Feature

posted 1 Jun 2006 in Volume 3 Issue 1

Workshop

Managing outsourcing for maximum value

Organisations should not have to accept sub-optimal performance from their outsourcing arrangements. But effective management is vital if outsourcing is to deliver its full value potential.

By Mark Sukiennik and Simon Lindley

The outsourcing market is maturing. Organisations are now far better at negotiating and implementing outsourcing agreements than ever. However, getting successfully to a signed agreement isn’t the end of the story – do these deals then go on to deliver the value that was expected from them? If not, why not?

With much talk and high-profile examples in the press of deals failing and being taken back in-house, what is the real picture and what are the lessons to be learnt to ensure outsourcing agreements deliver the value they should? That is the focus of this Workshop.

Cost reduction and service improvement are, of course, the staple demands from organisations when they outsource and most identify these upfront in their initial planning and approach to outsourcing.

However, it is not the only key requirement and, for many, other benefits such as continuous improvement and identification of new value-adding opportunities, potential for transformation and so on are also highly important.

What is concerning is that many organisations enter outsourcing selection exercises without having properly identified these other requirements and may therefore enter a process without properly considering what they want and how best to source it – hence they may follow unsuitable sourcing approaches, without the most appropriate supplier shortlist.

In association with Henley Management College, Orbys recently commissioned Benchmark Research to undertake a detailed study into the UK outsourcing market. Eighty-two UK and international organisations with revenues in excess of £100m ($190m) were interviewed. Three sectors were covered: financial services, manufacturing, and retail and consumer businesses. This sample provided us with a good indicator of the private sector’s current outsourcing performance, approaches and successes.

Overall, satisfaction levels are high, with 55 per cent of respondents indicating that they are ‘quite satisfied’ and a further 27 per cent saying they are ‘very satisfied’ with their outsourcing arrangements. However, there is significant level of disillusionment, with 43 per cent saying that the supplier failed to perform as expected and 35 per cent that the deal failed to meet the client’s needs (see figure one and figure two).

The failure to meet expectations appears to be due in large part to weaknesses in the initial strategy and planning – in particular, in not understanding market capability and available options; in not designing the retained function at this stage; and in the quality of subsequent performance management, which was often limited in scope and end-user involvement.

The fact that overall satisfaction is relatively high despite the failure to meet expectations, the high incidence of problems and only partially effective corrective action, suggests a surprising level of acceptance and complacency with this standard of underperformance.

Managing strategy and planning

In our survey, while nearly all of the respondents had identified the importance of cost/service improvement at the internal strategy and planning state, the opportunity and potential importance of working with the supplier to identify new ways to improve products or services was not identified until later on.

Many respondents had also not recognised the opportunity for other important benefits (albeit ones that were, on average, rated slightly lower than the two detailed above), such as potential for transformational change and the benefits of a relationship with a strong supplier brand until these later stages in the outsourcing process.

These findings suggest a combination of factors:

Clients did not put enough effort or focus into the upfront strategy and planning process;
Clients were not aware of the full range of potential benefits at the time they were developing their market strategy;
Additional added value benefits were then identified in discussion with suppliers (once they were involved in the process).

This confirms two key learning points for clients at the strategy and planning stage: First, outsourcing deals are usually long term and significant in impact. Consideration of options and potential opportunities should therefore be wide-ranging and strategic.

Transformational changes, in particular, need strategic alignment. Suitable assessment and design needs, at least, to be started by the business itself ahead of going to market. Only then, once the appropriate opportunities, risks and benefits have been identified, should an approach to market and selection of suitable suppliers be made to meet these requirements.

This analysis and consideration of options should be informed by market capability and not unduly influenced or shaped by discussions with a limited number of suppliers.

If this approach of strategic evaluation of benefits is not properly adopted, then a number of problems can arise:

Downstream service integration/ supplier rationalisation issues as a result of failing to clearly adopt a comprehensive approach to developing your strategy and planning its execution based upon future business changes and potential requirements;
Flawed selection exercise because the suppliers weren’t originally short listed based on the final requirements and hence weren’t the best from which to select the services and capability which were ultimately required;
Cultural, operational or commercial failure due to lack of upfront planning, design and selection linked to desired business outcomes.

