Ten deadly mistakes of outsourcing and how to avoid them

Buyers of outsourcing services often have considerable leverage over providers. They may represent a disproportionate component of their business, or have potential to be a powerful reference account for them or represent revenues that they desperately need to stay in business. The finalists in any

significant outsourcing competition may have invested hundred of thousands or even millions of dollars by this point and may be desperate to avoid losing the deal. In these circumstances, it is important to be careful not to push a provider too hard to win the business.

Alternatively, companies must be alert against falling for “low ball” proposals that involve proposed prices that are well below the bids of other competitors. In this situation, there is a risk that you may sign an agreement with seemingly wonderful terms that the provider will simply be unable to fulfill. It is important therefore to validate as much as possible the vendor’s ability to deliver before making a commitment.

Services are much more difficult to validate for effectiveness than products because they are harder to execute consistently and are often delivered differently to individual clients. Successful experiences with other companies may have little bearing on whether the provider will be successful delivering services to your company. It is important therefore to find ways to test capabilities before making any major outsourcing commitments. If possible, it is very helpful to have a previous established relationship and experience base with any vendors you are considering, as this can be a reliable indicator of their ability to perform. If you don’t have a track record with the provider then it may be worthwhile to engage them on a test basis, through a pilot or learning projects to see how they perform before making any major commitment. Ways of doing this include low risk pilots or test projects, farming out small pieces of a process first before outsourcing the entire thing and handing a vendor the keys and letting them test drive the process, i.e., letting them manage your internal process for 3-6 months to see how they manage it and what improvements to the process they identify and suggest.

Don’t rely on vendor references alone — seek out examples of successful and unsuccessful clients. Leverage peer networks of executives in other firms, user associations, research firms, etc. to broaden your base of references. When you visit their other clients or talk with references, be sure to contact them directly rather than let the provider control the circumstances of your conversation.

The more comprehensively potential vendors are assessed the better the chances of outsourcing success. It is important to evaluate not just the offering and the deal the vendor is willing to make, but their business strategy, market position, work processes, people, financial condition and performance, innovation capability and track record, organizational culture, management team and governance processes.

Many companies do not sufficiently understand the service provider’s profit model – some fail to sufficiently answer, or even to ask, the simple question of how the provider makes money. Is it through a cheaper cost base or an ability to run the process more efficiently? By reducing the quality and therefore it’s cost to deliver the service? Through continuous innovation of the process to drive down costs or improve quality? This kind of information is essential when evaluating any outsourcing provider. And you need to understand more than the provider’s business model — you also need to know whether or not they will be able to make a profit providing the type and level of service that YOU expect them to deliver. This issue is important because if your provider cannot make money on what you’ve specified, it will not pay sufficient attention to delivering the service for which you’ve contracted. Instead, it will look to cut corners by reducing quality or find other ways to make up for the profit shortfall such as overcharging for any services not initially specified in the contract or constantly attempting to sell you add-on services wherever it can.

Deadly Mistake Four: Obsessing Over the Contract but Ignoring the Relationship

There are two key tasks in any outsourcing deal. One is to negotiate the terms of a contract. The other is to start building a workable relationship between the customer and supplier. Everyone pays a great deal of attention to negotiating the contract but many companies neglect the relationship building part or do it poorly. Ironically, a great relationship will do far more to ensure that an outsourcing arrangement is successful than an iron-clad contract.

There are several reasons why too much attention gets paid to the contract and too little to the relationship. Underlying this problem is the conventional wisdom that the key to successful outsourcing is writing a good contract. This is untrue. A contract is nothing more than an insurance policy that provides legal protection when things go wrong. When written well, it clearly spells out the price of failure to perform. It does very little however to ensure that the relationship will succeed. In one government organization we studied, the executive responsible for negotiating its outsourcing relationship proudly displayed the 500-plus page contract that his team created and signed with its service provider. Despite this detail-laden document, the outsourcing provider managed to badly miss their time and budget goals and jeopardized the agency’s operations so severely that hearings were demanded by the lawmakers overseeing the department.

Another reason that relationship building is given short shrift at this point in the process is that it is often treated as the next sequential step after the contract is negotiated. But by then, it may be difficult to shift from adversarial negotiation mode to collaborative relationship mode if that is what’s required. Some companies even wait until after the deal takes effect to begin establishing the working relationship. But this is much too late in the process — fundamental building blocks need to be in place well before this point if the relationship is to have a reasonable chance to succeed.

It is important therefore, not to put relationship building on hold while negotiations are underway. Once a finalist is selected, there is typically a four-month period of negotiations to agree a deal. This is the time to get delivery teams and leadership on both sides together to begin building the relationship. Some companies have even implemented a process whereby the same group of people involved in contract negotiations in the morning participates in relationship building exercises in the afternoon. This approach is based on the belief that relationship building should not be put on hold just because you are negotiating a contract.

It is also vital to have all of the key players from both sides addressing the question of how they will work together after the deal is done. It is critical to agree on common principles around which the relationship will operate and to flesh out and resolve cultural incompatibilities between the parties. It is often helpful to concentrate first on developing a set of principles to guide and govern the relationship and to prominently display and discuss them during the negotiation process.

Some companies have successfully engaged professional facilitators to assist the effort who understand both the deal making and the relationship building processes. These experts bring an understanding of both the customer and supplier points of view and can help to accelerate the contract and relationship building processes as well as keep them on track and in sync. Others have had success by negotiating the basis of the relationship first and then turning the process over to the lawyers and accountants at the eleventh hour to hammer out the details of the contract.

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Jim Love, Chief Content Officer, IT World Canada

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