Bill Bierce is in the catbird seat when it comes to watching outsourcing agreements go south. The founder of Bierce & Kenerson, P.C., a New York law firm specializing in outsourcing and technology law, has devised a lucky list of how to raise the odds on outsourcing success.
Here is the list for buyers:
1. Don’t believe outsourcing will solve all your problems.
Many buyers don’t believe they are “a train wreck,” observes the attorney. An outsourcing provider is not a Deus ex machina who appears out of the heavens and fixes everything. According to Bierce’s script, a buyer should streamline its operations and fix the problems before outsourcing the process. Only then will buyers receive maximum results from outsourcing.
2. Don’t transfer key employees to the vendor.
Buyers often transfers their key people to the vendor after they sign an outsourcing contract. That can be a huge mistake, observes Bierce. Many of these employees have a wealth of historical knowledge about your firm that is lost forever when they change employers. Bierce calls this “knowledge mismanagement.”
3. Outsource more, not less.
Bierce believes buyers don’t outsource enough. They tend to have “command and control problems,” continuing to shepherd processes that add little value to their bottom lines. Give them up.
Buyers Must Manage the Relationship:
4. Fail to plan adequately for the co-management of the supplier’s operations.
Buyers often fail to acknowledge they have on-going responsibilities in an outsourcing relationship. They shift everything to the vendor and want to forget about it. But they must manage the relationship and help the vendor identify problems if the outsourcing partnership is going to work.
5. You do NOT know more than the vendor.
If a buyer has selected the right vendor, this supplier will bring in new ideas about the business process. These innovative thoughts should increase the bottom line for the buyer.
Too often the new outsourcing buyer thinks it knows more than the vendor about how to improve the outsourced process. Bierce says that may be true in the beginning, but not in the long term.
Bierce points out most outsourcing contracts are fee-for-service documents. But some outsourcing relationships would benefit from a strategy of sharing the risks and the rewards with the supplier. Causality is key in these kinds of relationships. Can the vendor prove its changes caused the increases in revenue?
6. Fail to establish control points.
The attorney says many buyers don’t understand project management. Some buyers “just hand over the keys and say ‘run the house,'” reports Bierce. Buyers are better off establishing control points.
7. Don’t pay enough attention to termination and transition problems.
Bierce says “there’s never enough planning” for a transition to another vendor. Once a buyer fires a vendor, that vendor most likely will not make it easy for its successor. Buyers need to know how they will recapture their process if the relationship fails.
Vendors make different mistakes. Here they are:
8. Being too rigid when it comes to change.
Bierce says vendors are reluctant to change their service level agreements or the scope of the project when they miscalculated the market or there was a change in technology. These problems tend to appear two years or later into an outsourcing relationship.
A good example is the wild popularity of the ASP model. The Internet is having a major impact on the cost structure of classic outsourcing vendors. Some “are getting killed,” observes the attorney.
†This rigidity pushes up prices, which make buyers very, very unhappy. The lawyer says this is unnecessary.
9. Not enough “walk to run” thinking.
Too many vendors put too much reliance on their due diligence legwork. Instead of beginning a transition slowly, they sprint. Bierce is a proponent of learning to walk before peeling off in a run. He suggests completing a consulting job first. Get paid to learn about the company and prepare an analysis. Then hit it.
Buyers require competing vendors to spend “big dollars on a beauty contest” in a short period of time, notes the attorney. This is not a good expenditure for the vendor, in his view. He suggests having the sales department develop a business relationship with the buyer instead.
10. Calculate due diligence costs and only fight the necessary battles.
Vendors need to think about what a due diligence investigation is going to cost them. “If a buyer has 1,500 questions in its Request for Proposal, a vendor has to ask why,” says Bierce. His answer to those 1,500 questions: “Vendors should revolt against this.” Instead, the lawyer insists vendors focus on strategies that will impact the buyer’s business and not get involved in researching politically correct questions.
Pricing Issues:
11. Rethink pricing strategies.
Until now, the goal of the vendor has been “to confuse the buyer with an array of services that are bundled and cross-subsidized,” explains Bierce. Buyers who turn angry then chose to rebid these services on an individual basis. The attorney† posits both sides will be happier if the vendor is “more transparent about its pricing assumptions.” The attorney realizes pricing is both confidential and competitive information. “There is a limit to how transparent the vendor can be. But they can do more than they are doing now,” he says.
12. Learn how to build alliances and be frank about them.
In today’s era of specialization, most vendors don’t have all the skill sets they need under their own roofs to get the job done for the buyer. So the prime supplier has to form alliances with companies that do have these services and then integrate them into their offerings.
The question arises: Who is responsible for the alliance partner’s performance? In addition, there may be political risks. If the alliance partner is located offshore and an international incident arises and the U.S. government forbids commerce with that country, what happens then?
Bierce recommends being frank about these hidden risks “because they may occur,” he says.
More Emphasis on Strategy:
13. Too much focus on service levels, not enough on strategy.
Bierce sees outsourcing as having two layers. The first is the contractual service levels. The second is the building of a strategic alliance that comes up with innovations to build the buyer’s business. Too often vendors just worry about the letter of the contract and ignore the extra value they can add.
Lessons from the Outsourcing Primer:
- Vendors need to be more transparent about pricing and honest about hidden risks of alliances.
- Buyers need to fix their internal problems before outsourcing.
- Due diligence procedures need to be amended so they are more cost effective for the vendor.