Have you ever heard the expression ‘Any road will take you there if you don’t know where you’re going’? When it comes to outsourcing, it can sure cause long term problems if you don’t invest in strategy development, goal setting and planning.
Thankfully, ‘worst’ practices in outsourcing strategy are becoming less common. One that is still surfacing takes place even in really well-run companies. When they step back to take a closer look at what they’ve got, they find a dizzying array of outsourcing relationships on their plate, rather like a messy mound of spaghetti. An elegant name for this is multi-sourcing, but don’t be lulled into complacency by a nice name for a challenging situation.
Let’s face the facts, all business processes eventually overlap at some point, both within and across business lines. In practical terms, in the absence of a company-level plan, the business units and departments will outsource their processes to the ‘best’ provider. Understandably, there is often little or no consideration for the consequences at the all-company level of this ‘best-of-breed’ strategy – or of the impact on established outsourcing relationships.
Business leaders are there to maximize their business or unit’s profitability and efficiency. They are likely unaware that a substantial part of the cost benefit and efficiencies are wiped out at the company level. The total cost of managing quality, service delivery, technology, and processes across a large pool of providers is something that can only be seen when measured at the macro-level.
I searched for stories of companies facing the challenge of rationalizing a long list of outsourcing service providers, but apparently this isn’t the type of story that gets aired in public. Let me instead share a personal experience: an HR executive showed me a long list of service providers and asked where to head next. The list included just about every provider you could think of, so a lot of analysis was needed before we could talk about rationalization strategies.
The first thing I did was to assess switch costs, which can end the conversation right there. Eventually, the discussion turned to implementing the switch process. Entering an outsourcing arrangement is a long, costly and sometimes risky process. But changing providers raised another legitimate concern: they no longer had an intimate operational knowledge, which didn’t feel too comfortable.
A ‘best’ practice is to invest time in creating an integrated destination strategy, with a phased implementation plan. This allows you to create a long term road map while managing pace.
VENDORS OR PARTNERS?
The word “partnership” is often used by both buyers and suppliers when referring to their outsourcing relationship. No doubt that in a bona fide outsourcing relationship – one where customers and employees can’t distinguish that a third party is delivering the services – the buy-side of the relationship is extremely dependent on their service provider to deliver services as agreed.
So where does the buyer/supplier relationship start and end, and what is a partnership in this relationship?
The expression “good fences make good neighbours” applies to outsourcing relationships. If you look for key controls in well structured and well managed outsourcing relationships, you’ll find elements like: clear pricing tables and formulae; billing with sufficient explanation and mapping back to volume, service level and pricing tables that they can be deciphered; scheduled reporting – the right things, the right quantity and the right timing; Service Level Agreements that measure meaningful aspects of the services that aren’t so complicated that you need a rocket scientist to calculate and understand the results; Descriptive deliverables that include who is going to do what, and by when.
These are the foundation for a healthy commercial relationship, but this isn’t a partnership. Partners share equally in risks and rewards. Sophisticated outsourcing arrangements can evolve partnerships. Some great ways to evolve into partnerships are to find ways for both parties to benefit from jointly developing a new product, service or business venture.
Another way to evolve a partnership model is to act as a beta test site to help the provider evolve their business, while the buyer benefits from early market entry. One example of this that I have first hand knowledge of is the HRO relationship between Convergys and Fifth Third Bank. HRO was a new venture for both parties, and Fifth Third shared the benefits (and some of the pain) of working with Convergys to leverage their core competency in customer care to create an employee care business. Convergys built a large and growing business line and Fifth Third got favourable terms and lots of management attention from Convergys.
Another example is the recent announcement by Department of Homeland Security (US) that Lockheed Martin won a $1.2 billion, eight-year deal from TSA to manage its integrated hiring operations and personnel program. Lockheed Martin will develop an HR application to support recruiting, assessing, hiring, paying and promotion of all TSA employees, in addition to operating its HR systems.
This deal is one of the largest public sector HRO deals ever announced, and is a new business line for Lockheed. These joint new business ventures operate more like a partnership than a typical outsourcing arrangement since both companies are learning together as they go forward.
Outsourcing deals are growing larger and more complex as this business model continues to quickly evolve. In many cases, the provider is in turn outsourcing some part of their responsibilities. Citing the TSA/Lockheed example, Lockheed will in turn outsource the Learning Management System to Plateau in order to meet TSA’s requirements for training support. So, did I mention trust? They’ll need it to help them get past the bumps in the road.
Linda Tuck Chapman is the founder and managing director of outsourcing consulting firm ONTALA Performance Solutions Ltd., Toronto.