The basic ingredients of a successful outsource relationship

I have been writing several posts on the impact the current economic situation has on the outsource market, but besides these specific challenges both clients and vendors have to face is there also a generic base with success factors. In my experience these are:

• the right services/products and quality are delivered. The client company has two basic ways to obtain a service from a vendor: a) hiring somebody with a certain skill set or b) receiving a pre-described functionality (e.g. orders are processed within 1 day after receiving for 99, 5% of the total volume). In both cases is it very important to have a clear understanding what both parties can expect from each other, both in terms of quality and quantity.
  In many cases are the expectations of the client not translated properly in a contract schedule (e.g. service catalogue, job profiles) resulting in tension between both parties.
• the right, market conform, fee is charged. The question on what a ’right’ fee is starts with defining in adequate detail the current situation (Current Mode of Operation/ Present Mode of Operation) and expected situation (Future Mode of Operation).
  Based on a throughout description of the demand (e.g. volume, service description, quality requirements) for both CMO/PMO and FMO the vendors invited for the RfX selection phase can calculate a realistic price for the contract. The more detail the client can provide regarding its demand (e.g. expected volume 3 years from now), the sharper the vendor can caluculate.
  To ensure a market conform price is charged for the whole duration of the contract benchmarking can be used as a means to compare the price charged by the vendor with peers. Here it also helps to have a decent description of the services/products helps to prevent comparing ‘apples with pears’.
• any secondary objectives are met (e.g. flexibility, innovation). Lower cost is one of the basic requirements which can be executed by outsourcing as a vendor can achieve better economies of scale. Every company has howver also a unique strategy, service/product portfolio and approach of the market. These parameters should also (where required) be translated in performance indicators the vendor has to adhere too.
• the risk is at or below the risk appetite. In several of my previous posts I have discussed some of the risks which are related to outsourcing and shared services and how these can be mitigated. Underestimating the (financial) impact of the sourcing risk may well result in an expensive retransition project (=insourcing) if the expected benefits fail to materialise.
  Discussing upfront the risk appetite (e.g. cash flow at risk, clients satisfaction at risk, reputation at risk) of outsourcing activities allows for the definition of a baseline to setup the risk management framework.

To ensure the previous success factors remain up to date the engagement also has to capture:

• the strategic objectives including risk reward tradeoffs (e.g. political; currency exchange, logistic lead times);
• allowance for long term evolvement of multiple complex objectives to be met;
• attention for importance of relationship, reputation and network of supplier.

One of the challenges of a successful outsource relationship is thus capturing and continuous aligning both short and long term requirements. This requires finding a balance between contractual clauses and mutual trust. To implement the requirements mentioned above the client desiring to outsource activities has to:

• Make the right sourcing decision. Outsourcing is an option, like there are others. Outsourcing has the potential of a higher return than internal supply, but it also comes with a higher risk profile (there is no such thing as a free lunch…). So do not jump by default on the outsourcing bandwagon, but also consider other options like internal rationalisation or sharing services/captives to capture additional benefits.
• Right third party vendor. Sounds simple, but selecting a partner which you might have to rely on for the next five to seven years is not a decision to be underestimated (due to the high costs of an exit the actual duration of the relationship is likely to be even longer). Investing in a thorough selection and due diligence is money well spend for those engagements which represent a considerable value-at-risk for the client.
• Right contract. The contracts and its schedules act as a description of the interface which is created between the client and the vendor. Putting all your trust in the blue eyes of the vendors’ account manager is in my experience not the right way to go. Trying to describe any little event and occasion which may or may not happen during the lifetime of the contract is also not feasible not desirable. Finding the balance depends among others on risk profile of the engagement and the value-at-risk.
• Right relationship and governance. Selecting the right vendor is one thing, investing in the relationship and governance another. The negotiations can result in a great contract, but if there is nobody to govern the relationship in a professional manner will the engagement be doomed to fail. Creating a culture of mutual trust and a client and vendor which are willing to both give and take are important pre-conditions for a mutual beneficial outcome.
• Right competencies and leadership of buyer. In many cases will line manager which previously managed an outsourced department be appointed as a contract manager. In other cases are activities and/or knowledge outsourced which (in hindsight) are required to align demand with supply. Defining upfront which knowledge, capabilities and skills are required to manage the engagement at strategic, tactical/functional and operational levels is thus key. Do also not assume by default that a line manager has the knowledge and skills to successfully manage a complex sourcing relationship.