“Outsourcing, by definition, requires the buyer to relinquish control of a process to the supplier, who is an expert in the process and able to perform it better, faster, and cheaper,” stated Peter Bendor-Samuel, CEO of global sourcing advisory firm, Everest Group, in a 2004 interview for an Outsourcing Journal article.
Bendor-Samuel went on to explain that the buyer must still verify whether it’s getting what it pays for and thus needs to establish a strong governance structure that includes monitoring performance.
Ravi Aron, Assistant Professor at Johns Hopkins University, explains the difference between monitoring and controlling the provider’s performance. “Controlling is telling them how to do their work. With monitoring, buyers establish objectives (what to do) but leave the how to the provider’s managers.” He adds that monitoring requires a granular system of metrics and a mechanism to track performance against service level agreements.
Giving up control over the outsourced process is a basic principle in how outsourcing works, but many buyers find it difficult to do this at the outset of a relationship. Some go ahead and start their outsourcing relationship even though they are not comfortable with giving up control over the work, and it inevitably leads to challenges. Service providers report that the buyer’s micromanaging causes the provider’s staff to feel the buyer does not trust their capabilities, which then leads to relationship issues.
Another result of not being comfortable with giving up control is not getting the scope of services correct. An example is Owens & Minor, whose Vice President, Information Technology & Program Development, Paul Higday, explained to Outsourcing Center that his firm had not been ready to give up control over all the related functions when it started a relationship with Perot Systems. O&M had not outsourced before and thought that not retaining control over some functions would be “too big a change.” But they later realized that mindset caused them to leave on the table some mutual opportunities for value creation.
Factors that cause initial discomfort
Outsourcing Center interviewed 64 buyers on this topic as part of its 2010 annual Outsourcing Excellence Awards program. Those who launched their relationships without being comfortable in not controlling the process cited feelings ranging from trepidation, anxiety, nervousness, and uneasiness to “great uncertainty about whether it would work.”
In describing why they were not comfortable with giving up control over their outsourced processes, four main factors bubbled to the top:
- The buyer had never outsourced before.
- The buyer was already in a very shaky financial position and could not afford a failed relationship.
- The buyer was uncertain as to whether or not the service provider would be a true partner and stay aligned with the buyer as the buyer’s business changed rapidly.
- The buyer would be outsourcing a customer-facing process, and it was already experiencing a high level of customer dissatisfaction and churn.
Factors that build a buyer’s comfort level
What can buyers that are new to outsourcing do to help themselves gain this necessary comfort? How can the service providers contribute to the comfort level? Outsourcing Center looked at the factors that built comfort for the buyers in the study.
Sixty-nine percent of the surveyed buyers reported being comfortable with turning over control of their work at the outset of the relationship. The factors can be segmented into three areas: (1) influences of provider, (2) joint influence from buyer and provider, and (3) influences of other people outside the relationship.
Comfort factors cited include:
- 16% – The provider’s skills, processes and procedures, methodologies, and discipline
- 14% – Prior relationship with the service provider, either in some activity not related to the outsourced process cited in the study or when the buyer’s executive was employed at a different company that outsourced to that provider
- 11% – The people factor and relationships that the parties built during due diligence and contract negotiation
- 9% – Protections built into contractual clauses, especially around termination and monetary penalties tied to service level agreements
- 9% – The provider’s employees include the buyer’s rebadged employees or include employees of the prior service provider in a terminated relationship
- 8% – References from the providers’ existing and past clients
- 7% – Provider’s reputation, trustworthiness, and core values
- 5% – Outsourcing consulting firm validated the buyer’s decisions
- 3% – Confidence in the governance structure such that any fallout that occurs can be quickly resolved
- 3% – Learnings from a prior failed relationship were put in place to make the new relationship succeed
- 1% – The buyer’s maturity in outsourcing provided confidence that its decisions were correct
- 1% – Started with a pilot program
Among the remaining 13 percent of comfort-enabling factors were such items as the provider communicating clearly about actions of the buyer that would be necessary for success, the fact that processes and change would be governed by Six Sigma, and the commitment demonstrated by the provider’s top executives.
Leap of faith?
It’s not unusual to hear people describe an outsourcing initiative as “a leap of faith.” In reality, it’s more a matter of trust or confidence than faith. Faith is a belief that is not based on proof. Trust, on the other hand, must be earned; one must demonstrate trustworthiness and reliability. In outsourcing, those demonstrations begin up front during the provider selection process and contract negotiation and provide some buyers with the necessary comfort level to turn over control of their outsourced process.
Others, initially hesitant, continue to closely watch trustworthiness and reliability demonstrations during the transition phase to erase any remaining anxieties and build confidence in the provider. Interestingly, of the 31 percent of surveyed buyers that reported they launched their relationships without a strong level of comfort for turning over control of their process, 100 percent reported they were completely comfortable by the end of the transition process, recognizing their “hard work” up front in selecting the right provider paid off.
Lessons from the Outsourcing Center:
- Outsourcing requires the buyer to relinquish control of a process to the service provider, who is an expert in the process and able to perform it better, faster, and cheaper. The buyer cannot control how the provider does the work, but it must monitor and verify whether it’s getting what it pays for.
- Buyers that start their outsourcing relationship even though they are not comfortable with giving up control over the work often micromanage the work, causing the provider’s staff to feel the buyer does not trust their capabilities, which then leads to relationship issues.
- Factors that make it more difficult for the buyer to have more confidence in the provider and relinquish control of the outsourced process include: (a) whether or not the buyer has outsourced before, (b) whether the buyer is in a shaky financial position and cannot afford a failed relationship, (c) uncertainty as to whether or not the service provider would be a true partner and stay aligned with the buyer’s interests, and (d) whether the outsourced work is a customer-facing process.
- Among the top factors that enable a buyer’s comfort level with giving process control to the provider are (a) the provider’s skills, processes and procedures, methodologies, and discipline, (b) a prior relationship with the service provider, (c) relationships that the parties build during due diligence and contract negotiation, and (d) protections built into contractual clauses, especially around termination and monetary penalties tied to service level agreements.