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Ask Before You Outsource: Ten Critical Questions to Put to Potential Service Providers |
The Eight Mistakes Buyers Make By Peter Bendor-Samuel, CEO, Everest Group
After a decade of outsourcing consulting, I'm surprised how companies ignore the value outsourcing generates. Other considerations override their efforts to capture the value inherent in outsourcing relationships. Everest has a vibrant business in repairing broken outsourcing relationships. Here are the eight mortal (and all too common) mistakes buyers should avoid if they want to capture the value outsourcing brings. Mistake No. 1: Cutting off your nose to spite your face.Buyers want to achieve a number of objectives when they sign an outsourcing contract. It goes without saying they want the most competitive price. But BPO buyers also want to maximize the business impact of outsourcing a process. For example, in human resources (HR), they expect their supplier to reduce benefit or recruiting costs. While these additional benefits have value, the buyers don't want to pay for that value. However, when a supplier is told only to focus on cost, that's all they worry about. This tunnel vision causes them to deny the existence of the other attributes they bring to the table that add value. This is the surest way for a buyer to ensure it won't get the maximum value from its outsourcing relationship. To me, that's cutting off your nose to spite your face. Mistake No. 2: Using the wrong pricing vehicle.Buyers who want to pay for problem resolution only get problem resolution. Unfortunately, this is a poor pricing vehicle because the problems never go away. For example, a buyer agrees to pay a supplier a set amount to resolve problems around closing the books every month. The outsourcing supplier is incented to efficiently resolve those problems. But the supplier is not encouraged to solve the root cause of these continual accounting errors, a benefit of outsourcing the finance and accounting process can produce. We've never seen a supplier deliberately create problems because that's how it gets paid. But no supplier we've worked with is willing to spend time or money fixing difficult problems the buyer couldn't solve itself without receiving appropriate compensation. The best solution is to align the interests of both buyer and supplier. Then, both benefit when a problem disappears permanently. Mistaken No. 3: Not providing significant consequences for good or bad behavior.The Everest Group has significant experience with buyers who have installed good, solid metrics in their outsourcing agreements. Later, these buyers were surprised to find their suppliers ignored their carefully thought out metrics because there were no consequences for bad behavior. Every parent knows how this works. You forbid your kids to do something, but they pretend they didn't hear you because the consequences of ignoring you are not strong enough to change their behavior. Suppliers are economic entities that must answer to stockholders and boards of directors. They will act in their best interests. To guarantee the behavior you're paying for, you have to add significant consequences that put some teeth in your metrics. I recommend a healthy balance between positive and negative consequences. Suppliers need penalties if they don't perform as promised. But they also need rewards if they go the extra mile or generate significant savings. Use objective, verifiable metrics to focus on key results. And enforce the consequences, both good and bad! Mistake No. 4: Not creating clear and definable boundaries.It's unfair and untenable to hold anyone accountable without defining exactly what the company will be accountable for. Outsourcing is the essence of accountability. There must be an obvious demarcation between where the supplier's responsibility ends and the buyer's accountability begins. Accountability starts with clear boundaries. The Everest Group has worked on more than 350 relationships and reviews thousands more each year. In every case, the hallmark of an accountable relationship is obvious and patrolable boundaries. In my experience these borders occur naturally. Natural boundaries follow complete processes. They are the simplest boundary to draw. They are objective and easy to measure. And they are the spot were you can generate the most value. Often, people new to outsourcing confuse a function with a process. Outsourcing is the most successful when a company outsources an entire function. Sometimes two departments handle different aspects of a function. For example, payroll is an HR function, but many companies assign that task to their finance and accounting departments. The IT department can be responsible for both the HR and the finance and accounting software. Companies who outsource their complete HR function would outsource everything, including payroll and their HR software. But buyers, in their attempt to control how the supplier completes a process, try to limit the supplier's responsibility as much as they can get away with. The result: both sides share some