Joe Szmadzinski is a connoisseur of outsourcing contracts. Szmadzinski has negotiated and lived through 25 outsourcing contracts in the last three years as president of System Advisory Group in Southfield, Michigan, a firm that provides interim CIOs for major corporations like Budget Rent A Car.
From a customer’s viewpoint, he says the word “accountability” must have the word “mutual” in front of it. “One-sided dependence will always fail,” he says pointedly. The seeds of failure are planted when expectations are not equal on each side.
Szmadzinski says IT outsourcing can be accountable only if the provider customizes the contract for that particular customer. “A successful IT outsourcing contract can’t focus on general IT accountability. It has to be accountable for your business. If you want a shortcut to failure, this is it,” he says.
Rules must also be balanced. A buyer can’t demand that a supplier keep its data confidential and then be free to spill the beans about the supplier. Confidentiality must be mutual, too.
Mutual accountability must remain the guiding principle of an outsourcing engagement. The best way to guarantee it is to put these tenets in writing in the contract itself. The contract “must acknowledge that outsourcing is a two party arrangement,” Szmadzinski insists. A good way for each party to ensure mutual accountability is to draft the contract from the other’s point of view.
Become Economically Dependent
The executive also suggests crafting a mutual economic dependency. He’s a big proponent of gain sharing. Gain sharing only works, of course, if the parties have a concrete way of measuring the contribution each is making to the relationship. The measurements must have dollar figures attached.
Szmadzinski rails against accountability measurements that are punitive. If a supplier doesn’t behave properly, the contract then allows a breach of contract or simply takes away dollars. The executive calls punitive measures “an immature way” to motivate a supplier because they provide no motivation for the provider to improve its performance.
Gain sharing is the more mature alternative, in his view. If the provider is making its margin on head count, more is better. There is no economic incentive to cut staff and do the work more efficiently. “Altruism does not exist in the outsourcing model,” says Szmadzinski wryly. Gain sharing, on the other hand, becomes a real economic motivation.
Szmadzinski believes an outsourcing provider should be rewarded if the provider:
- Improves the business.
- Improves a business process or
- Improves IT costs.
If any of these are the case, the supplier should be “rewarded commensurately and without disagreement,” says the executive. It’s best to work out the payment formula in advance, he advises.
Divide the Spoils in Advance
A supplier approached one of Smadzinski’s companies with a new e-business model. Its executives told the buyer they wanted a piece of the action if it worked. The alliance became wildly successful, opening up a new revenue source for the buyer. Smadzinski’s company gladly wrote the supplier “a very big check.” In addition, the supplier will receive checks on an on-going basis.
In another case, the buyer enjoyed a major server consolidation, cutting the number from 180 to 120. Szmadzinski’s company wrote two checks. The first check was based on the net savings to the company. The second check was to reimburse the supplier for its 15 percent mark up on the 60 servers it lost. This check covered one year of the four year agreement. “We didn’t have to pay them the next three years,” Szmadzinski points outs.
He once paid a 20 percent bonus to a software development company that completed a project on time, within the budget and exceeding the specs.
An inexpensive but powerful motivational tool is praise. Szmadzinski gives his suppliers constant recognition for superior performance. “We always chew them out when the system goes down, but we never reward them when they step above the bar. Take them to lunch!” he says.
When it comes to service level agreements (SLAs), Szmadzinski prefers a balanced scorecard approach because it incorporates a variety of measures into the metrics, including business values. One CEO told Szmadzinski he wanted just one SLA: he wanted to be happy. What made him happy was great customer service. That intangible became part of his scorecard.
Doing Business With Your Neighbors
Even though offshore outsourcing is on the rise, the executive believes working with a provider in the same province is a decided advantage. The same town is good, the same building even better. Cross-pollination happens over frappuccinos.
Szmadzinski even suggests both partners strategize together. An outsourcing supplier is already intimately familiar with its buyer’s business processes. The executive suggests inviting key players from the provider side to your strategy sessions. Ask them how a proposed change will affect them. “We need to listen to these folks,” he says.
Co-accountability improves and enhances an outsourcing contract’s chance of success. “If you don’t do this, it will increase your chances of failure,” he promises.
Lessons from the Outsourcing Journal:
- Accountability must be mutual for an outsourcing relationship to be successful.
- Gain sharing is a more mature way to encourage top performance from a supplier. Punitive measures don’t work well.
- Praise and recognition will go far.
- Invite the supplier to your strategy meetings for new ideas and perspectives.
- Hire a supplier in the same city so you can cross pollinate.