There is a body of research that suggests many outsourcing deals are not delivering the benefits expected by client organisations.
Common themes centre on a mixture of unexpected costs and issues surrounding the relationship. Yet despite these well publicised challenges there remains a significant client investment in outsourcing. In fact, the move towards outsourcing more core or strategic elements of the business coupled with the growing importance of greater collaboration with outsourcers is viewed as a way to achieve greater flexibility and agility.
These challenges and developments suggest that outsourcing continues to be viewed overall as significant in the realisation of business goals and strategies although there are many who are currently in existing outsourcing arrangements that are failing to deliver the benefits expected.
It is our belief that outsourcing can be an effective strategy however there are a number of aspects that have to be understood and actively managed both from the outset and throughout the life of the contract to realise the expected benefit for the clients’ business.
The right blend of ingredients
Having the right ingredients alone is not enough to form the basis of a successful recipe
Any memorable gastronomic experience has behind it an exact blend of quality ingredients and other elements including skills, experience, preparation, timing, tools and monitoring to ensure the delivery of a successful outcome for the customer. At Aurora Partners we believe the same can be said of outsourcing.
The objective of this article is not to describe an end to end process for outsourcing; after all there are plenty of articles about that. It is looking to explore, from a client perspective, those aspects of the “outsourcing recipe” that we know from experience are often overlooked or undervalued and yet we believe are critical in terms of delivering the required value throughout the term of the contract.
Looking at these aspects in more detail will help those involved in the procurement and management of outsourcing to better understand their existing outsource challenges and provide some insight into how to improve the successful prospects of future outsourcing ventures.
Having said this is not an end to end guide to outsourcing it is important however to provide some context. The outsourcing process can be broken down into 3 key stages; Business Case Development, Tendering & Selection and Managing the Contract.
Creating the right conditions
At the outset it is important to ensure the right “conditions” are created so it’s worth recapping on a few basic outsourcing principles
Understand what your organisation expects to achieve through outsourcing and what services it is planning to outsource:
- Cost saving is one driver for outsourcing but many organisations also outsource to obtain access to skills, drive innovation and to manage complexity/scalability more effectively
- Outsourcing is typically more attractive and less complex for routine/repeatable activities or commoditised services
- Outsourcing those aspects of the business that are considered core, critical or strategic carries with it a high impact associated with any failure. This type of outsource requires a higher risk profile to be understood and managed and requires a more mature, collaborative based approach.
Ensure that the business requirements, and how systems and capabilities can be leveraged, are clearly understood as this is essential to defining the service, the appropriate service levels, contract clauses and ultimately the price of the contract.
Recognise that the business strategy and technological developments may change during the term of the contract and therefore there is a need to build in the appropriate level of flexibility and responsiveness into the contract to avoid excessive cost through subsequent changes.
Understand the benefits and drawbacks of different contract lengths:
- Current trends are towards a business outcomes based approach with shorter deals that are more focused and managed more closely
- Any outsource inevitably results in losing knowledge/experience to the outsourcer making it difficult and risky to move to another provider or back in-house later
If the business or service requirement is not sufficiently understood then the right conditions for success will not be created. A clear understanding of the requirement enables the development of an optimum balance between Quality, Cost and Control.
Client & Outsourcer Relationships
Why are good relationships a key ingredient for successful outsourcing?
It is a common misconception that if there is a contract in place then that takes care of everything. A contract does indeed document what service has been bought and to what level. But not all contingencies can be explicitly incorporated into the legal contract and it is therefore necessary for parties to also rely on more implicit agreements or the spirit of the contract. In reality, the everyday working of the contractual relationship is governed by the individual’s more subjective interpretation and therefore reliance on the legal contract alone is insufficient.
Ultimately, it is the individual’s beliefs and perceptions of these obligations, rather than the actual written contract, that drive behaviour encompassing the parties’ perceptions and beliefs of both the explicit written terms found in the legal contract and implicit unwritten terms.
The perception of outsourcing success or failure is often associated with the extent to which the non-contractual aspects (implicit beliefs & expectations) have been or are being delivered.
