships, attitudes and behaviors. A good relationship management framework uses a tiered approach (often 3 tiers, including executive, operational and day-to-day functional levels) and peer-to-peer "2 in a Box" principles versus a single point of contact principle.

• Transformation Management - The best outsourcing agreements are transformative in nature.  They don't just buy a transaction to do the work the way it has always been done; they demand change and doing the work better, faster and cheaper by focusing on process innovations and by using continuous improvement programs. A good governance structure will have formal transformation management processes that embrace innovation and change and will have mechanisms to support the change.

• Exit Management - The future is unknown. Even the best plans fail or events will change the business environment. An exit management strategy provides procedures to handle these unknowns. It is not enough to merely have simple termination-for-convenience or termination-for-cause clauses for more complex outsourcing deals.

• Special Concerns and External Regulations - Today's business environment is demanding compliance against a host of environmental, regulatory and social responsibility compliance requirements.  A sound governance structure will address how the parties will manage strategic prerequisites, including regulatory compliance requirements as well as how they will deal with security, technology, and intellectual property.

If you don't have these elements embedded in your governance structure you might be experiencing savings leakage. And you are most definitely not fostering an environment for your supplier to feel comfortable in investing in process or other innovations that will shift your outsourcing agreement from performing tasks to delivering real business value.

                                 The Outlook

While some companies will use outsourcing as commodity, in 2012 more companies will strive to work more collaboratively with their service providers, focusing on creating business value. We believe that progressive companies will understand and embrace the need to embed formal governance structures as a critical component of their collaborative outsourcing and supply chain relationships. Wise companies will opt for governance structures based on insight versus oversight.