As we read about the strain between the Conservatives and Liberal Democrats in the UK coalition Government, it is worth remembering that clients and suppliers in an outsourcing arrangement often feel a similar level of stress.
While both parties obviously have different objectives, it could be argued that the basic rationale behind outsourcing should constitute a win-win situation. However, although most arrangements work sufficiently well to keep a business working, it often does not feel like a win-win in reality – particularly from the client’s perspective. High on the worry list is both obtaining and sustaining value for money. Many clients also wrestle with the alignment of their business objectives with that of the suppliers. Given the maturity of the outsourcing market and despite the majority of clients already experiencing their second, third or even fourth generation of contracts, surely it is time for this situation to be improved. But how can clients achieve this in practice?
For a start, from a client’s point-of-view, the word ‘relationship’ itself may not be appropriate in the context of outsourcing. ‘Relationship’ may suggest that this arrangement is a kind of friendship, a potential marriage or a platonic arrangement with dealings on a personal level. Nothing is further from the truth. While I am not advocating an adversarial or disrespectful stance in any way, the key aspect for clients to remember is that outsourcing should be considered strictly a business arrangement.
After all, this is the stance already taken by suppliers. At present, in most outsourcing relationships, the supplier’s skills and capability profile is far more developed in terms of managing its customer and stakeholders, as well as deploying and operating business disciplines and controls, to protect its business interests. Despite consistent advice and plenty of evidence to suggest that they would benefit from adopting a comparable approach to managing their own side of the arrangement, many clients have failed to invest in the appropriate skills to manage their supplier on an equal footing.
There are four key dimensions that need to be considered when building and maintaining an outsourcing business relationship. These dimensions include the:
1. performance metrics that inform the parties
2. business environment that the relationship operates within
3. people who engage to operate the relationship
4. characteristics of the relationship sought.
Everyone involved with outsourcing will recognise the first dimension, performance. The problem is that virtually everyone just concentrates on this aspect alone. Defining and discharging the obligations of the other three dimensions is more challenging. The usual response is, why bother? Analysis has shown that poor or inadequate relationship management can account for as much as 29% of the contract value not being realised.
No matter how it is wrapped up, outsourcing arrangements will always remain an extension of the client’s organisation. The only main difference is that outsourcing is defined by its own commercial arrangements which need to be managed and considered a fundamental part of the relationship. Too often clients treat an outsourcing arrangement as purely a transaction, comparable to buying paper-clips, with nothing further to do having signed a contract. However, they need to consider how outsourcing relationships develop and need careful management over time. Survey data again supports the case for investment in supplier relationship management: 50% of customer/supplier relationships fail. This is surpassed by those clients who take an ad-hoc approach to relationships, who can expect a failure rate of 80%
In today’s economic climate, can any business really afford not to make these achievable improvements?
Graham Beck is a sourcing expert at PA Consulting Group
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