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Uncovering more value: rocks to turn over in outsourcing arrangements

Uncovering more value: rocks to turn over in outsourcing arrangements
Danny Ertel
  • On April 19, 2011

As I described in “Health Checks: An Ounce of Prevention”, the early days of  outsourcing arrangements are often characterised by folks fighting fires – running from issue to issue, just trying to establish some sort of stability.   When the winds have calmed, and the parties have survived transition, many find that “business as usual” is just that – everything is “as usual” and no new value is being created.   While some outsourcing contracts involve step-decreases in fees in later years of the contract, most companies do not otherwise actively plan for how to capture additional value in the latter years of their arrangements.   In particular, many do not take a careful look at lessons learned from the early years of the deal to improve results in later years, nor do they take time to address value-sapping deficiencies in the way they manage their relationship.

Forward-looking organisations are increasingly recognising that “doing the same thing and expecting different results” doesn’t work.  While mid-contract benchmarking has its place, it is often executed in an adversarial way that creates more disputes than it resolves.  Real change in the value delivered by an outsourcing deal requires both sides to take an honest look at how they are contributing (or not) to making the deal work.

When the goal is to uncover greater value in mature outsourcing arrangements (generally 12-18 months into the deal), there are several “rocks” under which some incremental value tends to get buried.  This article outlines six of these common “rocks” – turn them over to unearth more value in your deal. You may “turn these rocks” as part of a formal health check or “value discovery” process,  or less formally, as part of your regular governance.

1. Communication
Communication challenges can drain significant value from outsourcing arrangements.  And more communication isn’t always better.  For example, an over-reliance on formal communication often means that individuals spend an inordinate amount of time preparing for meetings and briefings (when informal communication would suffice, and be less time-consuming).   Of course, the opposite is true as well: too little communication has its problems.  Absent robust information sharing about the buyer’s goals and objectives, providers aren’t able to focus on those things that matter most, leading to resource waste.  When issues and challenges are not spotted and discussed early, they sometimes grow into bigger problems than they might otherwise, had they been addressed earlier.

In order to find the “just right” communication balance, ask yourself:

  • Do we discuss relevant developments in our industry or our business and discuss what impact they might have on service delivery?
  • Do we share information the other party needs to be successful?
  • Are there ways we can enable more informal communication so that we can use time in formal meetings more efficiently?

2. Continuous improvement and innovation
Often parties have very different expectations about innovation.  Buyers may feel they were sold “value add,” and providers may believe that all of the “value add” they could have provided was squeezed out in price concessions.  Additionally, a “customer-vendor” dynamic – where the buyer “issues orders” and the provider is expected to follow – can lead to missed opportunities for the provider to contribute ideas for improvement.  And sometimes a strong focus on day-to-day operations means that no one takes the time to think carefully and plan for innovation.

To uncover more value related to innovation, some relevant questions to ask include:

  • Do we have a shared definition and understanding of continuous improvement and innovation and common expectations for what should be achieved in this relationship?
  • Do we have a shared understanding of what value has been achieved and where additional value can be generated?
  • How can we encourage more active planning for and achievement of innovation?

3. Decision-making

We all know that lack of clarity in decision-making processes leads to significant wasted effort – people being bounced around from one person or group to the next, with no resolution. Also, absent a clear decision process, decisions are often made, then un-made as people who think they should have been part of the process become aware of the decision.  Different understanding of decision making roles contributes to mistrust as well: people feeling undermined when they are not consulted about decisions.

Consider the following questions:

  • Does each side understand the other’s internal decision-making processes?
  • Have we outlined the types of decisions that have gotten us into trouble in the past, and clarified who should be involved or consulted when those same types of decisions need to be made in the future?
  • Is there commitment and follow-through when decisions are made?  If not, why not?

4. Governance structure
Most arrangements use some sort of multi-layered governance structure, but few take the time to assess whether the structure is optimal, given the needs of their arrangement. For example, arrangements with project-based elements may need a forum for assessing demand and prioritising among requests from different groups. Arrangements that involve centralisation of once-disparate groups and functions need some means for aligning different stakeholder groups.  Aside from looking at the different structural needs driven by different types of arrangements, the structure may simply not be functioning as intended.  For example, meetings that are meant to be strategic end up always being very tactical.

When assessing your governance structure, ask yourself:

  • Is the current model well-suited to the purposes of the deal, and the way we have structured our contract and pricing?
  • Are key leadership roles understood and filled?
  • Are committees functioning effectively?

5. Metrics
We’ve all seen it – the age-old problem where the “dashboard is green, but no one feels green.”  While metrics are important, the way they are selected and used can create many challenges.  It’s a common pattern: those things that are measured get attention;  therefore, buyers want more metrics so that all of the things that are important to them get attention.  With so many metrics, the provider does not know how to prioritise, and resents being micro-managed, and lots of time is wasted on both sides in compiling, presenting, and discussing reports and metrics.

Ask yourself:

  • Are we measuring what matters?
  • Do our metrics provide reasonable guidance on how to allocate resources?
  • Is our reporting efficient and effective?
  • Are adequate incentives in place to motivate collaborative behavior and effective performance?

6. Mindset and trust
What people think and feel drives the way they behave, and behaviour drives results.  If the retained buyer organisation views provider employees as their adversaries, and believe that their job is to police the provider, the result will inevitably be more reporting, more meetings, and more time and effort wasted in proving commitments have been met (vs. providing additional value or going the “extra mile”).  On the other hand, if buyer and provider view themselves as a single, extended team with shared goals, and believe that their role is to enable one another to be successful, the result will be better collaboration.

Ask yourself:

  • Do we view service delivery personnel as part of a shared delivery team with common customers?
  • Do we accept joint contribution for problems, rather than focusing only on who is at fault?
  • Do we trust our counterparts to meet their commitments effectively?