By Marc Kauffmann,
President,
The Kauffmann Group, LLC ?
Outsourcing people, processes, and information technology to a third party has become commonplace. It provides organizations with an opportunity to gain operating efficiencies, improve performance, lower costs, and focus on core competencies. Many businesses, however, neglect to take sufficient care of the relationship, adopting an ?out of sight, out of mind? approach once outsourcing begins.
Successful outsourcing is no different from any other business relationship. It requires nurturing and management so that the needs of all parties are met. It is critical that both the purchaser and the supplier of outsourced processes understand each other?s expectations and dependencies, work as partners, include innovation as part of the working arrangement, and focus on maintaining a strong communication channel. Regular monitoring and reporting, for example, provide valuable information on the health of the relationship.
Moreover, the organization needs to consider carefully any risks involved in the outsourcing engagement and perform necessary up-front planning in advance of vendor selection. This includes a detailed Statement of Work that clearly delineates the various activities that the third party provider will perform. This will include a brief discussion of Innovation initiatives that serve as incremental improvement to the cost reduction efforts. It discusses how third party vendors are to be compensated for improving an organization?s bottom line through innovative, actionable, and timely initiatives.
Successful outsourcing engagements also involve balancing cost reductions efforts with the preparation of a contractual agreement that systematically compensates third party vendors for innovative initiatives. This will be performed through an Innovative Clause which depicts the following:
- Specific innovation effort
- Anticipated time frame
- Approximate expenditures
- Anticipated Return on Investment
- Contribution to the bottom line
- Compensation plan
- Resource utilization
This clause will incentive the vendor to think as a partner. It will put the two parties on the same page and ensure that they are both headed toward a common goal. Innovation initiatives can be managed by one of the following:
1. Senior management team itself or a subset of it
2. The CEO or divisional president
3. A high-level, cross-functional steering group or board
4. CTO or CRO ?
5. & 6. Dedicated Innovation Manager or Chief Innovation Officer
7. Group of champions
8. & 9. To no one
9. & 10. A duo or complementary two-person team consisting of either the CTO/CRO and a BU manager, or of a CXO and BU manager team.
These individuals should consider the following when managing Innovative Outsourcing:
-? What does innovation mean to us.
-? How do we innovate today and what?s good or bad about it.
-? Where are there clear and present opportunities to be more innovative.
?-? What are some known new market, audience or business opportunities we are not exploiting.
?-? How innovative are our competitors and what makes you think so.
?-? Does my team or organization enable (or stifle) innovation.
?-? What can I or should I do to advance innovation (in whatever way you define innovation)
?-? Any other critical questions you might want to insert.
Causes of Relationship Failures
Numerous factors can cause an outsourcing arrangement to fail. A few of the more common reasons include:
? Support conflicts. The outsourcing service provider and its partner may enter into a relationship with different expectations , degree of innovation to be performed, and the timeliness of those services.
? Monetary considerations. When all of the costs involved in an outsourcing arrangement are considered, the resulting service may not be as cost-effective as anticipated. In addition, innovative functions may not? have been considered as part of the contract.
? Lack of Innovation. A common complaint is that the third party vendor offers minimal ?out of the box thinking.? They are more concerned with their bottom line than the needs of the client. This ensures that they spend all of their time and resources on those initiatives that serve their specific needs and are in strict adherence to the contract. They don?t focus on innovative ways to generate incremental revenue and profitability.
? Core functions. Functions performed by an outsourcing service entail a degree of separation from internal functions. However, it is essential that the third party service provider mirror the internal operations to ensure consistency and continued innovation.
Key Risk Areas
Understanding key areas of exposure associated with outsourced processes and developing steps to mitigate those exposures are critical to the outsourcing process. Whenever a relationship with a third party is formed, strong due diligence processes are necessary to gain confidence in the soundness of the business, including its training programs, management style, and insurance coverage. Many organizations fail to look beyond the potential Return on Investment for the outsourced process and consider the risks.
While cost savings will always be a major factor in selecting a third-party provider, the lack of a structured Innovation Process, a well defined governance structure, participation by senior management, defined innovation methodology, and compensation for appropriate activities may have a greater impact on the organization and its bottom line.
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Reputations at Stake
When a problem occurs ? and inevitably it will ? the organization, not the outsourced firm, will bear responsibility no matter where that problem lies or who created it. If the organization has staked its reputation on exceptional customer service or rapid turnaround and not informed the vendor of this, it should consider how these areas might be affected when direct control resides outside the core business. In addition, the organization needs to carefully consider the compensation arrangement for innovative activities that conform to the contractual Innovative Clause.
These can be measured assiduously to ensure compliance. Strategy Would cost reduction and innovative processes under consideration help the company meet its strategic objectives? If the process comprises back-office activities and can be performed by a vendor with greater expertise and resources, then outsourcing may allow the organization to better focus on its core strengths. If it involves a key business process, those responsible for the decision need to understand how outsourcing fits with company strategy.
Moreover, the organization needs to determine the level of sophistication, innovation, personnel, training and management that may be required to make sure the outsourced process works effectively and continues to support the strategy.
Ongoing Relationship Management
Any organization that outsources business or technical functions must actively manage the relationship. you need to consider taking the following actions to ensure ongoing vendor management efforts are effective:
1. Confirm that your contractual agreement contains an Innovation Clause that promotes revenue generating activites.
2. Understand the risks introduced through the vendor relationship, or risks that are inherent in the contracted organization or outsourced process. Ensure there is an ongoing risk assessment and innovative development process and that high-risk outcomes are mitigated appropriately.
3. Understand the elements required to ensure innovation.
4. Gain an intimate understanding of the vendor organization and any changes that need to be made to ensure contractual adherence.
5. Obtain and review copies of any third-party or internal audits of the vendor related to the services provided to the organization.
6 .Confirm that the services provided meet the organization?s expectations as defined in Service Level Agreements.
7. Verify that incremental expenses are appropriate based on the services provided, contracted costs, and Service Level Agreement requirements met.
8. Ensure that the organization consistently engages senior management to meet its SLA and contribute innovative initiatives that will translate into incremental revenue.
Vendor Transformation Process Clients have enormous opportunity to improve upon their vendor relationships. By adding innovation to the Service Level Agreements, instituting an Innovation Clause in all contracts, assigning the appropriate individual to manage all of these efforts, and compensating the vendor for successful innovation initiatives, will ensure that a Vendor morphs into more of a true business partner.
Marc Kauffmann is the president of The Kauffmann Group, LLC, a management consultancy featured in New York Times best-selling author Seth Godin?s book, ?Bull Market: Companies That Make Things Happen.? He has 25-plus years of expertise in the evolution of innovative business practices, market approaches, product/service offerings and information technology. You can follow him on Twitter @Marc81753262 or find him on LinkedIn.
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