Advice for Starting an Outsourcing Relationship
People considering entering into an outsourcing relationship frequently ask us at the Outsourcing Center to provide them with the reasons why some relationships fail.
The difference between success and failure factors is not a simple list of do's and don'ts. It's also not as simple as ensuring your contractual documents reflect the most appropriate metrics, pricing terms, scope descriptions, governance plan and other foundational principles. An outsourcing arrangement is a long-term relationship and, unless expectations and attitudes are realistic, it's possible to end up with just a so-so deal or even with charred remains.
The details can be as varied and complex as the colors viewed through a prism because the people and scenarios are never quite the same. But our research reveals definite patterns of thinking and behavior that don't work or that can get you moving in the right direction. In this first article in a series of three, we share top tips regarding important first steps in an outsourcing relationship.
Take Off the Rose-Colored Glasses
In probably 70 percent of the cases we've researched over the years, one problem regularly crops up in discussions about behaviors to avoid. Buyers have a tendency not to adequately communicate to top management the magnitude of the changes that will result by outsourcing or how long it will take to accomplish the desired end results.
Dave Kepler, corporate vice president, eBusiness and CIO at Dow Chemical, comments on this challenge. "Reality is that, from a management point of view, it takes a fair amount of time to manage an outsourcing deal during the first two years, and it does not happen overnight. It's also important to let management know how work will be prioritized."
Other buyers comment that they regretted not making clear to all end users of a service just how the work would be done and prioritized after being outsourced. When people don't know what to expect, their unmet expectations (realistic or not) will turn into complaints about the provider's level of service.
When it comes to advice about the "winning" perspective or approach to the relationship, the words "team approach" are important but have become almost trite. It implies that companies are willing to work together to achieve their mutual goals. In fact, many now use highly effective incentive pricing or risk/reward arrangements to ensure their interests remain aligned while working together.
But what about their behind-the-scenes behavior - something that doesn't affect the outcome of a particular mutual goal or even something the party might not know about? Are they teammates at that point? How far do their levels of trust and honesty extend?
It depends on the teammates. And their individual behavior and attitudes are set from a top-down example.
An example of true teammates attitude is reflected in the outsourcing relationship between Owens & Minor (O&M), a healthcare logistics provider, and Perot Systems. Perot provides a state-of-the-art data warehouse, application development and support, desktop support for the O&M in-house users and external customers, WAN, LAN, network and email.
David Guzman, senior vice president and chief information officer at O&M, relates an extraordinary incident in their relationship. "There were some accrued funds that had been set aside for a specific purpose, and Perot gave it back to us because they didn't use it for that purpose. We didn't even know they didn't use the funds. We would never have known the difference. That is true honesty and integrity, and it's worth its weight in gold to us. It is a great tribute to Ross that he has instilled this mentality in his people and they really live it and breathe it every day."
A service mentality and willingness to be flexible is certainly a primary characteristic that a buyer needs to seek in its choice of service provider. But in the most successful relationships, buyers are paired with providers that are willing to "push back" when the buyer's request is not the best idea.
Rather than seeking subservient flexibility, you want a true business alliance where the provider will ask, "Are you sure this is what you want to do? Here are some alternatives."
On an ongoing basis, make sure that both you and the service provider approach new ideas in a disciplined manner, instead of off-the-cuff requests that turn out in the end to cost more than you expected or don't provide the results you wanted. Are you telling the service provider what you really need, in a very articulate way, and then backing off to let the provider determine how to implement it?
For long-term success, the culture of the two companies must be compatible. Is one, for instance, very formal and ritualistic in the way it works? Does it have a large bureaucracy that requires everyone must sign off on something before it happens? Is one very flexible and in the practice of just picking up the phone and making quick decisions? Do both companies share the same values? Does one company have the disciplined practice of documenting everything they do, and the other operates on the fly sometimes? Does one company ensure there is a formal process in place before it attempts something, and the other company works out the process as it goes along?
The governance agreement is a crucial component of an outsourcing arrangement, for it sets procedures and expectations in place as to the way both companies will interact and communicate going forward.
An evolving - and dangerous - trend over the past two years is to quickly enter into an agreement in order to speed up the implementation process, with the understanding that the ongoing governance details will be worked out later. That's almost like getting a mail-order bride instead of spending some up-front engagement time to get acquainted, learn where there are some incompatibilities and establish how to work those out to the satisfaction of both before tying the knot.
A common point of discussion in outsourcing concerns is whether or not to outsource a "broken" process. The reality is that it doesn't matter whether you outsource a broken process and let the service provider fix it, or whether your company fixes the process and then outsources it. If the relationship and commitment of the two companies in the outsourcing alliance is not strong and they don't approach issues as teammates, it won't work either way. Both parties must drive to common solutions and both must take responsibility for making it work.
No matter what your drivers are for outsourcing or which service provider you award the work to, in the end success boils down to the way the relationship works. You need to remember that your success or failure is completely tied to your alliance together. If you enter a relationship with the attitude that one party is a vendor and the other is a customer, you set yourself up for failure.
Lessons from the Outsourcing Journal:
- Let management and end users know ahead of time how the work will be done and prioritized after it's outsourced in order to avoid problems from unmet expectations.
- A true teammate approach is based on honesty, integrity and trust; it should extend even in a behind-the-scenes situation.
- Choose a service provider that is flexible but will "push back" and offer other alternatives when an idea doesn't make sense as the best approach.
- It is a crucial success factor to have a governance agreement in place for management of the ongoing relationship before the provider begins its services.