360° Vendor Management

Outsourcing Vendor Management: Myths and Reality

Here are some frequent myths related to outsourcing vendor management.

Myth #1: We Need Software - There are many, many companies espousing the need for enterprise-class software to manage the complexities of outsourcing relationships.  There are probably as many diet and exercise fads, too.  What makes these two divergent products similar?  Both have buyers who lack control and they are looking complex solutions, when the actual solutions are simple do-it-yourself (in most cases).  What most people need is intranet-based collaboration tool (like Microsoft’s SharePoint) and a reporting tool (like Microsoft’s PerformancePoint).  These solutions are neither expensive or complex.  Remember, expensive and complex software packages are the hardest to convince people to adopt…and adoption is the name of the game in business process tools (e.g., Sales Force Automation (SFA), Customer Relationship Management (CRM), and e-commerce/sourcing tools). The best places to invest money is in reporting and intranet sites that make content visible.

Myth #2: An Operations Manager Can Do This Job - Maybe he can.  However, vendor management typically requires the relationship skills of a director, the ability to drive initiatives through cross-functional, unaligned organizations (typically a senior director skill), and the hands on day-to-day operations and analytical skills of an experienced manager.  The challenge, however, is to find a candidate with all the skills of a director, but who wants to get his hands dirty every day.  Candidates that lack the desire to manage operations with zeal, will not achieve results.  Candidates that lack the ability manage relationships and cross-functional differences will struggle with effectively and respectfully compelling vendors to deliver results.  Your HR team is your secondary challenge, because they’ll likely want to grade the position at the manager level, but the resource clearly has skills beyond this and is managing hundreds of vendor agents, too.  Vendor manager positions are best positioned as director level positions.

Myth #3: Focusing on Service Level Metrics Is Sufficient - If you believe driving a car requires only the ability to read the speedometer, odometer, and gas tank gauge, you’re crazy.  Experienced executives know the importance of leading indicators and micro-metrics.  This is the type of data that suggests that future problems loom.  SLAs typically are 4-6 metrics that measure the key outcomes, but managing an operation requires an operations-like focus on the metrics that drive overall results, such as training completion rate and staffing accuracy.  Remember, you outsourced the day-to-day work, but not the management oversight or responsibility to achieve metrics.

Myth #4: It’s All in the Contract - Most likely, it’s not.  When you realize this, it’s a) too late and b) going to cause a hate-fest with the contract negotiators.  I’ve seen many contract negotiators fired months or years after contract execution once the business realizes something is missing in the contract.  Hindsight is 20/20 they say, and few executives understand the negotiation trade-offs that were made many years ago.  The two simple truths are:

• The contract will never, ever fully encapsulate the entire outsourcing relationship.  You need to spend time developing processes and documentation to support the relationship’s many different facets (e.g., disaster recovery).
•  The contract is a historical document and reflect the desires of both parties at the time it was negotiated.  You need to spend time updating the document to include changes and current issues and perspectives.

Myth #5: Vendors Don’t Change - This may seem obvious, but take a moment to complete this exercise: First, close your eyes and reflect on the changes that have occurred within your company over the last few years.  Do you remember the process improvements, organizational changes, competitive pressures, technology implementations, and changes in personnel?  Next, think of your vendor and consider the changes they may experience over several years.  Anticipate change in both your company the vendor’s and strive to capitalize on the opportunities those changes present.

Terminating an Outsourcing Relationship

Maybe you’re a Michael Porter stalwart and have changed your definition of what is core versus non-core.  Or maybe the “we can do it better ourself” crowd has won management attention.  Or maybe vendor performance shortcomings or vendor consolidation strategies require a change of vendors.  Or maybe you’re negotiating a contract and you’ve finally recognized that post-deal transition issues are real.Regardless, you’ve come to the critical point in time when terminating a vendor relationship has become a possibility.  Here are a few thoughts we’d like to share with you:

Understand the Vendor’s Economics - Terminating a program before the planned end of contract term affects the vendor in the following ways: stranded capital assets (hardware, software, and facilities) that need to be depreciated sooner than anticipated, severance payments required by local laws can affect profitability, and vendor layoffs can negatively affect the vendor’s ability to hire in a local market (or break covenants with local officials).  Agents cannot be simply switched to other clients without training costs, and certain SOX rules may affect how accounting treatments are applied.  The result may even be a Wall Street issue.  So, terminations are not without cost to the vendors, but knowing this shouldn’t always affect your decision…empathy is better than sympathy.

