How An Internal Team Can Respond to an Outsourcing Challenge

When executives invite a vendor to submit an outsourcing proposal, their internal service provider is immediately put on the defensive. It must respond with a competitive proposal that demonstrates why it deserves to remain in business.

When facing a challenge from an outsourcing vendor, there are some critical “do’s and don’ts” for the internal staff, which I refer to as the "internal service provider."

This is not the right time for drastic cost reductions. It’s too late to significantly change the organization’s way of doing business, and “window dressing” the financial picture can lead to a deterioration of service, further alienation of the clients, and permanent damage to the organization and its staff.

Instead, the internal service provider should focus on preparing a clear, factual proposal that portrays its true costs of doing business. Given that an internal service provider doesn’t have to earn a profit, the financial comparisons should be favorable in spite of some inefficiencies.

But the biggest problem in responding to an outsourcing challenge is this: Generally, it’s difficult to compare an internal service provider’s budget to a vendor’s outsourcing proposal.

There are two primary reasons for this:

  1. An internal budget isn't presented in a businesslike fashion, making it difficult for clients to understand the cost of each product/service they receive.
  2. Internal staff are generally funded to do things that external vendors don’t have to (and should not) do. It’s easy for an outsourcing vendor to appear cheaper when they don’t have to do these corporate-good activities.

To permit a fair comparison of costs, an internal service provider must present its budget in a very different way.

In this article, we examine how your staff can prepare its own proposal to support its bid to keep the business.

Internal budgets are often presented in a manner that doesn’t give clients an understanding of what they’re buying.

Consider a budget spreadsheet, where the columns represent cost factors such as salaries, travel expenses, professional development, etc. The rows represent deliverables, in other words, specific projects and services.

 Deliverable  Salaries Training  Travel  Etc.
 Project 1 $  $  $  $
 Project 2 $  $  $  $
 Project 3  $  $  $
 Project 4 $  $  $  $

This sort of spreadsheet is a common and sensible way to develop a budget.

The problem is, after filling in the cells in this spreadsheet, most organizations total the columns instead of the rows, presenting the budget in terms of cost factors.

This, of course, invites the wrong kind of dialogue during the budget process. Executives debate the organization’s travel budget, micromanaging staff in a way that they never would to an outsourcing vendor.

Even worse, executives lose sight of the linkage between the organization’s budget and the deliverables they expect to receive during the year. They don’t know what they’re getting for their money, so the function seems expensive.

At the same time, this approach leads clients to expect that they’ll get whatever they need within the given budget, making it the staff’s problem to figure out how to fulfill clients’ unlimited demands. Put simply, clients are led to expect infinite products and services for a fixed price!

Success in this situation is, of course, impossible. As hard as the staff might try, the internal service provider gets blamed for both high costs and unresponsiveness.

Meanwhile, outsourcing vendors can offer bids that appear less costly simply by promising less. Executives have no way of knowing if the proposed level of service is comparable to what they’re receiving internally.

In short, while vendors are generally quite clear about the deliverables within their proposed contracts, the internal organization’s deliverables remain undocumented. When comparing a short list of outsourced services to a long but undocumented list of internal services, the vendor may very well appear less expensive.

The answer to this predicament is presenting the internal budget in a different way. The internal service provider should total the rows, not the columns. This is termed “Budget-by-Deliverables,” the opposite of budgeting by cost factors.

Budget-by-Deliverables permits fair comparisons between internal staff and outsourcing vendors.

With a budget presented in terms of the true cost of products and services, executives are often surprised to learn just how much an internal service provider is doing to earn its keep. In many cases, clients learn that, although the vendor appears to be less expensive in total, it's offering fewer services and perhaps a lower quality of service than the internal staff provides.

Learning to present budgets in terms of deliverables has tremendous benefits with or without an outsourcing challenge. One key change is that the debate during the budget process becomes much more businesslike. Instead of demanding that staff do more with less, executives decide what products and services they will and won’t buy. Trimming the budget is driven by clients, not staff; and, as a result, is better linked to business priorities.

Once a Budget-by-Deliverables is agreed upon, another ongoing benefit is that clients understand exactly what they can expect from staff. Of course, if they want more, the internal service provider willingly supplies it — at an additional cost. This is a critical step in balancing supply and demand for staff services.

Useful Links:

NDMA
http://www.ndma.com

To learn more about "budget by deliverables":
http://www.ndma.com/resources/ndm13451.htm