Outsourcing Relationship Success Principles

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The foundation for a successful Outsourcing is built in throughout the outsourcing process in selecting the scope of the process to be outsourced; developing the process diagram; selecting the provider; building the scorecard; and pricing, contracting, and negotiating the relationship.
How the organizations will manage the collaborative work on “day one” should be an integral part of the decision making throughout.

As the new operational environment is coming online, so is the new management system. The following ten principles should be used to shape that management system.

Principle #1: Keep the Strategic Responsibility  Close to the Top
Operational and management issues are dealt with at multiple levels within the organization, but the strategic responsibility—the responsibility to ensure an ongoing alignment of the interests of both the organization and the provider—is something that cannot be delegated. The functional executive is ultimately responsible for ensuring that the organization realizes the value anticipated from the services outsourced. Therefore, the management structure should be designed to ensure that the overall strategic responsibility for the relationship remains at the highest executive levels.
Some organizations even add a separate executive, reporting to the CEO, COO, or CFO, as the organization-wide coordinator of all of its major outsourcing projects. This executive works with the functional executives to assist them in the identification and implementation of outsourcing initiatives. This executive becomes a focal point for ensuring sustained senior executive focus on outsourcing and on the relationships created.
Organizations such as Bell Canada, Coors, the Toronto Hospital, American Express, and others have adopted this approach. At one New Zealand company, Meridian Energy, the CEO treats the senior executives in the provider organizations for his major outsourcing relationships as if they were his direct reports—they attend every other quarterly leadership meeting right alongside his own executive team. The key is to not allow senior leadership to become disconnected from the strategic importance of the relationship between the organization and the provider.

Principle #2: Create Multilevel Organizational Links
Just as the strategic link between organization and provider must be kept close to the top, there also needs to be links at multiple levels. The complexity of the relationship between the organization and the provider should not be underestimated. Decisions will need to be made on a continual basis that affect day-to-day activities. Other decisions will impact the overall scope of services, as well as the overall tenor of the relationship. The management structure must facilitate and support all of these.
The multilevel management structure should include layers of teams focused on the operational, tactical, and strategic aspects of the relationship. These teams should be comprised of individuals from both organizations representing all the needed disciplines and interests—operations, finance, end users, and others.   Operating committees, made up of individuals directly involved in the operational activities, ensure day-to-day communications between organization and provider, resolve issues as they occur, and report issues that cannot be resolved at their level.
A management committee, with overall responsibility for the contract and its deliverables, ensures that both organization and provider understand how performance compares to expectations, as reflected in the scorecard. They are also the focal point for approving changes in scope or deliverables and the arbitrator for unresolved operational issues.
Finally, the executive steering committee should be led by the executive with overall strategic relationship responsibility. This team is tasked with the ultimate responsibility of ensuring the ongoing health of the relationship and resolving any major issues that develop.  There is often a tendency to make relationship management the responsibility of one key person in each organization. This is a mistake. Relationships of this complexity require links up, down, and across the businesses. The role of the relationship managers in outsourcing, both on the organization and on the provider side, is not to be the funnel for the communications but, instead, to orchestrate the communications taking place across the businesses.

Principle #3: Conduct Regular, Goal-Oriented Meetings
There is simply no substitute for regular, goal-oriented meetings between the organizations. These meetings should have defined frequency, consistent attendance by the principals involved, continuity from meeting to meeting through formal agendas, assigned action items, and followthrough.
One critical point: Meetings between the responsible people in the organizations are the basic element of the management structure. Their effectiveness is central to the overall success. In fact, the one thing that has to happen when and if problems develop is an increase in the frequency of the meetings. Problems can only be resolved through the ongoing communications of the parties involved.

Principle #4: Use the Latest Communications Technologies
In addition to traditional face-to-face communications, electronic systems are powerful tools for managing the relationship between the organization and the provider. Outsourcing exists in a virtual world. One of its very drivers is the fact that technology has made much of the work of today’s modern organization placeless. This same technology opens up a whole range of new communications tools. Use of these tools should be an integral part of the outsourcing management structure. The Internet, voice mail, teleconferencing, e-mail, discussion groups, instant messaging, and online collaboration tools are all being used. Many companies place their operational dashboard right online for both organizations to see, using industry standard data formats to feed the systems.
Organizational structures and responsibilities, with names, photographs, and biographies, can be included as well to facilitate communications and create a feeling of team. Technology enables outsourcing. It also enables its management.

