The state of Wisconsin just passed a law requiring couples who are considering matrimony to attend mandatory pre-marital counseling before they can receive a marriage license from the state. The theory is that if dewy-eyed couples tackle the tricky issues up front and iron out their difficulties at the outset, the chances of divorce plummet.
The same theory applies to an outsourcing relationship. During the honeymoon period both parties tend to bend over backwards in effort to make things work. But when the friction starts, things can degenerate quickly. No one wins when two outsourcing partners divorce.
While there’s no law that requires pre-outsourcing counseling, wise customers are doing the equivalent. They hire third party consultants to help them negotiate their outsourcing contracts, especially the first one. “We become the go-between between the supplier and the customer to ensure there is a harmonious outcome,” says Richard Nichols, managing consultant for Compass Management Consulting Limited, an outsourcing consultancy in London, England. The company is part of the global consulting group Compass America Inc. which has offices in Chicago, San Francisco and Washington D.C.
The goal, says Nichols, is to write an outsourcing agreement that will “endure over time.” One of the big troublemakers that can sabotage an outsourcing agreement is only focusing on cost. Most companies decide to outsource their accounting or payroll because they view the service as a commodity where they can go to the marketplace to reduce their cost.
The financial area is a good place to achieve cost savings because financial people historically have not been subject to cost containment, according to Nichols. “There are significant advantages to outsourcing this area with some rigor,” he adds.
Consider All Elements Beside Cost
But when a buyer adopts tunnel vision and only focuses on cost reduction, it tends to ignore the other elements in the business equation. These topics may not even get addressed in the negotiations. Later, as the contract ages, these poorly considered elements could rear their ugly heads.
The value of a third party is having an outsider who can assess where the problems are. They can independently determine if the supplier is actually delivering what it promised. And they are invaluable when determining price. “We know what the best price is,” says Nichols.
Nichols’ golden rule is: “Never outsource a mess.” He says clients should get their financial departments as fit as possible before they hand over the process to an outsourcing provider. Nichols says many problems Compass sees happen because the buyer outsourced a mess. “The company had a huge headache and thought that outsourcing would solve the problem,” he explains. Outsourcing will solve the problem, but it becomes a costly solution because the contract price becomes more expensive.
Another major mistake is to make long term decisions without acknowledging that things always change. Successful outsourcing contracts must be flexible to accommodate the unforeseen.
Service levels are important. Nichols says most buyers focus on the cost and ignore the fact that quality is part of the metrics, too. A metric that is a good measurement takes into account both cost and quality.
Hire A Consultant At The Outset
Sometimes the consultant realizes during the negotiations that outsourcing isn’t what the buyer really wants to do. “Some corporations get a long way down the path and then decide they don’t need to outsource after all,” Nichols reports.
Nichols says the best approach is to get involved in the early stages of the contract negotiations. Too often the consultants face an uphill struggle if they enter mid-stream after the business equivalent of “the war of the Roses” has already commenced.
Outsourcing is coming of age in Europe. Once it was “a dumping ground.” Now corporations readily acknowledge its many benefits. Companies today “want to free their managers of their humdrum duties” so they can apply their talents on more important corporate goals. A strategic goal is to not oversee a large administrative area.
That’s why Nichols says human resources and accounting are two popular outsourcing arenas. “Mangers don’t want to be the king of payroll,” says the consultant.
Economic conditions in Europe are also encouraging outsourcing. In the UK, companies recognized the need to become more efficient. Even the government realizes this. It has signed large contracts with EDS and Siemens.
Innovative Strategic Partnerships
A new law in the UK has limited administration costs for life insurance and pensions to one percent of the premium. Nichols says the entire industry is being forced to outsource because of the price constraints.
One of the emerging types of outsourcing is the strategic partnership. These are innovative joint ventures. The mandate of these partnerships is to improve services and drive down costs within a specific time period. The intent is to turn a cost center into a profit center.
Legislation, however, creates one obstacle. The TUPE law requires an acquiring company to continue to provide the benefits of the old company to those employees who join its payroll. This can add costs to the outsourcing contract.
Human nature creates another. Nichols says long-time employees of a large corporation don’t want to work for a multi-national outsourcer. The corporate culture tends to be very different. He advises buyers to ID the key people and shackle them with golden handcuffs; it’s the best way to manage the risk of losing good people in the change over.
Lessons from the Outsourcing Primer:
- Hire a consultant at the beginning of the outsourcing process. This will help buyers write better contracts, including knowing what the best price is.
- Don’t outsource a mess. Have the department as fit as possible before you outsource.
- Metrics should include both cost and quality considerations.
- Identify key employees before outsourcing a process. Shackle them with golden handcuffs so they won’t leave when they become employees of the outsourcing provider.
- Cost is a primary consideration. But look at other elements when writing a contract. If you don’t, they could cause trouble later.