The past decade has seen a move toward outsourcing as a way to decrease operating costs. The outcome has not been a record of unblemished success, but “unanticipated results” have played a role in reshaping outsourcing, according to Ellen Quinn, vice president of administration, Yankee Energy. Now companies considering outsourcing are more likely to look at factors beyond cost containment.
“Now it’s more about is it better for our business to outsource this function,” she said. “Will the service be better, will the cost be competitive, and how will that fit with our key requirements for operation. It’s much less cost basis and more strategically assessed.”
That different way of looking at outsourcing leads to more strategic partnerships, more alliances, and more complicated interactions with the vendors. “There is more co-mingling potentially, even of resources around the service provided,” said Quinn, “but it is much more tailored and better for the business in the long run.”
Although the potential benefits of strategic outsourcing are intriguing, Quinn points out one major challenge. Such relationships also potentially are more difficult to manage. In fact, management is one of the two main areas that she said defines the success of an outsourcing venture. The other is “very clear definition of the service you want provided, the reason you want it provided and your expectations of level of performance,” said Quinn.
“If that has not been well defined,” she added, “you have a recipe for failure immediately, because the expectations of the vendor and the client are fundamentally different from the get-go. They could result in the same RFP requirements, but if you really haven’t talked about underlying need and expectations, you have a big problem.”
Quinn said companies are doing better now in defining their reasons and expectations, as indicated by an evolution in contracts in that area.
Management for Today and Tomorrow
Management, both inside the vendor and at the client operation, is the other critical area. “There has to be a compatible team, from a business point of view and a personal point of view,” said Quinn. “There has to be flexibility on both sides, and it has to be a regular ongoing relationship. I can’t think of any operation where you don’t need an ongoing dialogue.”
That dialogue, in addition to keeping the relationship running smoothly, also helps the vendor be ready to provide the next service needed or to help the client craft the strategic vision of where they want to go, according to Quinn.
She pointed out that management also is a key factor within the client operation. “Frequently when you relegate something to be outsourced, you think you don’t have to worry about management as much as you might otherwise,” she said. “And you really may have a significantly smaller population of people working in that function — but the quality of the people has to be very good. They have to be able to understand information that’s coming back around performance and price and know what that might mean in terms of where the service is going.”
Quinn identified some pitfalls that customers should consider when considering strategic outsourcing. Contracts can be a stumbling block, according to her. She said the agreements should contain no ambiguity in terms and conditions and should include provisions for a dispute resolution process, regularly reportable performance measures and opportunities to rebenchmark contracts around prevailing costs or market rates. She also noted the need to integrate legal requirements with business requirements in the contract to ensure the essence of the business relationship is maintained. (Editor’s Note: For more information on this subject, see “Strategic Outsourcing: The Contractual Perspective” in this issue.)
Know Your Vendors
Quinn also stressed that customers should know as much as possible about the vendors. “The screening of the vendors is an activity comparable to strategic analysis,” she said. “It includes all the components that go into a good business decision: checking their references, evaluating all information available on them, checking the level and reliability of their resources.”
An “internally great” company could be short on resources because of a growth spurt, she explained. That could affect their ability to meet your needs. In looking at a vendor, companies should consider some of the same issues they consider in their decisions about internal operations, said Quinn.
“They’re basically going to a replacement for you,” she said. “You need to know their ability to grow and flex with your needs. This is much more than who gave the best bid. It’s who can be tailored to be your partner.”
The best way to approach the decision-making process is, through discussions with your management, to create a matrix of all of the issues. “Have that matrix put together in terms of whatever are the issues of your particular outsourcing,” said Quinn, “so that all those terms and check lists are there before you even get bids. Then you have some relative rating on those vendors before you actually look at how they stack up on your particular RFP.
Keep Information Flowing
Another area that should be considered ahead of time is how the outsourced service will be linked to other processes in the company. “From the customer’s point of view, you want it to be seamless,” said Quinn. “There should be no difference in service, or the service should be better.”
The challenge, she said, is in ensuring that the flow of information is as good as it was when the service was provided internally. Looking at an example of a service center being outsourced, Quinn said, “If it’s (the flow of information) not as good because that function is no longer internal, that could impact customer service and affect profitability and growth.”
Companies should at least consider redoing processes that interface with functions being outsourced, said Quinn.
The move toward strategic outsourcing goes back to when management began to think about the idea of identifying core business, according to Quinn. Now companies are looking the other processes as things they need to get done in order to be in their core business.
“You need to get them done well and done cost effectively,” she said. “You need to get them in whatever time frame you need — but just because you need to get something done doesn’t mean you need to do it yourself.”
Lessons from the Outsourcing Primer
- Assess outsourcing’s strategic benefits to your company before making a decision.
- Develop a clear definition of the reasons for and the expectations of outsourcing.
- Be aware that managers of outsourcing relationships — both internally and externally — can be challenging.
- Screen your potential vendors as thoroughly as possible.
- Understand that processes that interface with the functions being outsourced may have to be redone in order to keep information flowing smoothly.