- The importance of effective outsourced relationship management can’t be overstated as well managed outsourcing arrangements can create 20-40% difference in value over poorly managed relationships.
- While most buyers understand its advantages, not everyone follows a systematic approach to vendor relationship management, thereby eroding value achieved from an outsourced business relationships.
- Communication is at the core of best practices for managing such a relationship. Other key best practices include defining targets and SLAs, establishing performance measurement metrics, integrating and incentivizing the supplier and your in-house team, ensuring skill and knowledge transfer, and developing governance framework to monitor progress.
The importance of effective outsourced relationship management can’t be overstated. In part I of our Outsourcing article series, we had shared guidelines on how to choose the right vendor for your outsourcing initiatives. However, selecting the right vendor is only one-half of building a successful outsourced relationship. On-going relationship management plays an equally (if not a more) important part in ensuring that organizations are able to derive the intended outsourcing benefits.
To put things into context, a study by LogicaCMG and Warwick Business School found that well managed outsourcing arrangements can create 20-40% difference in value over poorly managed relationships. A similar research by Vantage Partners found that, for both buyers and providers, ~30% of annual contract value is at stake when it comes to effective relationship management. The table below highlights how effective or poor relationship management can create or destroy value for buyers.
Impact of Good Vs. Poor Outsourced Relationship Management
Source: Vantage Partners
While most buyers understand its advantages, not everyone follows a systematic approach to vendor relationship management. Even though organizations or individuals that outsource tasks understand that it is important to manage their vendors well, most of them do not establish the right processes to do so. As a result, vendor management oscillates between being a chaotic, ad-hoc process at some buying organizations to a well-defined, organized process at others. However, given the stakes, it is imperative for all buyers to have well established vendor management processes that are designed to maximize value creation for buyers as well as providers.
Appended is a step by step approach on how to effectively manage and govern outsourced relationships, starting from the contracting and set-up phase to the on-going management phase.
- Define targets and SLAs: An important starting point for any outsourcing relationship is for buyers to list their expectations, and for providers to assess and communicate the degree to which those expectations can be met. This is usually done at the proposal and contracting stage to establish consensus on the targets/end-product and define Service Level Agreements (SLAs) accordingly.
- Establish performance measurement metrics: Once the SLAs are established, it is important to put in place the performance metrics that will measure success against the agreed targets and SLA. These metrics could include uptime/downtime for IT services, depth/quality of analysis for KPO services, maximum permissible error percentages for certain BPO tasks, or turnaround time (usually applicable to all outsourcing tasks).
- Select in-house vendor management team: Identify individuals within the buyer organization that will be responsible to overseeing the outsourced relationship on a day to day basis. For large organizations, it helps to have a vendor manager /single point of contact (SPOC) that is responsible for coordinating with various users within the buyer organization (similar to the role played by the project manager on the vendor front). For small organizations and individuals, owners should usually assume this important responsibility to fill the void created by the lack of a vendor manager designate.
- Integrate and incentivize the supplier and your in-house team: Let’s deal with integration first – it is natural for in-house teams to feel insecure when you decide to outsource operations on a large scale. In such a situation, it helps to communicate the rationale behind your decision (skill gap, cost saving, etc.) to your in-house team and also assure them that existing jobs are under no kind of threat, if that is the case indeed. Hold individual meetings or town halls, as necessary, but ensure that people hear from you directly and do not rely on corridor talk on this sensitive issue. Remember that unless your existing teams come on-board with your decision, it is next to impossible to expect them to coordinate and integrate with your outsourced team.
- Now coming to incentives. Remember that your outsourced team is an extension of your existing team, and therefore needs to be incentivized as much to outperform. So, draw up incentive structures which are fair and reward merit even in the outsourced team. Also, make sure to attach targets and rewards for your vendor management team so that they are incentivized to make the relationship work; these targets could be in the form of productivity gains, smooth delivery, innovation, etc.
- Ensure skill and knowledge transfer: Relevant for organizations outsourcing core tasks, e.g. an investment bank outsourcing part of its research process. In such cases, ensure that the requisite skill transfer has been made, and the outsourced team is up to speed with your in-house processes which are critical to achieving the output that you have come to expect over the years. Also relevant for individuals and small organizations that decide to outsource a specific task which they have been managing over a period of time.
- Develop governance framework to monitor progress: The governance framework is not limited to the performance measurement metrics developed in the set-up phase. Instead, it is the agreed upon set of roles, rights, accountabilities, principles, procedures, and escalation processes that guide decision making, issue resolution, and changes in the outsourcing arrangement.
It includes periodic governance calls (daily/weekly/monthly/) between operational teams to discuss day to day operational issues and ways to overcome them. Also, such a framework would establish a process for periodic review by the management teams of the buyer and the provider to:
Discuss progress and adherence to SLAs and performance metrics, and improvement areas.
Give regular feedback to course-correct projects and establish benchmarks
Identify risk areas and discuss mitigation strategies
Any disputes that remain unresolved at the first level
Upcoming change in buyer needs, etc.
Remember that establishing the governance framework is not enough. Buyers need to ensure that they adhere to the agreed upon framework and follow-up on their set of responsibilities, as the onus of making an outsourcing relationship successful relies as much on the buyer as the provider.
8. Communicate, Communicate, Communicate: Lack of responsiveness from buyers can be perceived as lack of seriousness by service providers, and can only harm an outsourced relationship. Therefore, it is important to establish a communication loop that goes beyond the formal governance framework and helps you build a personal relationship with your supplier. Regular communication can also help:
- Spot early warning signals and raise flags at the appropriate time
- Spot any changes in the team that works on your project
- Understand the growth of your vendor beyond your immediate contract, and the alignment of its growth strategies with your requirements. E.g. As they transition from a medium sized firm to a ‘big firm’, most vendors tend to give lesser importance to small clients and small projects. Or an IT vendor may decrease its focus on a particular technology service/product which you might be using, in order to focus more on a next generation technology that has better commercial future. It is important to be aware of such changes so that you can plan your procurement strategy accordingly, and change your vendor if required. In addition to regular communication, we also recommend a periodic strategic assessment of large/critical vendors that account for majority of your outsourcing spend.
- Communicate changes taking place at the buyer organization, in order to update your outsourced team about the resulting evolution/change in their roles and expectations.
9. Ensure smooth billing cycles and pay on time: Vendors appreciate clients that are as religious about processing invoices as about expecting results. Trivial as it may seem, it goes a long way in establishing trust, especially in smaller relationships. Remember, if you consider your outsourced unit as an extension of your in-house team, then you must apply the same rules to both.
We hope these best practices will help you manage your outsourced relationships in a more effective manner and achieve the intended benefits. We would love to hear your thoughts on other challenges that you or your organization have faced in such situations, and best practices for overcoming them.