Know Your Termination Responsibilities - Contracts typically require a particular notice period prior to termination and, sometimes, a termination fee to be paid to the vendor.  Do not be surprised by either, and be absolutely certain you know exactly how much you’re going to pay.  We’ve seen emotional clients so angry with vendors that they immediately start talking about termination, only to find that they didn’t budget for the termination fee.  Don’t shirk your responsibilities, either.  Outsourcing is a very small world, and your reputation proceeds you…and it can turn out to bite you in the future.

Know Your Transition Plan and Budget - While we’re talking money, be cognizant that transitioning to a new vendor or to an in-house organization can be expensive.  Either entity can be hit with capital expenses associate to facility, hardware, and software requirements, and their are training costs and learning curves to understand.  Believe it or not, transitioning work takes more effort than outsourcing it.  The reason is simple: you’re not managing day-to-day operations and it’s difficult to compel vendors to hand over the keys, regardless of the contract language lawyers have authored.  In addition, every transition brings new re-engineering opportunities, which can cost more time and money.  The best termination notices are accompanied with 99% complete and very detailed transition project plans.  However, be open to tweaking them if flexibility will reduce risk and cost.

Know Your Alternative Well - It goes without saying that you should have an alternative, but the best companies spend oodles of time fully understanding the future state alternative(s).  It would be foolhardy to simply terminate with the assumption that another vendor could pick-up the work.  Vendors are not all the same.  Sure, revenue is revenue, but good vendors understand how to scale programs and know the local job markets well enough to sometimes turn-away work.  Those who should spend the most time are owners of large scale programs (300+ seats) or high value processes.  Few programs can snap 300 agents into seats within 60 days…and wise business owners should be wary of promises to the contrary.

Use a Communication Plan - Terminating a vendor can go unnoticed, or it can become a media circus.  You have internal stakeholders, Board Members, vendors, regulatory agencies, internal employee perspectives, and media entities to consider.  Remember one of the fundamental axioms of communication - One cannot not communicate.  Your decision (whether intentional or not) to not communicate, speaks volumes.  You never, ever want the wave of media calls to greet you in the morning and not have a plan.  Invest in a comprehensive, detailed communication plan before you terminate.

Be Flexible - Although your executives may already have made-up their minds, vendors often understand terminations and want to successfully manage the transitions.  We seen flexibility pay handsomely - one termination notice would have affected 300 vendor FTEs and carried a significant fee.  The vendor offered to reduce the fee if the termination could be delayed by a mere two months in order for the FTEs to join another client’s program beginning later.  That’s a great win-win.

Expect the Best, Plan for the Worst - We’re all professionals, and we know what our bosses and companies expect from us.  However, sometimes emotions get in the way…or agents need to make decisions to guarantee financial stability.  Remember that terminating a program can have an effect on local job market conditions and agents may leave earlier than anticipated in order to get a new job elsewhere.  Attrition is the bane of transition plans, as the old vendor cannot hire, and the new vendor/internal organization rarely can ramp-up fast enough to handle unanticipated attrition.   They key is to anticipate attrition and plan for it.

Outsourcing Vendor Management Organizations

There are as many different organizational designs as there are flavors of ice cream.  We couldn’t dream on commenting on every imaginable formation of vendor management organizations, but today we’ll attempt to describe the major types.Before we get started, let’s ground ourselves in some common definitions:

• Vendors - The companies who perform outsourcing services
• The Business - The internal organization which ultimately responsible for business outcomes created by the vendors
• Vendor Management Organization (VMO) - A dedicated internal team assigned to managing vendors
• Vendor Managers - The internal resources that are assigned to managing outsourcing vendors

In-Line Model - Frequently, Vendor Managers are imbedded in The Business.  The results are clearly controllable outcomes for The Business and Vendors who clearly understand who their stakeholders are.  However, this type of organizational model definitely has shortcomings.

