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Collaboration drives innovation May 13, 2011

Posted by Mark Hillary in IT Services, Outsourcing.
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What is the biggest change in outsourcing over the past decade? Probably the level to which it has become an established part of the executive toolkit – no longer an exotic strategy adopted by the manager as he returns from a career-break spent completing an MBA at Harvard.

Outsourcing has become a normal and accepted business strategy for different types of company and business functions. But there is a world of difference between procuring a service and working with a partner. Despite the way most suppliers toss around ‘partnership’ during the sales process.

As outsourcing has matured though, it has become clear that it works best when there is a genuine sense of partnership and collaboration. This is hard to create, and even harder to sell, but it is possible.

What is needed though, is for the buyer of a service to appreciate that they are buying from an expert, not trying to find the cheapest possible deal from a company they don’t care about at all. The service provider has to understand that they are not going to just deliver a service at the lowest possible cost, but they are going to become an integral part of the client’s supply chain.

Traditionally the power has always been with the client. They are buying the service and they call the shots. But as it becomes clearer that many client firms are really just brands with a controlled network of suppliers, who has the power?

It is not that suppliers have suddenly achieved the upper hand, but their importance in making a business relationship work is acknowledged far more today, and that opens the door to a genuine partnership where doing well together works for both client and supplier.

Is becoming outcome-based the answer for outsourcing? January 10, 2011

Posted by Mark Hillary in Government, IT Services, Outsourcing.
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One of the key trends in outsourcing that has been led by the public sector – rather than the super-fast and advanced private sector – is the move towards outcome-based-agreements. But as contracts are increasingly written with payment tied to outcomes, the suppliers need to be more open about their real abilities from the start, not once the contract has been won.

The latest research from analyst firm Gartner on sales in the outsourcing sector did show that sales to the big suppliers are actually down. After the last couple of lean years, no matter how much outsourcing firms do to cut costs, they can’t avoid their own sales being down when compared to the boom years. Therefore, many of the big mega-contracts for outsourcing suppliers have remained on hold until very recently.

But suppliers offering their services based on payment for outcomes have noticed that business is better than average.
Both suppliers and buyers have a lot to gain from more outcome-based agreements and the reasons are obvious in the current climate – you can share the gain when times are good and share the pain when times are hard.
But outcomes and causation can be hard to agree on. There have been examples of companies using share price performance as a desired outcome. It sounds logical, if the share price is performing well then the supplier must be doing a good job for the client, but in many cases the supplier might have no influence over their client’s share price at all – a company running your IT helpdesk for example. Why would they be rewarded or penalised based on your share price if their actions don’t directly influence that measure?

Outcome based agreements work well where the supplier can take over an entire process and then price that process, rather than the component parts – the headcount and infrastructure required to deliver the service.
It does make contract negotiation a lot harder, as a period of parallel running may be required to calibrate the supplier prices, and it does need a greater sense of respect and trust between the client and supplier.

Whether this will become common practice in the private sector is anyone’s guess. What will be really interesting though will be to see how much the contracts rely on trust between parties and how much can actually be documented about expected future outcomes.

 

Your mess for less. You can’t outsource accountability… June 30, 2010

Posted by Mark Hillary in IT Services, Outsourcing.
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Outsourcing is often confused with procurement or purchasing, because many of the same drivers influence these strategic decisions. Both involve efficiency planning, cost reduction, comparing the price of various suppliers. It’s easy to see how the two disciplines get confused. But they are very different.

If you are procuring post-it notes from another firm, you agree on the price, quality, and amount of items, then you procure them. That’s the end of the relationship, except for those annoying stationery catalogues that will be sent for evermore.

If you are outsourcing a business process your company presently performs to a supplier then you are effectively lifting up the boundary wall of your company and rebuilding it around the supplier. Yes, they are still a supplier and are just contracted to provide a service, but to all intents and purposes they become a part of your supply chain, and therefore, an integral part of the service you offer to your own customers.

So why is this subtle difference so important? Take a look at the environmental disaster now playing out off the southern coast of the USA. Oil giant BP is being blamed for allowing a rig explosion and subsequent oil leak to spiral out of control to the point where some are even questioning the viability of the company – regardless of their assets and heritage in the oil industry.

BP could turn around and blame the contractors they had working in the area at the time of the explosion, but would anyone listen? When a firm contracts another to deliver a service there is an operational transfer of responsibility for delivering that service, but the accountability for making sure it works is not transferred from the client to supplier.

Nobody cares if people on the BP payroll made the mistakes or not. If BP hired a supplier then the buck stops with BP. This is an important point to remember if you are considering the use of outsourcing as a way of sorting out a messy or disorganised business function. The supplier might sell ‘your mess for less’, but the mistakes will still be your problem when they occur – both in terms of actual liability and reputation.