Have you experienced the often familiar situation where the SLAs have been achieved but it still does not feel as though you are receiving the service you thought you had signed up to?
Having established why relationships are so important to the success of an outsourced contract let us consider the factors that can influence the establishment of good relationships
It may seem a very simple question but what type of relationship do you want with your outsourced service provider?
We often hear the phrase “I don’t want a service provider I want a Partner” but what does this really mean and are all contracts suitable for this?
The starting point is to consider what type of service you are outsourcing.
For relatively simple and repeatable or commoditised services it is more usual to have a typical client/outsourcer relationship. If however you are looking for an outsourcer to support a more complex arrangement comprising core business functions then you will need to invest in a collaborative relationship often viewed as an extended enterprise that requires greater innovation and thought leadership.
Collaborative relationships often cost more as there is a greater investment required by the outsourcer. Therefore the type of relationship you have with your outsourcer is very much driven by the type of services you are buying and consequently contributes to the cost vs. value debate.
Contracts and relationships are complementary in that both need to be strong to produce positive outsourcing outcomes.
The management of outsourcing contracts requires interaction between client and outsourcer at different levels. The early development of both formal organisational roles in conjunction with successful interpersonal relationships is key to the efficiency, effectiveness and evolution of the contract.
The establishment of a good relationship takes a combination of the right people within the right organisational structure who are empowered and supported to make decisions. There must be a mutual understanding by both client and outsourcer regarding how they wish to conduct business together with behaviours that do not undermine the relationship even when under pressure.
On the client side it is beneficial to have a retained organisation that has the breadth and depth to understand and if necessary challenge what the outsourcer is saying and doing. Enlightened organisations recognise that the skills needed go beyond procurement, finance and legal and extend into other areas such as Service Management and Technical.
Skills & Experience
There must be sufficient skilled and experienced resources assigned to manage the contract from both the outsourcer and client organisations.
Identifying and securing key client and outsourcer resources within the contract will help mitigate for “bait and switch” soon after contract signature.
Both the client and the outsourcer need to recognise the importance in fielding people (especially at the points of interface between client and outsourcer) with strong interpersonal, problem solving and relationship management skills and capabilities. This is in addition to other skills such as technical or service management.
It is not uncommon for time consuming and costly issues to have arisen, drawing in many other more senior individuals within both organisations, as a direct result of deficiencies in these areas. If allowed to persist the damage to the efficiency and effectiveness of the contract can be significant.
The transfer of undertakings (Protection of Employment) Regulations or TUPE between organisations needs to be understood and managed in terms of relationships. In the early stages of the contract the familiarity that transferred staff have with the client organisation can be of benefit in terms of establishing the service. As time progresses familiarity with the “old way of doing things” may stifle creativity and innovation and therefore consideration should be given to a blended team for the contract.
Similarities and differences between client and outsourcer organisations will affect the approach to the relationship. Individuals will typically more closely align with the people, functions, goals and culture within their respective organisations. A failure by both parties to recognise and manage these differences introduces the risk of contention, misperception and conflict that can over time become toxic to the relationship. The concept of mutuality highlights the importance of looking at perceived obligations from the perspectives of both parties involved. Understanding and working through differences while building on similarities is significant in optimising the relationships and facilitating knowledge sharing crucial to the success of outsourcing relationships.
The goals and objectives of both client and outsource organisations will change over time introducing the prospect of tension especially in lengthy outsource contracts. It is therefore advisable to review any such developments and cultural alignment as part of a joint periodic review. Both client and outsourcer need to recognise that they are a team and together they are responsible for delivering a successful service. Contracts convey obligations on both parties not just the service provider.
Client and Outsourcer Perspective
How you behave as a client can influence the type of relationship that you have with your outsourcer. When everything is going well this might seem like a moot point but when the service is compromised good behaviours are sometimes sacrificed resulting in both parties resorting to quoting their interpretation of the contract.