• In particular, in large organizations where few Vendors are shared across business units, it becomes difficult for internal business units to coordinate activities and perspectives.
• If the Vendor fails to meet one group’s Service Level Agreements (SLAs), the Vendor often has little accountability to the other business unit, regardless of program sizes.
• Internal organizations also have difficulty sharing and enforcing the use of vendor management best practices.  The disconnects are so great that sometimes different business units will establish independent contracts.
• Vendor Managers do not have clear career tracks, and are often left to managing Vendors and therefore not given promotion opportunities typically left for employees with deep internal operations management experience.
• To the Vendors, multiple stakeholders raise the cost of supporting The Business - and the cost savings are left on the table.

In-Line VMO - With increasing frequency, organizations are realizing the shortcomings of approaching Vendors differently.  To ensure best practices are leveraged, Vendor Managers within a single business unit are consolidated into a single VMO reporting to The Business.  The Business therefore develops shared best practices, improves Vendor relationships, and improves the operating efficiencies of the Vendor while maintaining control and creating career development opportunities for Vendor Managers.  However, The Business still fails to achieve synergies that could be gained from leveraging Vendors in other business units and little coordination between the teams develops.  In fact, we’ve seen more BPO vs. ITO organizations developing than ever before.VMO Governance Teams - Large companies that are removing intra-departmental silos through re-organizations or that are seeking greater savings opportunities/better vendor management controls are building small corporate VMO governance teams that assist In-Line VMOs with information sharing.  Corporate VMO’s accelerate vendor management best practices and can serve as corporate level governance, depending on the amount of decision-making control granted to them.  It’s exactly this decision-making control that creates conflict among In-Line VMOs and different business units.  While the corporation as a whole benefits from lower vendor costs, improved decision-making, and better controls in contracts and vendor performance visibility, the different business units begin to lose decision-making authority.  Operations management teams who typically hold traditional viewpoints on keeping decision-making power close to operations leaders are left in an uncomfortable situation where outcomes are decided by corporate employees with different incentives - and The Business will often express this quite vocally, creating an internal power struggle that erodes the ability of best practices to take hold!  In addition, in the business environment where CFOs believe less is more, Corporate VMO Governance teams have a business value that is hard to quantify.Centralized Corporate VMOs - Some organizations are consolidating all In-Line and Corporate Governance VMOs into a single Corporate VMO.  These teams are held responsible for creating outcomes for their respective internal business unit stakeholders and are better able to leverage vendor relationships by focusing on fewer relationships.  The results are more uniformity in vendor results, lower costs, and deeper vendor relationships.  In addition, with the growing complexity of outsourcing contracting, Centralized Corporate VMOs are better able to leverage high-end skills and develop new skills.  The challenges with this model are clear: The Business Unit is left out of the picture (a point it will make clear whenever results are below expectations) and improperly managed VMOs create massive failures.  Centralized VMOs are also challenged with budgets and business unit chargebacks - especially where vendor fees are intermingled across different business units (e.g., call center and mailroom environments).  The other challenge is aligning internally managed operations with VMO managed operations.What model is best?  We don’t believe any single model is best.  However, we would recommend that business leaders employ an organizational model that best fits the immediate strategic needs.  If you’re failing to achieve synergies among the widely distributed supply base or achieving common results, centrally governing or managing vendors is a good idea.  If you’re facing a business environment where local differentiation is essential, give your business units high degrees of autonomy by placing VMO teams close to the day-to-day operations leadership.  If you’re looking for a compromise, the VMO Governance model is a great way to facilitate best practices and place controls on certain aspects of vendor management (e.g., contracting, IT support, and vendor selection).Do you have a perspective you’d like to share?  Share your ideas in a comment below!

Top Ten Service Level Agreement Considerations

Here are our top ten considerations for authors and managers of service level agreements (SLAs):