The second key point is this: good suppliers do add value to client propositions. Clearly, as discussed above, clients need first to understand their own strategic requirements and the opportunities and market capabilities that are available, how they best fit their needs and then to carry out selection from a shortlist of suppliers based on this comprehensive view of requirements.

However, once suppliers are involved in the process, they should be able to contribute to the design of the service. The challenge for clients is to design and run selection exercises that allow individual supplier input, without letting them become too influential. Some of the key lessons Orbys has learnt in practice are:

The importance of defining required outcomes, not regulating how they are to be delivered, unless there are compliance/control/ risk issues – leave the ‘how’ to the supplier as far as possible;
Allow time in the process for refinement of requirements – do not get caught negotiating against a deadline;
Provide suppliers with adequate briefing sessions/Q&A opportunities, to understand requirements and what they mean;
Consider allowing joint working-sessions for suppliers to test their ideas and approaches for suitability ahead of formal bid submissions (but do not let these become informal negotiation/selling sessions);
Consider options such as ‘compliant and non-compliant bids (with guidelines on what is and is not acceptable)’ and/or a selection process which involves a second ‘best and final offers’ (BAFO) stage once requirements are clear – but do not let any expectation of a BAFO round undermine the importance of the initial proposal stage (there must be some de-selection at this point and/or no commitment to follow a formal BAFO process with all bidders).

In our survey, the sample was asked about how well their initial outsourcing expectations and requirements had subsequently been met. Although more than half (55 per cent) of respondents were ‘quite satisfied’ and a further (27 per cent) were ‘very satisfied’ with the overall value they obtained from their outsourcing agreements, a number of problem areas were identified by a significant proportion of the sample. What is surprising is the contrast between the relatively high levels of satisfaction and the level of failure of arrangements to meet expectations. This suggests one or more of the following:

Unrealistic/unachievable expectations due to the impact of inadequate upfront research and planning leading to flawed design, selection and implementation (as previously discussed);
A lack of, or ineffective, performance management;
A level of complacency/acceptance with underperformance against expectations.

Managing performance

Formal performance measurement, backed up by a regular review process, is essential. In our survey, this was supported by a statistical correlation between the review approach and client satisfaction. This showed that there was a significant relationship between having regular formal reviews of key factors such as service delivery performance, commercial performance and risk, with having greater overall satisfaction with the value and performance of these contracts.

Hopefully these findings will provide a case for action for companies that have not implemented formal review and measurement processes – the vast majority of whom, from our research, have not done so due to either not considering it at all, or believing it unnecessary.

There are, again, some lessons here for both clients and suppliers, which are backed up by experience:

Successful management and control of value from outsourcing depends on effective ongoing review and measurement;
Clients cannot know they are getting a fair deal (and therefore be sure they are satisfied) unless they have the evidence to demonstrate it to themselves and the internal customers of the outsourced service. This means active comparison to the market in terms of commercial performance and technological developments and provides an objective basis on which to compare expectations;
Without a combination of measurement against the market and active management, failure to achieve expectations is highly likely.

This is a key area where forward-thinking suppliers can demonstrate value and improve client satisfaction and therefore retention by encouraging, supporting and contributing to effective performance measurement.

Additional complexity and challenge is added to businesses where they have outsourcing agreements with more than one service provider in terms of integration of the overall service to the end user and in co-ordinating and managing business changes which impact or require support from more than one supplier.

While some clients did not utilise a mixed management model or integration framework because of the services being logically distinct, this was not a justification for all, and even in this situation, experience suggests that many organisations see value in establishing common approaches and shared best practice in supplier and contract management. Ideally, Orbys would expect such a framework to cover:

Defined interface points between suppliers and clients;
Common processes and controls that link the retained organisation and its multiple suppliers;
Incentives/penalty mechanisms to ensure collaboration across suppliers rather than blame passing on services that cut across or handover between more than one supplier;
Multi-party governance covering maintenance/changes to the sourcing mode, including supplier participants, and related decision rights. For example, express expectations that one supplier will not encroach on another supplier’s existing scope of work.

Managing people

The retained organisation (the functions/activities that are not outsourced and are responsible for managing the outsourced contract), clearly plays a key role in ensuring successful delivery of benefits from outsourcing.

