Managing an outsourcing relationship can be fraught with challenges. Day-to-day decisions impact long-term goals. Lack of planning and misunderstandings can create difficulties in implementing strategies. Personality clashes can cause rifts in smooth operations.
One factor in avoiding such pitfalls is understanding that an outsourcing relationship is like a marriage, said Dean Davison, senior research analyst with Meta Group.
“That’s the most applicable analogy there is,” he said. “There has to be an understanding between both parties that they will mutually benefit.”
The situation is complicated by the arena in which outsourcing relationships exist, according to Davison. “If a car company is buying mufflers or some other hard asset, as long as the muffler meets their minimum requirements, the best price is the best price,” he said. “The problem with outsourcing is that it is a knowledge business. You’re buying the knowledge of people, and there are lots of dimensions on which you have to manage that.”
First, the customer should make sure that they have the vendor’s best people working in their relationship.
“There are many different capabilities and skill sets,” said Davison. “You want to make sure the vendor is going to make some money and that they value your relationship, so you get the good people working on your projects.”
Another factor is having contractual terms and conditions spelling out certain processes and disciplines to which the vendor will adhere. Having those elements in the contract can help the customer manage the relationship effectively, according to Davison. He cites as an example the customer having the first right of refusal for members of the vendor team.
“That gives the customer the ability to bump someone who isn’t, in the first few days, looking like they are going to conform with the culture or some of the other soft activities that might be involved,” he said. “A person can be a very qualified professional, but there can be personality clashes or cultural conflicts that can come into play. All of these can become impediments to the ability to do business together.”
Customers also should be able to specify maximum turnover rates of personnel, in order to maintain stability of the vendor personnel on the account, Davison recommended. He also suggested that the terms and conditions include the frequency of service level tracking and reporting and some processes by which that will be done.
“The key point,” said Davison, “is if you don’t go into the relationship with the right expectations and get the right terms and conditions in your contract, you run the risk of not being able to put in place the management controls you want.”
As well as outlining what the vendor will do, Davison said the customer needs to be realistic about the internal requirements for relationship management.
“Once the agreement has been signed, the customer needs to plan to invest some money,” he said. “Depending on the complexity of the contract and other variables involved, we see customers usually paying between three and seven percent of the contract value to manage the relationship.”
That money is used for a dedicated staff to track service levels, evaluate performance and track the amount of money actually paid to the vendor.
“No contract only pays out the amount of the contract,” said Davison. “There are always incremental services, penalties and rewards for performance. So there’s a lot of financial tracking that has to be done. Having a staff who will do that work is a key thing after the relationship has begun.”
He noted that customers also should plan to benchmark either annually or biannually to ensure that prices and services are in line with the marketplace.
The person who tracks the service levels typically is a technical person. However, Davison said the organizational structure in larger contracts typically includes a financial person who tracks the financial aspects of the relationship.
Someone on the customer’s senior or executive level also should meet periodically with the vendor to ensure that they are aware of strategic changes about to happen.
“Let’s say you’ve outsourced your desktop services, and you had 10,000 users,” said Davison. “The senior management is near completion of an acquisition that is going to add another 5,000 users. Once that can be talked about internally, it would be very appropriate to give your vendor an indication that that kind of change is coming, so they can prepare to provide the additional services that will be required.”
Service levels should be renegotiated every year, according to Davison.
Customers should expect the vendor to improve performance year to year, even if the improvement is only minor in some cases.
Customers are not the only ones tracking service. Davison said best practices vendors now are measuring their services along three dimensions.
“At Meta Group, we call it the balanced scorecard,” he said. “Not everyone calls it that, but most people who are really doing a good job of tracking service levels are applying these same concepts, maybe under different terminology.”
The concepts are a triangular formation, with the elements measured being performance levels, quality of services and long-term customer satisfaction.
“Quality of services means are we on budget, on schedule, are we friendly, courteous and kind. What is the general quality of working with us,” explained Davison.
He said he sees an increasing number of vendors measuring long-term customer satisfaction. “About 50 percent of vendors now are measuring customer satisfaction in the projects where they are involved,” he said.
Knowing whether a vendor measures customer satisfaction could assist customers in the vendor selection process.
“It doesn’t tell them how well the vendor might do in the performance statistics,” said Davison, “but it typically is indicative of how easy doing business with the vendor might be.”
Lessons from the Outsourcing Primer:
- Understand that a successful outsourcing relationship is like a marriage, with benefits for both parties.
- Remember that you’re not buying hard assets, you’re buying knowledge.
- Make sure that you have the vendor’s best people on your account.
- Spell out in the contract the processes and disciplines to which the vendor will be expected to adhere.>
- Be prepared to spend three to seven percent of the value of the contract on internal management of the relationship.