More and more, companies enter into outsourcing agreements as a strategy to remain competitive. But rapid technological advancements change the competition; hence, an essential element of an outsourcing agreement must be flexibility. G2R, which specializes in providing research and management consulting, assists end users and vendors in constructing effective sourcing agreements. In early 1999, Kepler Knott, then Vice President of Process Markets Group for G2R, emphasized communication as the nucleus of flexibility. Indeed, communication affects the who, what, where, when, how and why of a flexible outsourcing agreement.
The vendor with whom a customer crafts a partnership needs to be one with a high quality and level of transitioning skills and experience.† G2R’s research shows that, for large deals, vendors not experienced in factors such as capital assets, technology, funds, employees and benefits, are more likely to cause the deal to fail. These transitional matters require a great deal of flexibility. Users should seek to partner with vendors who have a working methodology for how they handle transitional factors. A vendor without a transition management model, should be a red flag to a customer, for that vendor’s ability to be flexible through the changes that will occur during a long-term deal is questionable.
Understanding key performance metrics is essential in constructing a good contract. The metrics for outsourcing a data center, for example, would basically be speed, volume and accuracy. But the more complex the outsourced process is, the more likely it is that the company won’t know how well it is doing unless performance metric objectives are understood and clearly outlined in the contract. If the measurements are not specified in the contract, a great amount of flexibility must be exercised during the first few months of the deal while establishing a baseline standard level of performance. This is especially true when what is being outsourced is something relatively new, with little information available. Third-party consulting firms, such as G2R, are an excellent source for benchmark data.
Contracts with all the t’s crossed and the i’s dotted are the least likely to be re-consulted. It is important to bear in mind that flexibility or accommodation carried too far can become a problem. It doesn’t benefit either party. At the outset, both parties must understand the philosophy behind why they are entering into an outsourcing agreement. It is not a good idea to write a contract with broad, philosophical guidelines in an effort to build for flexibility.† If the contract does not explicitly spell out what the user’s expectations are and how the vendor will match up to those expectations, neither side will be able to reach a comfort level that all bases are covered.
But everything cannot be written into a contract. Priorities, and strategies to meet them, can change, due to the influence of unforeseen factors. Y2k remediation is one example of unforeseen changes in priorities. If a company had outsourced an application in 1990, it most likely wasn’t thinking about the fact that it should make sure the vendor was Y2k compliant. Therefore, there would be no contractual obligation on the part of the vendor to be Y2k compliant. Their relationship in 1998 would require flexibility — complete disclosure of both parties as to their state of readiness, and decisions as to whether the customer should contract with a new vendor or enter into a new sub-contract with the existing vendor.
Clear communication with all employees who will be affected will help to mitigate potentially damaging misunderstandings surrounding the deal. The earlier they are informed, the better. Without a clear understanding of what is going on, as well as assurance of flexibility as problems are encountered, they potentially won’t be able to cooperate in a way that the vendor and user executives who crafted the deal would want them to.
Knott suggests three levels of management in an outsourcing agreement.† At the top should be one central authority who is responsible for the eventual success or failure of the deal. It is the responsibility of that individual to select the types and numbers of people involved on other levels in making sure the deal works. G2R’s research indicates that, for users that appoint a dedicated full-time outsourcing relationship manager, there is a much higher success rate than for users who don’t.
At the middle level are the people who negotiated and signed the contract and who meet periodically to determine how the deal is working. When they become involved (usually due to a problem), they manage by the contract.
At the third level is the functional manager of what is being outsourced. This is where the day-to-day management takes place, and the people at this level are responsible for making sure that operationally the deal works. A high level of flexibility is required of this group. These are decision-makers who are motivated by various priorities, not the least of which is keeping their jobs. Their tactics may vary. They manage informally, in a personal manner. Only if the deal is threatened by failure do they bring it to the attention of the upper level to consult the contract to see who is supposed to be doing what.
Recognizing that flexibility is a key factor framing the success or failure of an outsourcing relationship, both parties should aim to ensure that it will remain throughout the term of the contract. It starts at the beginning, before the deal is signed. G2R’s research indicates that the primary reason outsourcing relationships sometimes fail is due to a mismatch of expectations. An example of this would be a customer that is interested in driving costs out of the organization who partners with a vendor whose goal is to improve the way the customer does business. Both goals are appropriate, but they are antithetical; the user will be trying to save money, the vendor may be spending money. Open-book contracts often work well because, if each party knows what the other is getting out of the deal, they are more likely to supply the appropriate resources on a partner-like basis. If there is an open environment between the two partners, they will be more willing to be flexible because they can trust each other.
Lessons from the Outsourcing Primer:
- For a large deal, be sure to select a vendor with experience and a working methodology in transitional matters.
- Clear communication — the earlier, the better — with all employees who will be affected by the deal will help to mitigate potentially damaging misunderstandings.
- In managing the relationship, the highest level of flexibility will need to come from the functional manager of what is being outsourced.
- Open-book contracts and open environments work well because each party will be more likely to supply resources and be flexible if they understand what the other party is getting out the deal.
- Despite a need for flexibility, all bases must be covered; the contract must explicitly state the customer’s expectations and how the vendor will match up to those.