When we talked about the adversarial nature of outsourcing in the September issue, we used a container as a metaphor for the outsourcing contract. The goal, we said then, was to create a container (contract) that would hold its shape over time, despite the pressures that are implicit in any outsourcing deal. The contract — along with effective management — is one of the key issues in any discussion of common problems. However, even more basic is an understanding of what outsourcing is and what it is not.
Consider the difference between contracting and outsourcing. In contracting, the customer owns the process, and they ask the supplier to provide specific tasks. In outsourcing, however, the entire business process is turned over to the supplier, and the supplier owns the process. What does that mean to you, the customer? It means that the question you should be asking is not ‘how’ the process will be done, but ‘what’ the results will be. Having an awareness of that important difference can help you both understand and address most of the common problems in outsourcing.
Now let’s look at the contract itself. Contracts serve two basic purposes. First, they act as the standard by which two organizations deal with each other, most notably defining the level of risk the supplier agrees to take in delivering the services. As part of the establishment of standards, the contract also defines the nature of the relationship, specifically how the two parties will reconcile their differences and communicate rights and obligations.
Identifying the ‘What’
The second purpose of the typical contract is to provide a description of services, along with a statement of how the services are to be delivered and how they are to be measured. This is the contract area that contributes to many common problems in outsourcing. Much time is spent defining the rights and obligations, but too little attention is paid to describing the services and defining the metrics that will be used to measure them. In other words, the ‘what’ question is not being asked. Then, when a problem develops later in the relationship, there is no clear understanding of what the obligations are.
Tied closely to this is the fact that customers typically don’t focus on the accountability of the supplier. Baselines against which performance will be measured are not established. The consequences of nonperformance by the supplier are not delineated. And the situation is only exacerbated when you try to force control of ‘how’ the process is done.
First of all, you shouldn’t be outsourcing unless your outsourcer is competent. And if your outsourcer is competent, you should let them do their jobs. When you dictate ‘how’ the process is done, you basically remove the supplier’s accountability for the results of the process. You also erode their ability to implement economies of scale, which is detrimental to both parties. When you fail to address the accountability issues and neglect to establish intermediate steps for reconciliation of problems, you may find yourself boxed into a corner where your only option is to terminate a relationship. And that can be financially disastrous. Both customers and suppliers make substantial investments in switching the process to the supplier.
While these switching costs make it impractical to continue to focus on the ‘how,’ rather than the ‘what’ of outsourcing, the inclination to do so is understandable. Historically, customers are much more familiar with contracting for services where they own the process, and the change in paradigm requires a philosophical shift that can be difficult for some people to make. However, focusing on ‘how’ inevitably produces very poor relationships.
That change in focus only impacts the other key source of problems–management. Customers frequently select as their relationship manager someone who is familiar with the service. A payroll manager, for example, will be selected to manage an outsourced payroll process. At first blush, this seems like a really good idea. The problem is that all of that individual’s competency comes from knowing ‘how’ to run the process, not what has been provided by the process. Such a manager can undermine the supplier relationship by insisting that the old procedures be followed, rather than allowing the supplier to leverage their economies of scale and do it in a way that allows them to make money.
A much better approach is to appoint a business person who is focused on results and can manage the relationship on a business basis rather than a technical basis. In the September issue, we talked about the business changes, including the profit motive, that drive the development of adversarial relationships. A business person is best suited to make that supplier profit motive work for the benefit of the customer. By understanding how to use that energy constructively, a business-oriented manager can help create mutual opportunities for both companies, instead of allowing squabbles over technical details push the relationship into a win-lose proposition.
Avoiding the Problems
Now that we’ve identified some of the most common problematic areas in outsourcing, let’s take a look at how to avoid them. Perhaps the following guidelines will help:
- Remember to focus on ‘what,’ rather than ‘how.’
- Develop contracts that can flex and change to meet changing business conditions and changing technologies. Keep the costs for each area self-contained, without cross-subsidization from business tower to business tower.
- Avoid large investments up front that are paid back over many years. Instead, split such investments out from the contract in a transparent vehicle that is easily understood by both sides and amortized to the satisfaction of both parties. The reason for this is simple. While the benefits of the investment will be clear in the beginning, you may lose any memory of those benefits at the other end of the contract, when they are no longer immediate.
- Appoint a business person as relationship manager and develop techniques that enable you to focus on both the supplier and customer side of the business relationship.