Many companies – large and small, local and international, publicly traded and privately held – utilize outsourced relationships to improve their bottom line. Outsourcing service providers routinely extol and deliver the economic benefits of outsourcing: improved operations, lower costs and enhanced shareholder value. Many companies considering using an outsourcer are interested in more than money and the effect of outsourcing on the company balance sheet. These companies realize that while cost containment is critical, customer satisfaction, retention and employee morale are equally important to the bottom line. Too often, however, companies embarking on an outsourcing relationship find themselves reaping the financial benefits but struggling with the day-to-day management of the relationship between itself and the outsourcer.
It is important to know how to structure a successful outsourcing relationship – providing long-term cost savings while effectively dealing with the non-financial aspects of the relationship. Companies can help ensure a smooth running and rewarding outsourcing engagement by focusing on three “Cs” – commitment, consistency and control.
Outsourcing is not a routine sub-contracting relationship involving a non-critical task (for instance, the company\’s janitorial service). In an outsourcing engagement, the outsourcer assumes mission critical functions that historically the company has handled – information technology (IT), finance and accounting, human resources (HR) and customer relations. And because these operations invariably overlap, it is important when outsourcing a critical function to gain buy-in from all affected constituencies.
Consider the outsourcing of the finance and accounting function within an organization. Whether it is the implementation of a new accounting system or simply access to information, the outsourcer requires collaboration and support from other business units within the company. The person or group responsible for the success of the outsourcing relationship must be vested with the muscle to compel the affected business units within the organization to work together. That is where a vocal and strongly communicated commitment from the organization\’s C-level management personnel comes into play. A clear, consistent, forceful message from company management stating the organization is committed to the outsourcing relationship and that the engagement is a priority, translates into cooperation within the organization and goes a long way toward successful outsourcing.
Business process outsourcing engagements are typically long-term relationships; depending on the scope of the outsourcing, it is not unusual to have a contractual term of more than 10 years. Because the outsourced business functions are critical to the health of the company and the contracts are normally long-term, it is important to maintain a level of consistency with the key players on both sides of the transaction. The concept of partnering is uniquely apropos in a business process outsourcing relationship. Not only is the outsourcer intimately involved in the company\’s critical business functions and interacting with company personnel on a daily basis, but also they are often physically present at the company site for extended time periods. A comfort level needs to develop between outsourcer and company personnel. To prevent the disruptions that invariably result from a continual change in the cast of characters performing the service, the outsourcer should agree that specified key personnel will fill critical service delivery roles for a minimum time period and that replacement of any key players be subject to a sensible transition process that minimizes disruption. Maintaining a consistent team fosters collaboration and trust between the company and the outsourcer.
It is not unusual for business functions within a company to overlap. When these functions are performed internally, the overlap is relatively manageable – most companies have a reporting/management structure ensuring these areas work together. Adding a third party outsourcer, or possibly more than one, complicates it even more. Because of this, many companies choosing to outsource multiple business functions as part of their operational model go with multiple vendors. These companies eschew the relative convenience of the one-stop shop approach in favor of the opportunity to receive best-in-class performances from vendors with a more focused approach to individualized service offerings, and have found that managing their outsourcing engagements as a portfolio allows them to share resources when necessary or appropriate. Managing multiple vendors and ensuring cooperation among them – not to mention cooperation between vendors and company personnel in charge of its retained internal business functions – presents a significant challenge.
While gaining collaboration among multiple vendors and internal staff is a challenge, it is not insurmountable. First, the agreements between the company and the various outsource vendors need to contractually mandate cooperation. Subject to appropriate protections for confidential information and security protocols, each outsource vendor should provide other outsourcing vendors with access to facilities, software and systems, as well as written documentation, etc. necessary for the other vendors to perform the service assigned to them. Secondly, the parties should agree to a comprehensive, robust governance mechanism that recognizes that in a long-term relationship, change is unavoidable. A well-structured, manageable governance procedure, focusing on how the parties will cope with changes throughout the relationship, provides a means for the company and the outsourcer to align business objectives and increase collaboration while effectively dealing with unforeseen events and market developments.
The outsourcer\’s central business proposition is that its expertise and experience allow it to perform critical business functions more efficiently and economically than the company itself. Gaining commitment, maintaining consistency and effectively controlling the outsourcing relationship ensures that the outsourcing customer receives the promised benefits of that relationship.