With continued pressure even within the most successful enterprises on strategic business unit (SBU) leaders to limit head count and maintain hiring restrictions, it is tempting for them to transfer work into contingent labor and, more and more often, to service contracts that reward business partners and independent contractors for project deliverables, often on a strict delivery schedule and with monitored milestones.
These contracts, referred to as statement-of-work (SOW) contracts, establish contractual terms and conditions around work activities, work deliverables and deadlines. In some cases, a master schedule of services is required (providing a regulatory and governance framework for individual statements of work to be drawn up later).
Seeing the Pattern
When managing SOW, it’s important to identify engagement models for these types of service contracts. There are three main areas to consider:
- Which business service areas currently use SOWs;
- Which engagement patterns can be identified;
- Which administration processes are used to manage SOW contracts
Service areas are usually transparent and well known to procurement: IT services — financial services, marketing, business consulting, etc. — and beyond stating the need to audit each service area and identify exposure to existing and planned work contract budgeted spend, I will not explore this particular aspect of SOW management in more detail.
Engagement patterns emerge from two well-established criteria: the common business name applied to the SOW and the payment schedule for the SOW.
Fundamentally, four types of work outsourcing exist: Professional (and/or knowledge-based), process-specific, manufacturing and operational. When designing a master services schedule or a SOW contract, it is essential that a further engagement pattern be identified to establish the scale and nature of the work:
- Independent contractor (IC)
- Business services
- Managed program
The above are not exclusive and often overlaps will be seen. Examples could be: outsourcing of all invoicing (BPO, possibly offshore); outsourcing production of an electronic component (manufacturing business service, either offsite and/or offshore); or outsourcing of legal services (process-specific, KPO).
Arguably the most common SOW type, project-based SOWs focus on deliverables and, like a good book, must have a beginning, middle and end. Independent contractors, technically, are one-person projects, they too are deliverable based, specialize in certain types of work and work independently of established employees.
Business services and managed programs are similar in that both do not necessarily define specific projects or deliverables but they do entail stakeholders within a company to engage with a third-party service provider. The difference between the two is that a managed program will require a much more comprehensive scope of work than a business service (e.g. a set menu for a full meal verses “a la carte” dining).
BPO/KPO describe statements of work where expertise in certain business processes or knowledge is not prevalent in-house and must be procured from an external third party. Here, the quality of the service provided is critical and manifested in agreed service levels.
Once we have established the type of outsourcing and the engagement pattern involved, we can then get to the heart of SOW: the payment schedule. Depending on the type of work, a fundamentally different payment schedule can be established. The four main types are based on: Service-level agreements (SLA), deliverables, units or time and expense.
Yes, that’s right, time and expense-based payments are often found in SOW contracts. For example, if your company has outsourced legal services to a third-party legal firm, it’s highly likely the contract is on a time and expense or time and materials materials basis, often with a cost-plus fee attached.
SLA payment terms for a SOW incentivize the supplier to perform the work to previously agreed levels of quality and service. The failure to adhere to SLA criteria should result in less of a financial reward for the supplier. Deliverable-based payments usually break down the total cost of a contract into time-scheduled deliverables; these are often stages of a project or individual pieces of project work — such as 10 percent of contract fee paid upon delivery of IT system design specification or 15 percent contract fee paid upon delivery of product marketing survey results. Unit-based payments will usual be made once agreed product or service units (usually of the same specification and/or grade) are handed over — such as $50,000 payment for 20 laptops or $100,000 payment for 500,000 cardboard boxes.
However, governance around these contracts is frequently limited to the financial signing power of the respective hiring manager. Beyond the initial budget allocation to a cost center, or across a set of participating cost centers, little exists to monitor expenditure and to monitor service delivery performance. If I asked you whether your enterprise has a well-established method to monitor earned value of awarded SOW contracts and whether you can report reliably on budgeted cost of work performed (earned value) measured against budgeted cost of work scheduled (planned value), you will probably say no, or that you don’t know.
With a lack of contract performance visibility, the temptation is for procurement to gather all existing service contracts and transfer the risk of managing these to a third party. For service contracts with limited geographical scope, relatively low deliverable complexity and low regulatory compliance considerations, this may be the best first step. However, third-party (MSP) competencies in managing global service contracts is strictly limited and their ability to execute effectively across all categories and geographies is also somewhat limited. This is due to the newness of managing this type of workforce and contract types, and partially is due to the limited history in collaboration with programs that include SOW as a component.
A second temptation is to jump to a solution, or system, that promises to provide a holistic view of your talent requirements, visibility on workforce category numbers and better control on all types of labor spend (including SOW).
Before considering either a managed service or a technology system for SOW it is important to verify which engagement patterns are currently used and what administrative processes and overheads are present. Only then will one understand which aspects of SOW management can be outsourced to a third party and what technology enablement is required to capture and report on SOW performance.
First steps may be to evaluate project and IC contracts, spend and payment terms. Then, once the scale of SOW spend in these categories is understood, to ask some important questions around project and IC spend that will help drive both SOW performance and decisions around the outsourcing of SOW management:
- Are all SOW deliverables and milestones being tracked effectively and payment schedules respected?
- Are all SOW contracts negotiated and terms and pricing competitive?
- Is supplier performance across all SOW contracts visible? Can we track earned value against planned value?
- Do SOW contracts start on time and end on time? Do we effectively manage onboarding and offboarding of project workers and ICs?
- Do we have an efficient SOW contract invoice and payment process? Can invoices and payments be accurately matched against SOW deliverables?
- How transparent, compliant and competitive is the RFP and SOW award process and how well formed are the resulting contracts?
- How are SOW contract disputes managed and resolved?
Deploying a SOW management system can play a major role in answering these questions and providing better outcomes for SOW performance and spend management. The SBU walls and budget silos that exist today must be evaluated and broken down and a SOW platform can drive higher vendor performance, leading, ultimately, to better workforce decision making and management of spend beyond contingent labor.