Get Beyond Contract Price as the Final Factor

“We’ve got to get [outsourcing] off the zero-margin deals.”–Ben Trowbridge, Alsbridge

Does driving the absolute best deal possible always make your firm the winner? When it comes to sourcing, maybe not.

The hype around outsourcing has led to a feeding frenzy in which clients drive deals forward solely on expected cost savings, and suppliers desperately make concessions to land deals in a crowded market. That’s not healthy for either side in the long run, says Ben Trowbridge of Alsbridge, a Dallas, Texas- and UK-based outsourcing advisory firm.

In many cases, outsourcing consultants -- and he candidly includes his own company in that group -- can make the situation worse by helping clients squeeze every possible concession from the supplier. The problem? That creates suppliers who are working for next to nothing -- making them a weak long-term partner at best.

Dynamics in the market “are driving established players like [Electronic Data Systems Inc.] and [Computer Sciences Corp.] into low-margin deals time after time,” Mr. Trowbridge says. That’s because small fringe competitors are bidding those same jobs with tiny margins and low overhead, often because they’re using offshore labor or cutting their margins razor-thin.

As you shop for a service provider, Mr. Trowbridge counsels, remember that it’s a buyer’s market right now. Many of the companies competing for your business may have very little actual experience as outsourcers yet. “All sorts of companies are claiming they’re outsourcing providers,” he says, “while actually, very few of them even understand how to write a good outsourcing contract.”

One way Alsbridge helps companies align their relationships with service vendors is by sorting through the service level agreement (SLA) and simplifying it. In doing so, they help the client create a shorter list of indicators that really matter -- ones that can be effectively monitored for compliance.

Rather than joining the race to the bottom line, Mr. Trowbridge suggests “aligning the relationship” by negotiating a truly fair price. It may seem counterintuitive, but if you’re doing a large outsourcing deal, you need to focus on the overall balance of the deal -- not just the price and what you’re getting for that price. Looking at the contract with a broader view helps make sure your provider is going to stay in business and provide you with good service.

For example, as you negotiate, “make sure you know the real cost to provide your services from that new location,” Mr. Trowbridge says. Once you know that, don’t push the contract price down to the range of a zero-margin deal. If the contract really is saving you more than 50%, he says, consider the costs to the service provider. Where’s their margin? And without a profit, what’s their incentive to stay in business? Do you really want to be redoing this deal in 18 months after your vendor goes under?

--> TIP: Don’t drive your potential sourcing partner to the lowest possible price. Instead, consider it a partnership, where each of you needs to make a reasonable profit to stay healthy.

SLAs, are a universal document used in defining outsourcing deals. But according to Mr. Trowbridge, they can make or break a deal. Mr. Trowbridge cites a large wireless company, mired in a bad outsourcing contract, which came to his firm for help. The price was too high, the service level agreement was bad, and the client was locked in for years to come. In helping to renegotiate a better deal, Mr. Trowbridge says, one thing his firm helped correct was the SLA.

A well-defined service level agreement specifies a number of key performance indicators, or KPIs, that the sourcing company can be measured against. That’s standard. But Mr. Trowbridge says a common problem is to include far too many KPIs in an effort to further control the deal. That makes it hard to monitor the important KPIs, of which there are probably only a few dozen.

Instead, Mr. Trowbridge would like to see outsourcing get back to the business basics of years back – with high-touch, high-customer-service relationships between providers and clients. “If you’re doing a larger outsourcing deal, then focus on the overall balance of the deal with your provider. Make sure they’re going to stay in business and are going to provide you with good service.”

He suggests viewing the relationship as a partnership in which no one wins ultimately if either side has a lopsided amount of power and control -- in a way, he says, “like a marriage.” “Don’t have the purchasing agent mentality,” Trowbridge says. “When I see clients [acting like] that, I have to assume they’re just not thinking.”

Useful Link:

Alsbridge
http://www.alsbridge.com
Ben Trowbridge, Info@Alsbridge.com, (214) 696-6410

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