Though outsourcing is a versatile business solution, it’s not like a Swiss Army Knife with components that handily solve almost any challenge. It has a people factor; and the interactions and intents of the people using outsourcing can actually hinder its effectiveness — or they can enhance it. One of the aspects where this takes place is collaborative outsourcing relationships.
We studied three of the relationships nominated for the Outsourcing Excellence Awards that had a significant amount of successful collaborative activities. The study revealed several operational characteristics shared by all three relationships as well as their methods of creating a structure for collaboration.
When asked to describe characteristics that differentiate their relationships from other outsourcing arrangements, the buyers each stated it is the level of collaboration. This article takes an in-depth look at the nuts and bolts of the three relationships that enable successful collaborative outsourcing relationships.
The customers’ objectives for outsourcing
Company A is a mid-sized multinational chemical company; it signed a five-year contract, which was later renewed for another four years. Company B is a large utilities company outside the United States; it signed its outsourcing agreement for five years. Company C, a European government agency with more than 100,000 employees, signed a 10-year contract. All three contracts are for multiple BPO processes.
All three buyer organizations had prior outsourcing experience through outsourcing other back-office processes to other providers.
Evolving governmental and industry regulations impact each of the buyers in the three relationships, and regulatory compliance was an objective of their outsourcing strategies. At the time they outsourced, all three organizations also were in markets that were changing quickly, so they each sought to gain competitive advantages and yet at the same time reduce operational costs.
Selecting the outsourcing partners
In looking for a collaborative outsourcing partner, the top consideration on the buyers’ lists of service provider selection criteria was a proven capability of helping customers change. As one explained, “We wanted a provider with expertise at driving transformation into our operations, and we felt this expertise must be something that differentiated the provider.”
All three buyers also stated that cultural fit was a critical factor in their provider selection criteria. They felt evidence of the corporate culture they sought for a collaborative relationship would be reflected in five provider characteristics: creative, entrepreneurial, flexible, proactive, and responsive.
Other key criteria included a proven track record in “embracing challenges and owning the outcome,” and a willingness to take risks on the buyer’s behalf. Each provider needed to also have proven expertise in mitigating migration/transition risks.
The government agency best described the three buyers’ similar approach to contract negotiation and developing a governance structure. Each recognized that change would be a constant factor in their businesses and that they needed to structure their outsourcing relationships to evolve. As the agency’s procurement manager stated, “I think too often in outsourcing agreements you focus on the front end on nailing down the terms and conditions and locking people into deals. And then the deal becomes so rigid that you don’t get the ability to flex the deal to reflect changing circumstances. It’s very important that both sides are amenable to altering things and reconfiguring the deal whenever necessary so it meets our changing needs as we go forward.”
The utilities company agreed, stating that a rigid contract and governance framework can almost become a barrier to change at times. The executive added, “We would rather put more of our effort into jointly making sure that ideas of change are coming through instead of trying to adhere to a rigid framework.”
Aligning interests for win-win outcomes
All three relationships included financial incentive programs in their deals from the outset in order to ensure their interests remain aligned despite business changes over the long term. The providers’ willingness to adopt this model was a key driver for selection.
The incentive in the chemical company’s relationship aims to ensure both parties remain focused on safety performance even when in pursuit of cost reduction. The customer sets aside a bonus pool of money that it awards to the provider based on meeting or exceeding a clear set of performance metrics in five areas: safe transportation of goods, carrier service/complaints, user satisfaction, how the customer’s carrier rates compared to an external measure, and the contribution value of special projects.
A gain-share mechanism in the outsourcing arrangement between the utility company and its provider focuses on ensuring a joint effort. As the company reported during the awards program survey, “It shouldn’t matter which of us drives improvements because we both share in the benefits.”
The government agency links its gain-share program to the business outcomes they jointly achieve. “The service provider must bring resources and incur costs to achieve our goals. But we only want to pay for those resources if the service delivery has an impact on our bottom line,” the buyer’s executive explained. “By aligning what we pay them with achievement of our targets (which yields a financial benefit to the agency), it incentivizes them to be innovative in achieving our goals.”
In all three relationships, the parties meet on a regular basis to jointly discuss creation of new mutually beneficial value-creation opportunities. One meets weekly; the other two meet quarterly for this purpose. The chemical company’s executive stated, “We use these meetings to look for opportunities in the context of collaboration.” These discussions are separate from meetings at other times of the year, which focus on strategic planning.