tasks. However, it is much harder to determine performance levels when both parties are sharing the job. What happens when there is a problem? Value slips away as each side points the finger at the other. The best way to solve the problem is to expand or contract the process responsibilities until you hit a natural boundary. In our experience, expanding the boundaries to include the whole function generates the highest value. Mistake No. 5: Eliminating the opportunity for aggressive supplier prices.Setting clear boundaries has another benefit for buyers. When the buyer can't describe the supplier's responsibilities in black and white, the supplier becomes unable to price its services aggressively. The issue here is risk. The suppliers become unable to quantify the risks in the relationship. When the suppliers have doubts about their exact role, they assume the worst case scenario. The supplier adds extra cost to the tab to cover the costs of all the contingencies that might arise in a high risk situation. Mistake No. 6: Tying the suppliers' hands so they can't take advantage of leverage.Leverage is what makes outsourcing a sound business decision. As I mentioned in the beginning, outsourcing creates leverage by employing economies of scale, creating labor arbitrage, and providing ready access to scarce capital and process expertise. Telling the supplier how to do its job squeezes the economics out of the equation. Specifying tasks minimizes -- at best -- or destroys -- at worst -- the leverage the supplier brings to the table. It's far better to explain to the experts what you want and rely on their expertise. Let them be innovative and creative within their boundaries. Then, when this leverage generates savings, share them. Mistake No. 7: Writing a one-sided contract.The most successful outsourcing partnerships develop when the master agreement is fair and equitable. These documents create arrangements where it's clear the parties plan on working together for the long term. If one party gains a temporary advantage, that move reverberates back to the other party, who tries to rectify the situation by exploiting the terms of the contract. This dysfunctional behavior begins a death spiral for the relationship. Everest has worked on hundreds of these transactions and has developed a best practices checklist with its attorneys. Most of these principles are portable from transaction to transaction. You need them if you are going to capture value in your outsourcing relationships. We recommend you use an intermediary like Everest and a top notch law firm specializing in outsourcing to help you craft these contracts. We recommend Brown Raysman Millstein Felder & Steiner LLP, in New York, New York, and Mayer, Platt Brown in Chicago, Illinois. Mistake No. 8: Failure to understand your own limits.Buyers are not well equipped to take on this complex transaction unassisted. They are up against a formidable opponent: seasoned and well practiced suppliers who want to capture the maximum value for their side. Buyers negotiate outsourcing contracts so infrequently they are rarely cognizant of current market pricing. Outsourcing services have a constantly changing price range. Buyers who retain a consultant hire an expert who is intimately familiar with the outsourcing landscape. This increases the chances of getting the best price for the services rendered. In addition, an external agent of change is necessary to help buyers through their resulting painful transitions. It's very difficult for insiders to wrench an existing process from the tight clutches of an organization that believes BPO outsourcing is unnatural. The outsourcing advisor can help you navigate the shoals. Professional advisors are even more crucial when the buyer is outsourcing a new or emerging service where there are few landmarks. Everest has helped buyers in this situation structure transactions where both parties share the value created. This revenue sharing encourages the supplier to offer its most aggressive pricing. Finally, a good advisor minimizes the time spent "doing the deal." Buyers get higher quality deals inked faster than if they had to do the work themselves. Clearly, sound, competent advice yields huge returns. These include more competitive pricing, higher quality services, faster time to market and better business relationships. If you follow this advice, you can have a big impact on your company's competitive position. Everyone wins when buyers and suppliers align their strategic imperatives and capture the value that's the heart of an outsourcing relationship. Lessons from the Outsourcing Primer:Avoid these eight mistakes and you will be able to capture value in your outsourcing relationship.
Publish Date: October 2001
For more information... Related Articles Copyright © 2001 - Everest Partners, L.P. |
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Generating value is one of the most attractive aspects of outsourcing. Handing over an important but non-core process to an expert at that process provides a host of benefits we talked about last month. To review, these include:
