Can you Overdose on Outsourcing? | Article

Maintaining ‘Health’ for Enterprise-wide Value Chains

medical outsourcingSometimes touted as a “miracle drug” for business transformation and competitive advantage, outsourcing can be a bitter pill if not taken as prescribed. Unfortunately, some executives mistakenly believe, if one flavor of “outsourcing pill” is good, then a fistful must be even better for company growth and efficiency. But caution is advised against “self-medicating” habits. Just as drug interaction problems can result from mixing various pills, an unsatisfactory outcome may result from multiple outsourcing providers not interacting for a buyer’s optimal value.

As companies outsource more and more of their business processes, they must ensure all service providers (and other suppliers) interact effectively with each other where the various IT infrastructure and business processes touch. At Outsourcing Center, we study companies’ proactive and reactive approaches in handling this challenge, along with their lessons learned. This article shares some of that insight.

Choose a Provider Who Keys in to Buyer’s Needs

Within HR benefits administration outsourcing lies one “touch” area that can make or break an outsourcing arrangement. Accountable for cost-effective, efficient performance, the outsourcer dictates to the buyer’s HR benefits carriers how invoices, payments and other administrative functions will be processed. Some carriers, however, may meet a new outsourced approach with resistance.

Butting heads with other providers only gives all of them black eyes.

Cardinal Health Inc., the Dublin, Ohio-based healthcare products and services provider, credits its outsourcing partner, Hewitt Associates, the Lincolnshire, Illinois-based global HR outsourcing firm, with being willing to be flexible in this regard.

“Hewitt’s flexibility and how it interacts with our carriers on our behalf is a critical piece,” explains Kendell Sherer, vice president, Corporate Benefits at Cardinal. “They are our carriers, selected to run our programs. This is a three-legged stool. Hewitt has to be willing to listen to our carriers and consider whether there may be a better way to do something because, at the end of the day, it helps our Cardinal employees.”

The ideal scenario for success is to ensure that buyer and provider interests are aligned so that the provider will be proactive in meeting the buyer’s goals. The provider should be there, every step of the way. No matter who the other vendors or suppliers are, the outsourcing provider needs to proactively ensure everything is working toward the best results for the buyer.

Foster Communication and Collaboration

All outsourcing arrangements, unfortunately, aren’t working optimally among all vendors, nor are the providers proactive in effectively resolving issues. Many experience a “vendor vs. vendor, running to the buyer” situation (where vendors, unable to resolve issues between them, “run” to the buyer to make the business decision). When there is a breakdown on the tracks, how can the buyer implement a solution that brings all parties together and aligns their interests going forward?

Xcel Energy, a Minneapolis, Minnesota-based electricity and natural gas energy company, found itself in such a situation during a system conversion conducted by its IT outsourcing provider, IBM Global Services. DST Output, Xcel Energy’s outsourcing provider for invoice print and mail services, suddenly had to interface with IBM. The conversion to XML caused several process and technology changes in DST’s services, which eventually led to relationship problems between the two service providers.

Although there had been some expressions of concern and some finger pointing between the two providers, it was the dollars Xcel Energy was spending on change procedure fees that eventually drew its attention to a relationship problem.

“There was a lot of confusion,” recalls Jane Doyon, director, Customer Care Billing Services and Operations at Xcel Energy. “There wasn’t real clarity around who’s on first. All three of us were going down different paths because we couldn’t find the right linkages or see the cost impacts of what each group was doing separately.”

To resolve the dilemma, the buyer brought both providers together in an all-day meeting to clarify roles, smooth bumps and build a new joint commitment. They also went to dinner together to make sure people from all three teams would know each other well enough to feel comfortable in sharing information crucial to their mutual success.

“Building that trust level is what moved us forward,” comments Doyon. “It’s now a much-improved environment around making decisions and ensuring we are committed to both DST and IBM and making sure they are committed not only to Xcel Energy but also to each other.”

As Doyon points out, change fees are not intended to be a provider’s revenue source. Such fees serve as an incentive to quickly resolve conflicts. Moreover, once the providers became more efficient by working together, the profit picture improved for both providers.

In today’s environment, where change in business requirements and technology is a certainty, buyers cannot afford to have an outsourcing partner with a “my way or the highway” attitude. Buyers seeking to optimize value in their outsourcing solutions must ensure integration occurs between everyone they’re depending upon for success.

Learn the “Art” of Creating Good Relationships

Ford Motor Credit has a well-defined supplier relationship process called “the art of supplier relations.” More than a list of desired outcomes, Arthur Belloli, manager, Supplier Relations, says the program is a “paradigm shift of talking about supplier relationships instead of vendor management.” It’s a pull, rather than a push, strategy, with the result of all parties being on the same page at the same time. According to Belloli, the paradigm is now one of “‘coopetition,’ which is cooperation instead of competition.”

In many companies’ organizational charts, providers are somewhere at the bottom. Belloli advocates turning the chart upside down so that it looks more like a tree. “The leaves would be our customers,” Ford’s relationship manager explains. “All the supporting infrastructure – the stems and branches and roots – are the suppliers and service providers. They are the ones doing the work that touches our customers. Behind them on the limb are the Ford people who are supporting the suppliers and service providers. They take the roots to the ground, where the board of directors and the executive team are.”

The relationships work only from that perspective, he believes. Where one can get into trouble is when the chart is not upside down, and the supplier or service provider has to worry about keeping its revenue and competing with other suppliers and service providers.

A fact of human nature is that, when people are worried about keeping their jobs/revenue, they often don’t cooperate or offer suggestions for the good of all involved. It results in a loss of value in the ultimate outcomes achievable from the outsourcing initiative.

Lessons from the Outsourcing Journal:

  • When change management fees increase, it may indicate a communications breakdown (around who, what, when, how or why) or conflicting objectives. Such fees serve as an incentive to quickly resolve conflicts.
  • By clearly documenting everybody’s expectations and responsibilities, all parties have the same understanding. The best scenario is to do this upfront in the contractual relationship management and governance structure
  • The parties must determine and document clearly defined processes before a provider takes over. Buyers need to determine linkages down the line and get all external parties involved so that everybody knows how what they do affects the others.


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