Lacity on Outsourcing Management

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    What a treat to hear Mary Lacity speak about some aspect of sourcing. This morning, service provider Primavera hosted a Webinar featuring Lacity, a professor of IS at the University of Missouri-St. Louis, speaking about her latest book, Global Sourcing of Business & IT Services. She and her cohorts base their insights on in-depth interviews – dozens and dozens of them – with both client organizations and service providers. She laughed when she said they consider themselves "organizational therapists," who explain to clients what the supplier perspective is and to the supplier what the client perspective is.


    Primavera will soon enough archive the presentation on their site, but I’ll share a few of the topics Lacity discussed here, as covered in the book.


    First, the book offers 53 processes that clients closely need to manage if they’re going to succeed at outsourcing. Sound like a lot? As she said later in the talk, "It’s hard to get it right. It’s challenging. But the other thing we say is that you’re going to the outsourcing market because you’ve got some internal challenges too."


    Those 53 processes – such as how to assess suppliers – coalesce into 12 capabilities and three competencies, encompassing: delivery, transformation and relationship. The delivery competency is based on capabilities that determine the extent to which a supplier can respond to a client’s day to day operational services. The transformation competency is based on capabilities that determine the extent to which a supplier is equipped to deliver radically improved service in terms of cost, quality and speed. And the relationship competency derives from capabilities that determine the extent to which a supplier is willing and able to align with the client’s needs and goals.


    How does this translate to specific activities? She offered one example. Clients frequently assess suppliers based on supplier resources (the state of facilities and what kinds of resumes staff members have, for example). But, she points out, just because the supplier has great resources doesn’t mean they’ll be applied effectively to the client’s work. Customers need to assess the capabilities to leverage those resources.


    A lot of that depends on factors such as how attractive you are to the supplier. What your prestige score is, how much volume you’ll be able to offer and whether the supplier will be able to earn a good profit margin.


    She shared an overview of a new model she and her colleagues have identified in the field (she talks about it as if she were a birder who has just spotted the ivory-billed Woodpecker). Titled the "Enterprise Partnership," and first practiced by BPO firm Xchanging, it’s characterized by the structure of the financing. As in a marriage, the challenge in long-term deals is how to keep the relationship exciting for both parties, particularly after the savings have been wrung out through process improvement. Although the details were sketchy in the Webinar (the book spends three chapters showing it in action), I believe it works this way: The client actually pays slightly more – say, 10 percent – than the contract price. Then once a year the client receives a rebate on what’s spent, which can vary depending on the actual savings enjoyed by the supplier.


    In a $100 million/year deal, the client may actually pay $110 million. If the supplier rebate is 15 percent and the supplier can deliver those base services for $80 million, the client gains back $16.5 million and the supplier earns $13.5 million.


    Lacity said the new model works best "if the back office is a mess," because that gives the supplier, which is presumably great at transformation, the chance to make dramatic improvements through consolidation, shared service offices, etc.


    In other words, both parties enjoy the savings when it’s sustained.


    How does the client ensure that services won’t be shortcut? Through management, of course. There’s a joint board of directors and a service delivery board, as well as "very clear requirements about what the service is supposed to be."


    You’ll gain a lot by listening to Lacity. And although I haven’t read the book yet, you can bet it’s now going to appear on my stack.

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