1. MECE - SLAs should be Mutually Exclusive and Completely Exhaustive (MECE). By this, no two SLAs should measure the same thing, and there should be a SLA for every important aspect of the program. Too often we see SLAs that overlap, creating double jeopardy situations and misleading positive or negative performance reports. In addition, we often see important areas that are left unmeasured due to oversight.
2. Defined - Service levels must be thoroughly defined. For example, abandonment rate within a call center ought to be defined so that parties know whether blocked calls (trunk blockage), calls that terminate in the IVR, calls that terminate in the first 5 seconds (we don’t agree with this, but someone people do), or calls that answered by agents but are the “wrong number” are considered abandoned calls. Check this Q&A section out if you need some idea of how varied definitions are. If you don’t define the service level, you don’t know what you’re measuring.
3. Calculated - Even though you spend time defining service levels, you need to define any calculations. For example, if the service level is abandonment rate, the calculation should defined as “the number of Abandoned Calls divided by the total number of Offered Calls”. Where we use capitalized terms, these are predefined earlier in the SLA section. Vendors and vendor managers should never, ever be surprised by calculations. Give examples in your written SLAs.
4. Measurable - Don’t waste anyone’s time with SLAs that can’t be measured. For example, if you’re measuring customer satisfaction in a call center environment (typically done via a 3rd party after the primary call is concluded), but you don’t have the means to measure customer satisfaction (e.g., your call center doesn’t have the ability to use 3rd parties or your agents aren’t trained to collect satisfaction data), its a waste of time. Typically, angry customers will whip out unmeasurable SLAs and argue that vendors failed to achieve them, which is a huge waste of effort.
5. Easily Measurable - It’s one thing to measure something, its another thing to spend oodles of dollars to measure the same thing. If the cost of measurement doesn’t warrant the benefits of the SLA, don’t use it. The best example of this was a measure where customers call to complain about a bad transaction they’ve recently received in the mail. The vendor didn’t manage the call center, just the backoffice transactions. So, the call center needed to take notes on bad transactions and track them in a manner that allowed auditors to identify if the vendor was the cause of the bad transaction or not. Since the vendor only handled one of six steps in the backoffice process and the mainframe systems didn’t track transaction history, it was impossible to determine who caused the error without significant system modifications.
6. Time Frames - SLAs should cover a specific time period. Daily, weekly, monthly, quarterly, annually, etc. They should also only be assessed once. The example provided in #4 is a bad example of this, since customers could call to complain months after the transaction was completed, making it difficult to understand when to assess a month’s quality number. Essentially, the vendor would be in jeopardy forever, since a customer could complain at any time about a month - and every complaint would only lower the quality score, until the vendor had to pay penalties.
7. Singled Barrels - A SLA should contain only one measure, not two, three, or even four measures. If you’re SLA is “99% of transactions must meet quality standards and achieve customer satisfaction requirements” you need to track both conditions, which is nightmarishly difficult. In questionaire terminology, these are called double-barreled situations, and typically provide misleading or inaccurate pictures of operational performance.
8. Serve a Purpose - In some contracts, a minimum number of SLAs are required (to reduce the vendor’s risk, of course). That’s great when you need 3 or 4 SLAs, but what if you only need two SLAs and are therefore required to make-up another one or two to meet the contractual guidelines? These typically become “gimmes” and are a waste of time. Every SLA should serve a purpose.
9. Actionable - Every SLA should be capable of being influenced through actions of the vendor or the company. If the SLA can’t be influenced, don’t bother. A bad example may be measures of employee satisfaction with compensation in a HR outsourcing relationship, where the vendor has no control over compensation or employee /supervisor communication/training program. Since all employees will naturally dislike their compensation to some degree, the vendor has very little ability to create positive results.
10. Realistic - Look, we all want to be perfect, but those who belong to the cult of zero defects don’t understand contracting and real-life BPO and ITO. Achieving 100% of anything is simply unrealistic in most situations. Your goals can be aggressive (or evenly progressively more aggressive over time), but they should achievable.

We want to hear your comments! Let us know what you’re thinking by commenting below.

Are Your Outsourcing Vendor’s Agents Trained?

Long after the initial mega-transition is completed, changes in processes, systems, or customers require additional agent training.  You’ll surely experience the need for attrition-caused training, too.  With all those changes, and your visibility down to the agent level not-what-it-once-was, you’re faced with a difficult situation.  Left unmanaged, your quality results will slowly decline, customer satisfaction will dwindle, and those not-so-friendly calls to your CEO will start to land on your desk (accompanied by the memo asking for action and weekly status on the issue).  Soon, internal stakeholders who were riding the outsourcing fence will start the anti-outsourcing rally cry, claiming vendors have a difficult time delivering quality targets (ignore the fact that the group was probably struggling with the same issue long before the outsourcing program began!).