Designing and populating a retained organisation is a long lead-time item that can often result in the need to run an internal change programme in parallel with the outsourced agenda.

In practice, much of the requirements for the retained organisation, such as demand management, service and supply management and so on, and the related skill sets, can and should be identified early on as part of the strategy and planning stage. It is, however, consistent with the findings that some organisations had not fully identified their business requirements upfront, that the retained organisation design had also not been completed at this stage.

Ideally, Orbys would encourage clients to:

Ensure the service and commercial management team is in place pre-contract award and that, preferably, they are involved in contract negotiations;
Have a transition management project team and funding established to discharge their transition phase obligations post contract award;
By the end of transition clients have embedded and established all necessary controls and processes across the organisational/supplier divide including governance so that a robust basis exists for managing the deal.

It is typical in our experience that the retained organisation is either an afterthought or considered a low-priority issue, when in fact establishing the right structure, skills and processes is essential to long term success. Sourcing the required skills often has a long lead time and should therefore be planned for early on and considered as part of the retained organisation design. This is particularly important in multi-sourcing situations where consideration of ‘integrator’ model options and whether or not to perform this role internally or via a supplier become critically important.

Managing problems

The survey questioned the extent to which a number of types of problem had been experienced. The most common problems experienced were:

Loss of pricing competitiveness;
Declining or static service levels;
Supplier inertia.

Each of the above was an appreciable/ significant problem for about two-fifths

of the sample. Of these, the most rated as a significant/frequent issue (15 per cent of respondents) was ‘supplier inertia’ (a post contract lack of pro-activity or focus on continuous improvement by the supplier – a perception by clients that suppliers are merely ‘turning the handle’). The next issue most highly rated as significant/ frequent issue (one-tenth of respondents) was a loss of pricing competitiveness.

In fact these three areas are related – with supplier inertia and lack of pro-active effort at continuous improvement being a strong explanation (and a reason Orbys often sees in practice) for a gradual erosion of price competitiveness and static (or worsening) service performance. The loss of pricing competitiveness in particular is also being driven by the number of respondents who do not actively measure and manage supplier performance.

Clearly these discrepancies contribute to clients’ perceptions of the failure to meet their expectations. Many of our respondents had undertaken within the last five years to address outsourcing performance issues (see figure four). Clearly, the most common approach was to follow up the easiest routes first – that is, to implement a corrective action plan with the existing supplier and then to escalate to re-negotiation/tender later.

What was surprising, however, was the high amount of corrective action taken, from remedial action plans through to re-negotiation and re-tendering. Almost a quarter (23 per cent) had even gone as far as to bring services back in-house.

Where remedial action was taken, however, there was a disappointing level of effectiveness. Perhaps this explains both the large amount of corrective action undertaken and the remaining failure to meet expectations.

In terms of causes, Orbys suggests the following:

Weaknesses in upfront planning and strategy – setting off in the wrong direction, with the wrong supplier or just with poorly defined expectations based on lack of market knowledge, will make it much harder to get back on track and meet your original expectations;
Lack of comprehensive and proactive management against hard and soft factors and against what is happening in the external market – these methods need to be established upfront and embedded into the design and running of the retained organisation and its workings with the supplier. Expectations that are formalised and managed against on an ongoing basis are clearer to both parties and problems/issues are better resolved while they are small than before they require remedial programmes or worse.

Finally, in terms of the discrepancy between relatively high satisfaction and failure to meet expectations, it seems that this inability to achieve effective change has driven an acceptance of failure to meet expectations.

Hopefully the lessons of better upfront planning and effective performance management can help address these problems of failed expectations and reduce the need for clients to accept less than good performance from their outsourcing agreements.

Mark Sukiennik is director of Orbys Consulting a company that has provided outsourcing advisory services to more than 700 clients worldwide, including British Airways, Orange, Sainsbury’s and Thomas Cook.

Simon Lindley is a consultant at Orbys Consulting and has more than 15 years’ experience working on outsourcing and major business transformation projects. This has included onshore and offshore outsourcing, internal shared service centre feasibility, and design. They can both be contacted at marketing@orbys.com