While the promise of outsourcing is bright, outsourcing relationships often fail before they start. Improper guidelines, poor communications between the company and its outsourcer, and unrealistic expectations frequently lay the groundwork for failure.
Too often, companies believe that a significant shift to outsourcing will eliminate the requirement for high-level IT management competency and depth internally. That assumption creates a major impediment to success. An informed and empowered single point of contact, such as a contract administrator, is perhaps the most important element of successful implementation of an outsourcing strategy.
That commitment should be mirrored on the outsourcer’s side with a strong account management team, usually led by a dedicated account manager. While the single contact communications is important, the customer and the outsourcer also must develop relationships at multiple levels throughout the organization to gain the trust and understanding required for long-term success. That includes having the senior management of both organizations become acquainted with one another.
Although multiple relationships are beneficial, they also underscore the need for a consistent communication chain between the customer and the outsourcer. Outsourcers can be provided confusing and conflicting direction from multiple customer sources in outsourcing relationships. To alleviate that confusion, the outsourcer and the customer both need a single point of contact to coordinate these directions. Both parties need a database of the written communication between the parties to track commitments and instructions made for their respective staffs to reference.
Speak the same language
To achieve success in an outsourcing relationship, companies and their outsourcers should speak the same language. Both parties need to coordinate standards such as software, network protocols, and business processes such as procurement and customer service, shipping schedules, warehousing processes, inventory, and lead-times. In addition, both parties should perform joint budgeting exercises such as perspective budgets and cost plans in order to understand the key cost driver information inherent in the other’s infrastructure.
It is critical for the customer to have access to detailed cost information associated with the services provided by the outsourcer. This goes beyond just the pricing that is provided by the outsourcer and must include an understanding of the key cost drivers inherent in the outsourcer’s organization. This is particularly urgent where the outsourcer manages a dedicated infrastructure on behalf of the customer. In addition to cost information, there needs to be qualitative information associated with the reliability and performance of the outsourced services.
Most outsourcing agreements represent long-term, dynamic relationships in which unforeseen opportunities, technologies and business conditions will need to be addressed. That dictates a need for flexibility, in order to accommodate changes in technologies and technology costs. In many cases, contracts are expensive and difficult to terminate prematurely. Without careful management, the outsourcer can easily gain the upper hand in the relationship, which can be disastrous.
The needs of both parties must be addressed in the contract. Usually, it is in the interest of the customer to negotiate a short-term contract which provides a measure of flexibility and price deflation when the contract is re-negotiated. Conversely, it is in the interest of the outsourcer to extend the length of the contract. The final result is heavily influenced to the extent to which both parties have significantly invested in the relationship.
Whatever the length of the contract, the customer should provide itself a reasonable exit of convenience in case the relationship becomes unmanageable. The key point to remember when constructing these relationships is that terminating a contract is the worst condition that can occur. The contract must define intermediate consequences for dysfunctional behavior on both sides so that terminating the contract is not an issue when minor “bumps” in the relationship occur.
These intermediate consequences can take the form of penalties and, in some cases, additional payments or bonuses paid for high levels of performance achieved by the outsourcer. When setting these penalties and performances, one might remember the words of Gilbert Sullivan, “The punishment should fit the crime.”
Additional payments should be attached to conditions in which superior performance provides a quantifiable benefit of significant tangible value to the customer and are not attached to service levels which have penalties associated with them. Penalties are usually set when the degrading of services impacts the customer.
In any outsourcing relationship, it is important to remember that “If you can’t measure it, it won’t get done.” Service level agreements must be defined in detail. Outsourcing relationships also should allow for the addition of service levels that reflect changing business requirements and therefore changing service levels.
An often overlooked inducement for cooperation is the willingness of the customer to allow the outsourcer to extend the relationship to new business areas. By carefully controlling the outsourcer’s ability to expand its relationship, the customer can encourage the outsourcer to negotiate favorably in other key areas. By not controlling this ability, the customer gives up a substantial leverage point.
Benchmarking — typically a situation in which the outsourcer agrees to measure its cost structure against other outsourcing situations and against comparable internal organizations — cannot be forgotten in this discussion. Benchmarking can be used for both a cost and a qualitative measurement and for performance goal-setting. For a more detailed discussion of benchmarking, see InfoServer, December, 1997.
The effective day-to-day management of an outsourcing relationship begins with planning. Management on both sides of the equation must be committed to the communication and flexibility required for the relationship to shape and reshape itself as needs and opportunities arise. Having well-defined management structures enhances the probability of creating a win-win situation and establishing a relationship that can grow toward the future.
Peter Bendor-Samuel is the president of Everest Software Corp, a company specializing in outsourcing management. He has a wide spectrum of outsourcing experience from both the outsourcing and customer sides that includes outsourcing sales, sales support, account management, RFP construction, contract negotiation, ongoing outsourcing management, and contract restructuring.
He has built Everest into the industry leader in providing outsourcing management services including training, consulting, and software. He has been published, profiled, and quoted in numerous industry magazines and trade publications.