Principle #5: Define the Escalation Process
Just as problems surface almost daily in any in-house operation, problems have to be expected with outsourcing.
An important element of the management structure is the “escalation” process for problem resolution—the process by which unresolved issues are brought to a higher level. The escalation process is critical to both parties. Define it in advance. Make certain that everyone knows how it works and what his or her role is. Use an objective scoring system to rate the status and severity of issues. Make the escalation process automatically tied to an objective scoring system, such as rating items as “green,” “yellow,” or “red.”
Make certain that all parties realize that the focus is on solving the problem, not assigning blame. Be consistent, quick, and fair.
As mentioned earlier, technology provides new techniques for surveying the positions of impacted parties and keeping everyone informed. Define a process for establishing working groups to investigate and make recommendations on issue resolution. Define in advance the people who make up these groups and the processes they will follow to make their recommendations. The bottom line is to make certain that the management structure ensures that issues will be escalated until resolved satisfactorily.

Principle #6: Use the Scorecard to Report Results
Regular communications and performance reviews are the essence of the outsourcing management structure—many of the key principles of which have just been reviewed. In turn, the scorecard is the essential tool for gauging performance. Defined when the relationship is created, the scorecard declares what is important, keeps the organizations focused, enables objective tracking, and is a powerful motivator of achievement.
From day one, the scorecard must be the objective basis for understanding what is working, what isn’t, and for measuring improvement. Making sure that the ability to collect and report scorecard data is in place on day one is a critical task of the transition team. The outsourcing relationship simply cannot be managed without an objective scorecard. In its absence, opinions, instead of facts, reign.

Principle #7: Consistently Apply Incentives and Penalties
Incentives and penalties need to be fairly and consistently determined and applied. Failure to apply them uniformly undermines their value and, over time, can undermine the entire relationship. If incentives are earned but not paid, then the effort goes unrewarded and is unlikely to be repeated. By the same token, if penalties are not enforced, then how important can the outcome actually be to the organization?
The entire reason for incentives and penalties is to motivate behavior. As the organization receiving services, you want the provider’s account team to be recognized by its management for its achievements. Just as important, you want the account team to be able to marshal resources to correct problems that may be causing penalties. Financial incentives and penalties, if fairly and consistently applied, can have this effect. In the case of penalties, the goal is not to punish. Nor is it to pay less for poor service or to simply attempt to recover costs incurred as a result of problems. The true goal of incentives and penalties is to get changes enacted that fix the problems and increase the probability of repeatable successes.

Principle #8: Reward the Provider’s Employees
The next principle of a sound management structure for outsourcing is to extend the incentive system so that it rewards the provider’s employees. Just as incentives are powerful motivators for an organization’s own people, they are equally powerful for the provider’s. One caution, however, is to make certain incentive programs do not flow directly from the organization’s management to the provider’s employees. If this happens, a coemployment situation can result. Under coemployment, both companies become parties to the employment relationship with the individual. This, in turn, can have specific personnel and legal implications.
There are still a number of ways to recognize the provider’s employees.
They can indirectly participate in the organization’s award or bonus programs. One example is American Airlines, which extended its AAwards program to its provider’s employees, with the awards being granted through the provider’s management team. Another way is for the provider to tie customer input, such as letters of commendation or customer satisfaction surveys, into its internal recognition program. Still another approach is joint celebrations. These enable both companies to recognize the people who have made their collaborative accomplishments possible.
A final, and somewhat less-recognized, incentive is for the organization to keep in mind that career advancement is often the most powerful incentive available. This is a difficult issue for many organizations. They want the provider’s best people assigned to them. On the other, they don’t want to lose these people through advancement. In the longrun, it is in the customer’s best interest to encourage and support the achievement and advancement of top performers.

Principle #9: Implement the Change Process
Another key element of the management structure for outsourcing is the change process. The system to be used for identifying, negotiating, and implementing change must be defined and mutually agreed to in advance.
Successful organizations position the change process as an integral part of the management structure. Each level of the management structure deals with change—operational, tactical, and strategic. And they do so as part of their regular agenda, continually negotiating and implementing needed changes. Kodak, in fact, sent managers from both its organization and its provider to joint training programs on principled negotiations. They also agreed, in advance, to the structure of the teams that would develop and recommend changes in the relationship. In effect, the way changes would be handled was locked in as an essential part of the management structure.
As a final point on the change process, consider implementing a 360-degree review process. Encourage the service provider to provide feedback on improvements the organization can make that would advance both of their interests.

Principle #10: Treat the Relationship as a Valuable Asset
The final principle captures the very essence of what has been discussed so far. When developing the management structure, recognize that the relationship required a significant investment of time and resources to create; that the services being contracted are critical to the business’s operations and important to your customers. With this in mind, manage the relationship as what it is—a strategic business asset. An asset that is just as important as any traditional asset—people, facilities, technologies, and customer relationships.

As outsourcing relationships expand and proliferate, new interdependent management systems are routinely developed. One current development is the project management office, another is the collaborative governance board.