Sourcing Inside Out: Who’s at Fault? Be Honest

When an outsourcing contract approaches its termination date, the client organization has three basic choices: renew the contract with the incumbent; issue an RFP to find a new service provider; or take services back in-house. (An additional option is to do a combination of all three.)

Over the next three months, we’ll look at certain aspects of each option in detail. We’ll focus on how to analyze your situation to determine which option is most appropriate, and, once a decision is made, how to optimize the results for each path.

Let’s start with the option of renewing the contract with the incumbent. If you’re completely satisfied with your service provider, then the choice is obviously easy. The decision gets to be thorny when the relationship is troubled, but not quite a disaster. Problems exist, but you believe there’s a possibility to work thing out.

How to Proceed?

First off, we advise our clients that, if in doubt, they should make every effort to explore the option of renewal and salvage the relationship if possible. It’s a clichŽ, but outsourcing relationships are like marriages – they involve significant investments that should not be discarded lightly.

A number of practical reasons support the strategy of staying with the incumbent service provider if at all possible. The costs of transitioning from one vendor to another can be significant, in terms of both money, disruption in services, and internal time and resources needed to get the new provider up to speed. Put differently, the devil you know may well be better than the devil you don’t. And the devil you know has knowledge of your organization that any new vendor will require years to acquire. Consider too that switching vendors often causes internal political battles – and you know how much fun those can be.

You should also recognize that a “fresh start” in outsourcing, in and of itself, rarely solves underlying problems. There’s no guarantee – in fact, no particular reason to expect – that a new vendor will perform any better than the incumbent.

Perhaps the best advice we can give to a client struggling with the decision of whether or not to renew is to be brutally honest; specifically, to objectively analyze the outsourcing relationship to determine how and to what degree they contribute to the problems that exist.

If you’re in this situation, here are questions to ask yourself.

Are We Difficult to Work With?

We’ve learned from outsourcers that, from their perspective, one of the biggest obstacles to success is the client’s poorly staffed – and sometimes hostile – retained organization. Evidence shows that a substantial number of outsourcing relationships fail due to poor management on both sides, including poorly implemented processes, deficient service standards and reporting, and inadequate, unqualified or unsuitable account teams.

Do We “Do” Rather than Manage?

This is a pervasive problem in outsourcing relationships. What often happens is that, following an outsourcing initiative, in-house technical staff are assigned to the retained function to oversee the service provider. The problem is, these people – while very skilled in their areas of specialization – have no experience at managing and delegating tasks. As a result, in the new and unfamiliar environment, they quite understandably revert to their areas of strength – doing the technical work that the service provider was hired to do. The results are duplication of effort, uncoordinated silos of activity and unsupervised vendor staff. But whose fault is that? While many client organizations have recognized and addressed this problem as the market has matured, it remains an issue.

Do We Have Unreasonable Expectations?

This is another major source of contention vendors. Specifically, clients enter negotiations with lofty ambitions about technological innovation and leveraging the expertise of the vendor for added value. But they fail to adequately define their business objectives, so the vendor is left guessing as to what the client really meant by all that talk, and struggles to deliver. The client, meanwhile, sees a lack of results in terms of strategic initiatives and reverts to complaining about price. Bottom line: You can’t have it both ways; you can’t expect the vendor to give you top talent at rock-bottom prices.

By better understanding how you’ve contributed to the problems in the relationship, you can better determine how to fix them – whether it’s with the incumbent or with a new vendor. While that sounds a bit like a pitch for an organizational form of psychotherapy, it can provide a host of practical benefits. For one thing, an internal focus can help you define what exactly you mean by “value,” and how it can be delivered; this, in turn, can be used to construct an appropriate contract with appropriate goals and measures that the vendor can work towards. Conversely, you can better understand where you require commodity services at low costs, and negotiate accordingly.

Taken a step further, a better understanding of your organization and its capabilities can help you define an appropriate role for offshoring to reduce costs. Importantly, this can include a realistic appraisal of how well-equipped you are (or aren’t) to manage an offshore operation either directly or through a third party.

Acknowledging your organization’s strengths and weaknesses can also help you determine whether selective sourcing is appropriate. While a selective approach is increasingly seen as delivering the best results in terms of client satisfaction, it requires a more advanced level of internal management capabilities. An objective appraisal of your internal capabilities can tell you whether or not you’re ready to take on that level of oversight.

Of course, the internal soul-searching exercise might lead you to conclude that, in fact, maintaining the relationship is not a viable option.

Next month we’ll examine how to proceed with finding a new service provider.

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