All three also have regularly scheduled meetings where both parties discuss the health of their relationship and ensure they develop the relationship on a personal level as well as an operational level.
Communication
The dictionary describes collaborating as working together and cooperating with colleagues. It’s far more than that and requires a range of communication strategies and interpersonal skills. Sharing information with each other, for example, including giving and receiving feedback, is essential for collaborating.
The three buyers reported that they hold nothing back from their providers. As the chemical company pointed out, “We’ve both got to have access to the same understanding of what we’re trying to accomplish as a business. So we need to ensure an extremely open, honest, close way of communicating so that if something’s not working right, we both know it fairly quickly.”
They feel free to communicate openly because they built a structure for effective communication and collaboration. The structure relies on trusting and respecting each other and sharing decision making.
The utilities company added that, for a collaborative relationship, it’s more important that communications are structured to ensure effective discussions rather than always concentrating on “getting it right.” The chemical company says it’s important for both parties to “take the attitude that there are always things that we can do better together.”
All three buyers reported that they have visibility into the true spend and that they and their providers have visibility and insight into what each other is pursuing. And if any points of contention arise, they handle them jointly in a constructive manner.
The government agency stated that “a lot of communication goes on in a collaborative relationship. Alignment comes from being partners and making sure we truly understand each other along with understanding what’s important to each of us and the outcomes we’re working toward.” The alignment occurs over time, he explains, and “gets deeper as both organizations’ people’s personal relationships get better by working through strategies and challenges together.”
One executive pointed out the importance of both parties’ prompt responsiveness to the other, as this helps ensure “problems don’t hang around very long” and negatively impact the relationship.
The government agency’s service provider reported during the awards program survey that a key factor in the relationship’s success in collaboration is the customer ensuring the provider has the freedom to innovate and deliver. According to the provider, they further made collaboration possible because both parties created an environment up front that demonstrates they want each other to be successful and enjoy a long-term relationship.
Focusing on the long-term picture
The companies in these three relationships discussed up front what “success” would be as they moved forward. Two of them put on paper their lists of “critical success factors,” which were activities and responsibilities that both parties need to do to help each other in supporting their objectives. “No one can change anything in isolation in an outsourcing relationship,” said one executive.
Mutual flexibility is also key to success in collaborative outsourcing relationships.
The utilities company cited an example. “We had to redesign our organizational structure as we’ve migrated staff. Otherwise, we would end up with gaps and things falling between the cracks. Together with our provider, EXL, we focused on designing everything around what will enable the outcomes we seek. That design required flexibility for us as well as our provider because it’s not the way EXL structures its teams for other clients. We both had to collaborate and think outside of the box and be very, very flexible around the structures involved in the relationship to ensure they fit together but also can evolve. Evolution has to happen in tandem because we both recognize and align around the future direction of our partnership.”
In describing the outstanding characteristics in the way the relationship works, the service provider, EXL, cited openness, innovative thinking, and flexibility at both ends as well as an integrated model that drives value beyond labor arbitrage.
Odyssey Logistics & Technology Corporation, the service provider for the chemical company, commented on the success of their relationship. Warren Hoppmeyer, vice president of Marketing and Sales Operations at Odyssey, says their relationship succeeds because the client views Odyssey as part of its own organization. He added, “Constant and routine business reviews, along with mutually agreed goals on improvement projects are outstanding characteristics of this relationship and enable the collaborative interaction.”
Lessons from the Outsourcing Journal:
- Enablers for effective collaboration include: shared values and cultural fit along with wanting to ensure that both parties are successful.
- Collaboration requires a communication framework that ensures openness, honesty, and a focus on having effective discussions rather than always trying to “get it right.”
- Service provider selection criteria for a collaborative outsourcing relationship needs to include the provider’s expertise in helping customers change and drive transformation into its operations, along with the provider’s willingness to embrace challenges and take risks on the buyer’s behalf.
- A rigid contract and governance framework that nails down all the terms and conditions and locks the parties into position will hinder the ability to be flexible through changing circumstances in any outsourcing relationship. In a collaborative relationship, this rigidity can stop the flow of ideas for change.
- Parties in a collaborative and business-transformational outsourcing relationship will benefit greatly by building an incentive arrangement (bonuses, gain-sharing mechanism, etc.) into their relationships, as it helps to ensure the parties’ interests will remain aligned over time.