The following recommendations provide a guide for today’s corporate executive to avoid multiple landmines, when considering or managing outsourcing environments:
Make the board a stakeholder before outsourcing. Corporate Governance is on the mind of every CEO and board chairman. Audit committees are probing ever deeper into day-to-day operations and they are directing external auditors to increase scrutiny of controls. It would, therefore, seem ludicrous that senior executives fail to stakeholder board members before large outsourcing deals are executed, but many do.
Once you have developed a strong case for implementing an outsourcing initiative, getting board-level buy-in is normally a straight-forward process. Building advocacy of outsourcing long in advance of outsourcing a department, is a best practice because outsourcing is truly about acquiring core competencies and building competitive advantage in pursuit of the strategic corporate agenda. Asking for forgiveness from a board that is angry about being excluded is certainly a risky proposition
Manage your customers. An outsourced department services can have either internal customers, external customers, or both. Executives routinely fail to communicate outsourcing events effectively to key customers with sufficient detail to set and manage expectations. While it’s certainly not always essential to manage all external customers’ expectations, managing the expectations of key customers is vital. Almost as important, great executives remember that perception is reality, and they check-in with key customers on a regular basis.
Constantly measure your progress against the initial outsourcing objectives. Whether intentional or not, many executives fail to track results against outsourcing objectives. This could be the result of failing to have concrete, measurable goals, or simply avoiding the effort. Managing an outsourcing relationship to achieve accountable goals is a tremendously arduous challenge because many forces work against executives, namely expensive change orders are often necessary to adapt to new business processes; providers continuously seek opportunities to increase pricing; and companies become frighteningly reliant on providers after knowledge capital has migrated to the provider.
Successful executives have clear, measurable goals. They regularly measure against the outsourcing relationship and they manage their goals. When goals need to be changed, you should have formal, documented procedures for managing this change, which frequently requires you to build board or customer support.
Hands-on provider management is imperative. Many executives are comfortable managing employees. Senior executives are familiar with delegating responsibility to a subordinate whose own subordinates will work hard to achieve the stated business objectives. Progress against these tasks is easy to obtain and measure. Well, managing providers is an entirely different, incredibly more complex proposition because the provider, although they would suggest otherwise, works for himself, and therefore has his own priorities, which may not be identical to yours’. Changing priorities now require change orders and lawyers. Progress cannot be easily measured, and significant challenges exist in gauging compliance with contracts, because the provider may operate from a foreign country.
Executives who fail to employ hands-on provider management are likely to be surprised when service levels are not achieved, security lags, and objectives are not met. You must recognize the challenge and assemble a team of knowledgeable, experienced provider managers whose sole objective is to ensure the providers achieve their goals. And if you don’t have the right people to do this for you, you must go out and hire them.
Be wary of the low-cost country bandwagon. The number of providers and countries touting the “next great outsourcing destination” can become overwhelming. What started off in Canada, moved to India and traveled to the Philippines and Costa Rica. Each country has experienced movement from “tier-1” cities to “tier-3” cities as competition for low-cost labor accelerates attrition and salaries. Argentina, Brazil, China, Eastern Europe, the Middle East, and a variety of developing companies now loudly tout their high unemployment, skilled labor and tax incentives. Remember, they, too, will experience similar cost increases and migrations to lesser-known cities.
Constantly chasing incremental cost savings may be enticing, but the hidden costs of transitioning to new countries with the same or a different provider have bitten many outsourcing executives in the past. Also, to start-up provider fees, training costs and travel expenses, service is likely to lag behind current levels due to learning curves. The costs of all these elements can often eliminate most of the first couple of years’ of savings — at which point your new country may experience the same problems as your last country and price increases will eliminate your future savings.
Make sure you have obtained exhaustive customer references and conducted diligent research over a period of time before moving services to new locations. And remember, outsourcing is a longer-term proposition, and not simply a series of quick cost-savings hits every time a cheaper locale comes along.
