As an outsourcing service provider, it is imperative for us to understand what “ailments” can cause a performance partnership to fail or not meet the expectations of one or both parties as outlined in the original agreement. What mind-set or mistakes can prevent this win-win approach? Again, the researchers at the University of Tennessee came up with some answers.1
“10 Common Outsourcing Ailments”
1. Penny Wise and Pound Foolish
When outsourcing, you need to think beyond the short-term bottom line. The danger in focusing on the cheapest offer is that it inevitably leads to tradeoffs in quality and/or service. Unfortunately, many executives view outsourcing as a quick-fix solution to resolving balance sheet problems. Often companies suffering from a “Penny Wise and Pound Foolish” mentality, fall into a loop of frequently bidding out their work, picking the lowest price provider, and then transitioning to that supplier. This can lead to a vicious cycle of bid and transition, bid and transition, bid and transition.
2. The Outsourcing Paradox
This ailment typically begins with the “experts” at the outsourcing company developing the “perfect” set of tasks, frequencies and measures for the engagement. The result is an impressive document containing all the possible details on how the work is to be done. At last, the perfect system! However, this “perfect system” can actually sow the seeds of failure of the outsourcing effort. The reason: it’s the company’s perfect system, not one designed by the provider of the services, who’s supposed to be the experts at getting the job done.
3. The Activity Trap
Traditionally, companies purchasing outsourced services have used a transaction-based model where the service provider is paid for every transaction—regardless of whether or not it is needed. Businesses are in business to make money; providers of outsourcing services are no different. The more transactions they perform, the more money they make. There is simply no incentive for them to reduce the number of non-value-added transactions because it would result in a reduction of revenue. Make sure your outsourcing agreement is not based on pushing the cash register button every time a specified activity is performed, especially when that activity is not value added.
4.The Junkyard Dog Factor
When the decision to outsource comes down, it usually means that jobs will be lost as the work and jobs transition to the service provider. This often results in employees hunkering down and staking their territorial claim to certain processes that simply must stay in house. Even if the majority of the jobs are outsourced, many companies choose to keep their “best” employees on board to manage the new outsource provider. These employees are often the same ones who were asked to help write the statement of work (SOW). Is it any wonder then, that SOWs become rigid documents that dictate conventional and less-than-optimal ways of performing the tasks being outsourced?
5. The Honeymoon Effect
At the beginning of any relationship, both parties go through a honeymoon stage. Outsource providers will jump through hoops as they ramp up for their new client, who’s happy just to have someone else doing the job. But while the provider remains conscientious about meeting the company’s expectations and service levels outlined in the contract, it never progresses beyond this point. The Honeymoon Effect lingers on, even while performance levels for the services provided may be improving industry wide. The problem: while the honeymoon lasts, there’s no inherent incentive to raise service levels (or decrease the price) beyond what’s contained in the Service Level Agreements.
Let’s look at a typical outsourcing example of sandbagging. Many times during contract negotiation, someone on the company side, often a senior manager, will ask, “Just how much can I save?” Rather than establish the highest level of savings achievable as early as possible (which would be most beneficial to the company outsourcing), the provider will sandbag and offer up the savings in smaller increments over time. Why deliver everything up front when you know that your hardnosed customer is just going to hammer you for more next quarter or next year? The providers know that total savings are made of up “low hanging fruit” and long term savings. They often hold back some improvements in an effort to manufacture future savings opportunities in case they don’t perform well in a given quarter or year.
7. The Zero-Sum Game
Companies that play this game believe, mistakenly, that if something is good for the outsource provider, then it’s automatically bad for them. Providers feel the same way from the other perspective. Many organizations fail to understand that the sum of the parts, when combined effectively, can actually exceed the whole. This was proven by John Nash’s Nobel Prize winning research, commonly referred to as game theory. The theory’s basic premise is that when individuals or organizations play a game together (or work together to solve a problem) the results are always better than if they had played against each other (i.e., worked separately).
8. Driving Blind Disease
The Driving Blind Disease afflicts companies that have not done their homework in preparing for the outsourcing engagement. Specifically, it relates to the lack of a formal governance process to monitor the performance of the relationship. Research from the Aberdeen Group shows that one of the biggest challenges organizations face today is assuring that negotiated savings are actually realized on the bottom line.
9. Measurement Minutiae
When companies try to measure everything, they usually succumb to the malady of Measurement Minutiae. What’s remarkable is the scale of the minutiae that some organizations are able to create. We have found spreadsheets with 50 to 100 metrics on them. Measurement minutiae is often associated with companies that are suffering from the junkyard dog factor and with agreements that have fallen into the activity trap. If you find yourself micromanaging your service provider, you’re either bored or you don’t trust them.
10. The Power of Not Doing
The saddest of all ailments is the one we call the Power of Not Doing. This happens when a company falls into the trap of establishing measures for the sake of measures, without thinking through how those measures will be used to manage the business. We’ve all heard the old adage that “You can’t manage what you don’t measure.” But if you don’t use your measures to make improvements, you should not expect results.
1 Vested Outsourcing: Five Rules That Will Transform Outsourcing, By Kate Vitasek. To learn more about the University of Tennessee research or Kate Vitasek’s upcoming book visit: www.vestedbook.com .