Recognise that your outsourcer has a reputation to maintain so wants to deliver the service that you have procured but also recognise that when things go wrong you need to maintain trust and work together to return the service to its optimum state.
Ultimately the outsourcer’s main priority is profit and this can drive behaviours that conflict with the client needs. The outsourcer’s perspective is typically that the client does not always appreciate the effort associated with responding to changing requirements.
What do we mean by governance for it is a much used and misappropriated term?
In this context, governance sets the framework for how the contract will be managed, decisions taken, disputes resolved and successes identified. It is the framework within which the relationship operates and it is supported by clearly defined processes and effective monitoring.
Now let us consider the factors that can influence the establishment of good end to end governance:
At the outset there needs to be clarity in terms of who is running the outsourcing project. The business drivers for outsourcing often result in the expectation that the outsourcer takes charge of the entire project. However the outsourcer’s expectation may be that they expect the client to fulfil their obligations in the area of project ownership.
A governance plan needs to be established at the initiation of the outsourcing project and aligned to measures of success that represent what the client expects to achieve through outsourcing.
It is important not to underestimate the resource and capability required to support the mobilisation, transition and on-going management of the service. Factors including the type, complexity, criticality and frequency of changes to the service will influence the model for governance with offshore arrangements usually requiring a relatively higher level of resource to administrate.
Target setting must not be confined to post “go live”. Work with the outsourcer to establish joint targets that will monitor and report progress eg. Achievements, Benefits, Concerns and Do next (ABCD) to all stakeholders.
Monitoring & Analysis
Governance is underpinned by effective monitoring and analysis. This typically takes the form of Service Level Agreements (SLAs), Operational Level Agreements (OLAs) and Key Performance Indicators (KPIs). When designing metrics ensure that you cover the full scope of the contract with sufficient detail, including metrics for both performance and compliance. In addition, always seek to establish why you are monitoring this aspect of the service and what you will do with the outcome? Taken together this should ensure that you avoid the unintended consequences of poorly designed metrics.
A governance model should be in situ throughout the outsourcing lifecycle from business case development through contract signature, early life support and into the operational lifecycle. The structure, focus and participants can be expected to change. Regular reviews should be undertaken to assess ongoing suitability with any changes to the terms of reference formally agreed by all parties.
The establishment of a clear terms of reference and RACI model will enable both parties to remove ambiguity concerning decision making and information flow thus improving process transparency.
Governance tends to focus on the formal side of the relationship but this should not discourage the informal communications that can be so valuable between client and outsourcer personnel. Encouraging such conversations can strengthen relationships and result in the resolution of concerns avoiding the need to pursue a more formal route.
In the virtual environment client and outsourcers need to exploit the many tools available to connect people with one another. Developing a healthy virtual network is critical to coordinating projects, sharing of knowledge and establishing levels of trust at the individual and organisational level.
What are the key ingredients for successful outsourcing?
Firstly it’s important to create the right conditions under which the outsourced service has the potential for success. Making sure you are clear about the business requirements and what you expect to achieve through outsourcing are critical foundations for success. Supporting this with an appropriate contract term that has the right level of flexibility & responsiveness built in will help cement that success.
Secondly the recipe requires inclusion of the three ingredients: relationships, governance and processes to be used in the right quantities. Whilst these three ingredient are all needed for a successful outsource the quantity used can vary depending on the nature of the outsource.
Finally it is vital that relationships are:
- Appropriately sponsored from the outset by both client and outsourcer senior management especially up to and including the conclusion of early life support
- The future client and outsourcer engagement requirement is understood during the early stages of negotiations and is appropriately reflected within the contract
- That ongoing service management resources are engaged during contract development to contribute, build an understanding and establish relationships to facilitate the subsequent transition to a successful business as usual state
We have sought to provide details of those ingredients that we believe are often underrepresented and yet key to the successful evolution of the client outsourcer relationship and process through which value will be delivered for the service consumer.
Central to this success is the ongoing dialogue between client and outsourcer using an agreed approach to define and deliver against existing and emerging expectations in an effective and efficient manner.