Strife occurs in outsourcing relationships; that’s a fact. Sometimes the friction is due to clashes between the vendor account manager and the client; sometimes the adversarial situation develops during disagreements about the price paid and the service received for that price. Arming themselves with knowledge through benchmarking is one way customers can avoid some confrontations and ease the resolution of others, according to Syd Hutchinson, senior consultant, COMPASS America, Inc.
“We strongly recommend to people that they do a benchmark when they’re in-house, right before they go outside,” said Hutchinson. “Benchmarking doesn’t have to be the first thing, but it should be one of the first things to think about.”
How Strong Are You?
The process, according to Hutchinson, can help customers understand their strengths and weaknesses and establish clear expectations.
“Where are you? Are your costs as low as they can go? Are your service levels as high as they can go,” Hutchinson said answers to those questions can provide valuable insight. “Then go get the bids and the RFP from the vendor,” he said. “You can decide to improve internally, or you can decide to outsource. If you outsource, you have a point to measure future years against, and you can tie that in contractually to make sure things don’t get out of hand.”
One reason he advocates benchmarking early on is his contention that adversarial relationships start in the sales process. “The customer thought they were buying something and ended up with something else or they thought they were going to pay x and now they’re paying x-plus-y,” he said. “The client’s expectations were set during the sales process in both cases.”
Then there’s what Hutchinson calls the learning curve, where the vendor is trying to make money and the client is trying to minimize the money spent. There, too, benchmarking can help in the management of the conflict. “Instead of I feel this or I think that, you have a basis in fact to discuss,” he said. “It’s better to know than to think.”
Make or Buy?
A common flaw in vendor selection and initial negotiation is comparing one outsourcing deal with another, according to Hutchinson.
“Every deal is different,” he said. “We view outsourcing as a make-or-buy decision. You’re either going to make something in-house, or you’re going to buy it from a vendor.”
The issues then become how much does it cost to do the work in-house, as compared with the cost of buying from a vendor. Is the difference positive or negative, reasonable or unreasonable? Companies should not only know the current costs, but what those costs would be if best practices were implemented. Then they should negotiate from the lower figure.
“The point is that the vendor is going to do those things and get that money, and you want some of that back,” said Hutchinson. “You don’t want it all to flow to them.”
Benchmarking also can help customers “draw a line in the sand in order to monitor future years,” according to Hutchinson.
“Just about every deal we’ve seen is renegotiated at some point in time,” he said. “The question is how is it handled? Is there a process for doing that? Is there some sort of third-party benchmark to help the process, or does the client have to stamp their feet and hold their breath until the vendor comes back to the table?”
Hutchinson said of the companies where he recommends benchmarking, about half follow through with the process. Among the other half, the issue is always time. The people working on the outsourcing deal are the same one who would be heavily involved in the benchmarking process. They are meeting outsourcing deadlines imposed their CFO or CEO who wants to get that part of the business off the corporate books.
“We’ve had people say they’ll do one immediately after they’ve outsourced because it will be pretty much the same operation, but nobody has ever done that,” he said. “Once the vendor takes over, the door closes pretty quickly. And you can’t blame them for that; that’s their business.”
Having enough information of the right kind enables customers to structure contracts that are more likely to endure without serious conflict in a rapidly changing environment, according to Hutchinson.
“We tell people if you think you know more than 24- months in advance what’s going to happen, you’re insane,” said Hutchinson. “You have to have some sort of process contractually in place to see where you are and to make changes in either the price you paid or the services delivered.
“Ten years from now, you might be able to run a company on a PC off Windows,” he added. “Are you going to want to pay mainframe prices for that service? Things change. You have to set up a way to deal with that contractually.”
Lessons from the Outsourcing Primer:
- Benchmarking can establish current in-house costs and service levels.
- Knowledge takes the guesswork out of negotiations.
- Time spent on benchmarking can improve the outsourcing relationship.
- Good information can help the customer face a changing environment with a minimum of conflict in the outsourcing relationship.