Is it a good time for outsourcing buyers to implement a catch-up strategy?
It seems that the world wasn’t coming to an end after all, and those pesky year-end targets didn’t just disappear during the recent economic meltdown. So how is this affecting the world of outsourcing? Let’s just say that there is a storm surge of outsourcing and offshoring on the horizon, and companies that have spent time preparing for that eventuality will enjoy riding the crest of the waves. Isn’t that what they call “creating a competitive advantage”?
The days of a strong buyers’ market for outsourcing services are drawing to a close. Are you prepared for a return to a sellers’ market? Do you recall the time just a couple of short years ago that outsourcing companies, particularly offshore service providers, prequalified prospects before they agreed to invest time in business development?
If you haven’t invested in capitalizing on the current market opportunity to take a long, hard look at your contracts, relationships, and strategies, the window of opportunity is still open. But don’t count on it staying open for much longer.
Here are three things you should be doing right now as part of your catch-up strategy:
1. Renegotiate existing outsourcing agreements
Most service providers will make significant concessions in exchange for an early renewal or extension of the term of an existing agreement. Extensions and early renewals save the service provider a lot of money in business development and deal pursuit costs. Equally important, they can issue press releases and otherwise showcase your extension or renewal to new and existing customers, their investors, and their bankers, which improves their profile in the marketplace and can even help them secure better terms with their bank.
Negotiable concessions include such things as price cuts, additional services, more favorable contractual terms and conditions, upgrades to infrastructure, and better committed service levels.
One negotiating lever that you may find a bit radical is to agree to accelerate your payment terms in exchange for concessions. Credit markets are still pretty tight for you and for the service provider community, so this tactic will require a sharp mind and a good calculator to ensure that you effectively structure terms that create value for both parties.
You’ll need to establish the time value of money associated with the faster payments. You’ll also need to develop a detailed cost/benefit analysis to ensure you correctly assess your additional financial costs, the estimated financial benefit for your service provider, and the value of negotiated benefits for all parties — both financial and non-financial. If you are thorough, this is an extremely effective way to generate value for a small cost. And, if you approach this in the spirit of creating benefits for both parties, it can be a wonderful way to strengthen your relationship. People remember a helping hand for a very long time, particularly if it’s extended willingly and is unexpected.
2. Develop a strategic plan for offshoring
After several years of triple-digit growth, most offshore service providers are experiencing flat revenue. They are really hungry for new business and willing to give you their very best with smaller profit margins. This is where the next catch-up strategy comes into play.
Before you execute any new agreements, it is critically important to invest in developing a long-term, enterprise level offshoring strategic plan, perhaps with the help of an experienced advisor. Establishing an offshore strategy at the enterprise level ensures long-term sustainability, leverage for negotiations and performance levels, better cohesion across business units, lower infrastructure and management costs, and effective overall cost management.
In the absence of an enterprise strategy, individual business units will take the initiative to do their own thing. An uncoordinated approach may be great at the line-of-business or business-unit level, but it most certainly will be detrimental to your company’s operations in the long run.
Now is a good time to invest in some well-researched site visits to potential service providers. Be sure to document clear objectives for the site visits and objective evaluation criteria to assess operations, capabilities, and fit.
When you go, you’ll find that there’s no substitute for seeing their operations with your own eyes. Site visits enables a critical assessment of capabilities and the company’s culture, environment, and infrastructure, ensuring you make sound decisions later. Also, you will be able to lay to rest your concerns about infrastructure, data transmission, and information.
It may interest you to hear that, similar to free trips to inspect vacation condos, some international governments in partnership with their service providers are offering to foot 100 percent of the bill for senior decision-makers from qualified companies. They want them to visit the supplier’s facility and hear about the benefits of offshoring to that particular country. While there is no such thing as a free lunch, if you’re seriously looking for an offshore partner and can withstand any feelings of obligation to your hosts, not to mention being bombarded by multiple sales events and follow-up calls, taking one of these “free” trips may be a viable alternative to trying to loosen up your tight travel budget.
3. Initiate innovative relationships with your top five service providers
By now, it should be clear which of your key service providers will still be standing when the economic turmoil finally settles. These service providers, like you, are in the process shaking off the impact of economic uncertainty and are once again looking for opportunities to thrive and grow. What better time to initiate dialog about creating a better future together?
Forward-looking leaders are already in discussions with or are implementing enhanced business relationships with their service providers. Over the past few months, I have been engaged with my clients on both the buy and sell side on new go-to-market and innovation strategies. One such strategy is between a service provider and a business partner that traditionally would have been a customer to jointly develop a service offering that benefits the partner as a “customer” and enables the joint venture to quickly productize the service offering for the broader market.
Another example is for a service provider to significantly enhance its traditional service offering to help its customer create a unique portfolio of services, thereby leveraging their complementary expertise to create a competitive advantage for the customer.
A third example is services innovation, where the service provider proactively proposed to introduce deep analytics to the data set it generates during processing. Implementing analytics to identify opportunities empowered the customer to increase the level of satisfaction with its own customers, while improving its bottom line.
Each of these strategies is innovative and exciting. They create new revenue for both parties and represent thought leadership at its finest!
As a forward-looking business leader, the question you should ask yourself is whether you need a catch-up strategy before the window of opportunity closes.
Ask yourself:
- What should I be doing now to improve performance?
- How can I best position the organization for the future?
Lessons from the Outsourcing Journal:
- To position your organization for a successful future, embrace these three priorities:
- Renegotiate existing outsourcing agreements
- Develop a strategic plan for offshoring
- Initiate innovative relationships with your top five service providers
Linda Tuck Chapman is an advisor and former corporate executive with deep expertise in outsourcing, offshoring, risk management, and governance. Linda can be reached at 416.4562.4635 or lindatuckchapman@ontala.com. Visit www.ontala.com.