Remind yourself everyday that your provider is not really your partner. Yes, you have to develop deep relationships with them, but, like it or not, providers are not partners. Developing a trusted long-term relationship is extremely important to the success of your outsourcing engagement, but ultimately their employees are loyal to their own management, not yours. Highly incentivized salespeople actively seek opportunities to deepen relationships in an attempt to head-off competitive RFPs by growing business “organically.” Many providers have dedicated contract negotiation teams and use specialized outside law firms in an attempt to maximize their profitability and minimize risk.
Ultimately, you are buying a service the provider sells and a good executive never forgets that. No matter how well a provider performs or ingratiates itself, the only thing that matters is that the customer is receiving consistently high quality service provided with a smile.
Negotiate contracts effectively and consider using a third-party adviser. Naïve executives fail to understand the complexity of outsourcing contracts. Under the pressure to “get the deal done,” many executives focus on key price terms, but neglect rest of the deal.
Providers, on the other hand, negotiate outsourcing agreements for a living and their standard contracts (the ones they hand to you to start a relationship) are seldom written in the spirit of “partnership.” Provider sales executives are well-trained masters of creating negotiation leverage. Good sales teams mathematically predict the probability of winning a deal — that’s how experienced providers really are. Even more worrying are executives’ procurement and legal teams who are probably inexperienced with complex contract negotiations. Make sure you are properly equipped to negotiate these contracts.
Engage a third-party adviser that specializes in negotiating complex outsourcing deals if you do not have the inhouse expertise or legal counsel to do this for you. Even if you are sole-sourcing an outsourcing engagement, a third-party adviser can help negotiation service levels that help drive quality, lower cost and higher performance into a contract, and not simply squeeze down the provider’s costs.
Focus on driving value from your provider at every opportunity. While innovation is frequently a loosely used term, outsourcing does provide an opportunity to develop a long-term training ground for your company to access and acquire new skills, access process acumen and better technology, in addition to driving out cost on an ongoing basis.
However, you must use the tools at your disposal to ensure your provider is constantly keeping your costs at a minimum and adding real business value to your outsourced department by upgrading your technology regularly and adding rigor to your business processes. This includes guarantees that they will devote Six Sigma black belts to your engagement, focus on refining process flows over the duration of the contract, and work with your staff to drive out costs and eliminate inefficiencies. Ensure they are keeping your technology applications and tools upgraded on a regular basis. As mentioned above, this is not going to happen simply through the spirit of partnership.
Get key people on board your train across the enterprise. The impact of outsourcing reaches all corners of your organization. However, in an effort to maintain the confidentiality of an outsourcing initiative, many executives fail to communicate to key internal teams, including IT departments, HR departments, corporate communications, and public affairs. The result is that these teams are frequently left with insufficient time to support the initiative. Experienced executives assemble a small team of key resources to manage media relations, communicate with government officials and agencies, and determine legally defensible methods of selecting employees who will be impacted by outsourcing — and to manage their transition or severance packages. The best executives communicate with peers and key employees in order to seek opportunities to place key employees within other departments.
Take your time to get this right. There is little doubt that today’s companies place a premium on achieving results quickly. Many outsourcing executives who seek quick cost saving opportunities will rush through the key assessment, provider selection, negotiation and implementation tasks. Invariably, implementations go awry and provider relationships sour. The reason is simple: Outsourcing is too complex, has too many stakeholders, and relies on too many resources within a company and the provider to skip tasks or avoid detailed analysis, planning, and testing. Conducting a business case to find cost-savings is the easy part — executing on achieving this end state, a reality, is another challenge altogether and it is your job to do that.
Phil is Director of Research for BPO, offshoring and IT sourcing at AMR Research where he advises tbe buy-side clients on outsourcing strategy and vendor selection. In the past, he has worked with Deloitte Consulting as Senior Executive for Outsourcing Advisory Services, where he led numerous sourcing relationships with Fortune 500s.