Building Outsourcing Relationships
© 2003, Kenneth A. Polcyn, Ph.D.
Deva Industries, Inc.
You are a company considering the outsourcing of some or all of your business processes. So you ask some questions…How many outsourcing vendors exist that could possibly meet my needs? How do I identify them? How do I know which ones will be good for me? What kind of a relationship should we have? What steps are necessary for selecting the right outsourcing provider? This sounds like selecting a mate! Basically, that's what it's all about; both companies, the provider and the buyer, should be exploring a mutually compatible relationship, a marriage in effect! Consequently, there are two sides to the relationship. Each should be looking for the ideal partnership, where there is mutual benefit and "happiness".
First, let's address the suitor/vendor half of the equation. How many companies exist? There are numerous with some specializing, while others cover the spectrum of services, but they themselves may outsource some functions to companies specializing in certain business processes. Of course this makes selection more complex because you may have to deal with "multiple personalities", so to speak, if the provider does not properly manage them. So how many reliable vendors exist? Unfortunately, the answer is unknown! Like all industries, there is a spectrum of vendors from bad to excellent; it's a matter of establishing criteria. At the moment there are no performance standards or certification requirements for becoming an outsourcing vendor per se. However, there are companies that assist with searching out, identifying the reputable vendors, and helping to negotiate and insure savings and operational efficiencies.
Nevertheless, if you are a suitor, how do you attract potential partners? Very frankly, there is really little that is new here, no matter what the verbiage thrown about today. What has attracted and retained partners over the years, in any relationship, is basically the same. They are looking for stability and dependability including client knowledge, specific subject knowledge and related experience, honesty, quality products/services, quality personnel, flexibility in meeting client needs, reasonable pricing and value. But, there is another interesting dimension that has emerged across the outsourcing field…shared risk! Of course this was originally a Professional Employer Organization (PEO) concept with co-employment.
Today, there is a growing trend of truly sharing the rewards and risks by both parties. It's called "co-sourcing" in today's parlance. For example, AT&T is culminating such a relationship with Aon; Proctor & Gamble is seeking to establish a similar arrangement with a provider; and, IBM is doing the same with Fidelity Employer Services Company. In all cases certain operations have been contracted to the provider for a period of years, at a firm fixed price or fixed price with incentives, and at required quality and service standards. If the vendors perform according to specifications and for contract price or less, they make money, if not, they lose money. Regardless, quality and service standards must be met. Nevertheless, an important point is a vendor must also have sufficient resources, know how to price work to be profitable, and know how to perform under a fixed priced contract to be a credible suitor.
However, relative to contract vehicles, there are several with which outsourcers will more than likely be required to work. All are basically nested within two types of contracts labeled Fixed Price and Cost-Reimbursement. The principal characteristics of any Fixed-Priced type contract is the specifics and costs of what is to be delivered are known; as noted above, in some cases there is a legal obligation to deliver what was contracted for, regardless of the actual cost of performance may be. But, the Cost-Plus or Reimbursement type contract is used when the cost of the work cannot be adequately described for the outsourcer to guarantee performance of the contract. Therefore, the vendor is paid what it takes to do the work, within defined limits.
A critical point to remember, all the above applies to relationships with the providers’ subcontractors participating in the endeavor. Subcontractors must be contracted with and managed in accordance with the primary contract. To often the management emphasis is between the provider and buyer with mediocre attention to the subcontractor (s) supporting the effort. Investing in trained managers to undertake this role is extremely important for insuring alignment between all players' products/services, contract requirements and the costs and profit margins. There should be no surprises! All aspects of the working relationships should be in sync with specifications/requirements. According to Gartner, Inc. "Over 50% of outsourcing deals fail", which parallels the divorce rate! Therefore, know your business and don't let it happen to your company.
Now lets look at the buyer side of the equation. There are many questions to be answered in choosing an outsourcing partner. But to select the right company, and have the right contract vehicle and relationship, one must first know oneself! Then it is possible to establish vendor evaluation/compatibility/selection criteria to determine the advantages and/or disadvantages of potential relationships.
A primary question is…Why do you want to outsource? Have goals been established along with strategies, including outsourcing processes? It is within this context that you must think about your company, knowing whom you are, where you are going and alternatives for getting there. If you are to outsource, there are a number of factors involved in a self-awareness equation. It is important to know what you can or should outsource and the advantages relative to your goals.
The first step is to have intimate knowledge of all of the company's business processes. This includes the purpose, inputs, outputs, resources required for execution, quality requirements and associated costs. Second, you should know what company processes are core and not be contracted out, because they provide a competitive advantage. Third, in terms of purpose, there must be a clear understanding of what the process is to accomplish. Fourth, relative to inputs and outputs, if you or a client is to provide input to the vendor to execute a process, it is critical to know the specifications. For example, what specific information, etc. must be provided to the vendor, and what are the specific outputs required from the vendor? Also the input and output quality requirement must be established so that both input and output meet these standards.
Let's look more closely at quality standards. When talking quality standards there must be metrics! How do you measure quality without hard numbers? Therefore, your processes must have numbers (indicators) that measure, for example poor, average, or excellent performance. Moreover, these must be understood across the spectrum of management, technology and staff; who, what or a combination thereof is responsible for the good and the bad? By having this knowledge you have a foundation for negotiating metrics and measuring whether an vendor is going to, or is, meeting expectations.
Relative to resources involved in processes, the human capital aspect is significant relative to competence (knowledge/skills/experience) and cost/value. Therefore, when evaluating a vendor you should be aware of the competence of your personnel performing process (s) and those of the vendors, and whether they have equal or better talent based on the objectives of outsourcing. Of course, attempting to outsource processes without knowing the inhouse human cost/value of performance also is not practical. The same applies to technology resources used to support process execution. By not having a grasp of all of these factors, it is impossible to determine the actual merits of outsourcing. Can vendors do it as well or better? Can they do it more inexpensively/cost-effectively? Will outsourcing improve company and customer value? In other words… what are the advantages?
Another consideration is human capital reassignment, should certain processes be contracted out. When outsourcing is a consideration, individuals become anxious, wondering what will happen to them if their processors are chosen. At times productivity suffers also some key employees resign because of the uncertainty. Consequently, knowing the capabilities of the staff and their contributions in other process areas will enable you to inform, prepare, train and transfer the desired personnel with minimal anxiety and concern for everyone.
Nevertheless, as you contemplate establishing a relationship with a outsourcing vendor, an assessment of contracting capabilities should be conducted. This evaluation should address the internal legal staff's or outside law firm's competencies relative to the particulars of creating and evaluating outsourcing contracts, such as IT licensing agreements, as well as technical and business advantages and disadvantages. Moreover, it is obviously, the contract negotiating team should be experienced and prepared with all aspects of contracts relative to the type of products and services being provided, as well as dealing with the vendor's business and contracting practices. Now you may ask… "Are you crazy? We can't be that in depth every time we outsource! Correct! But a company must have criteria to distinguish between the known and unknown and be willing to go in depth when necessary. If you don't, the problem potential and associated costs could be substantial.
Finally, it's obvious that both the buyer and seller require considerable preparation if a relationship is going to allow each to achieve their objectives. For those who are not prepared, the results can be traumatic and costly.