Because of the direct impact on quality, training should be as tightly managed as other aspects of an outsourcing relationship.  Here are a few tips to get started:

1. Create a training course catalog that contains every training class that has ever been given.  Use a college-like numbering system to keep track of these classes (e.g., 101 - New Hire Basics, 102 - New Hire Accent Neutralization, 201 - Program Transaction Requirements).
2. Since a large quantity of training is adhoc, try to bundle this type of training into a weekly, bi-weekly, or monthly course.  Safe the immediate training/communication needs for urgent emergencies.  Just as in application development, fewer releases of training helps the production processes avoid disruption that occurs through constant changes.  Number these “courses”, too.  Look to update standard training courses with this new content as soon as possible.
3. Update SLA quality guidelines with all changes and manage the guidelines with careful use of version control.
4. Ask your vendor to track every agent’s completion of each training course.  Consider establishing a key measurement requiring all vendor agents to complete new training within x number of hours/days of release.  This metric will be useful for vendor managers and vendor account managers to better understand quality issues and training effectiveness, and can contribute to root cause analysis (e.g., “99% of our agents have completed the required training on time and with passing scores, so the issues we’re experiencing aren’t because of training.”)
5. Refresh frequently! Require vendor agents to complete refresher training on a quarterly, semi-annual, or annual basis in order to keep skills sharp and up-to-date.
6. Use training regimen to advance agent skills to new levels.  Create new classes to that challenge agents and provide them more opportunity to excel in the workplace, while creating better quality results.

Do you have comments? Let us know by posting them below and sharing with the community how to best manage training.

Calibrating Quality Expectations With Your Outsourcing Vendor

If you manage a call center, you know what calibration is. Otherwise, you may not be leveraging the most important tool you have to manage agent-level quality. In an outsourcing relationship, failure to calibrate quality expectations can result in poor vendor performance.

Calibration is the process by which both the vendor and the client review a sample of real-life transactions, score the transactions independently, and compare the results to each other. The best companies have several types of calibration sessions.

The first is the standard monthly calibration session, where the client’s internal audit team compares results with the vendor’s quality team. The purpose of this meeting is to ensure that the vendor provides feedback to their agents based on the exactly the client’s expectations. Normal attendees include auditors, trainers, quality management, and day-to-day operations managers. The team tracks calibration variance*, on-time completion of monthly sessions, importance issues - and the issue’s corresponding action plans. Results are reported to vendor management and account management teams. The trick behind this meeting is to make sure that the vendor truly understands the client’s expectations - simply marking items correct or incorrect is insufficient. The teams need to spend the time to ensure that everyone has a shared understanding of the rationale behind the scoring in an environment that is NOT confrontational.

From our experience, teams start using calibration sessions with the right intentions, but later hold the sessions less frequently than they should (every month folks, every month!) or parties begin to use an accusatory tone in the meetings, making it a vendor vs. client meeting. Effective managers avoid this and carefully facilitate the meeting to get the desired results. The other issue we frequently see is that the sample sizes shrink as other tasks take priority. It’s important that the right sample size be crafted for every calibration session - and that the samples be pulled at random.

The second type of meeting rarely occurs, but, in our opinion, should occur far, far often. Executives and key stakeholders rarely spend the time to get close to nitty-gritty details of transaction quality. However, it’s precisely due the infrequency of looking at the low-level details and the frequency of informal “stories” (regardless of the stories’ completeness or accuracy) that executives begin to make decisions regarding a program based on inaccurate information. Every quarter, executives should spend 1-2 hours reviewing transaction quality by having calibration teams make a joint presentation of program quality issues, achievements, and plans. You might want to include key customers, key internal stakeholders, and other influencers.

Programs that calibrate frequently, accurately, and with a tone of continuous improvement have a far greater likelihood of success than those that don’t. SLA results will be contested less and the agents handling the transactions will receive the feedback they need to improve individual and team performance. It doesn’t make a difference if your program is a call center, back office transaction, or IT program…CALIBRATE!

* Calibration variance, a metric that identifies the difference between client and vendor quality scoring, is calculated as (VendorQualityResult - ClientQualityResult) / ClientQualityResult.

Managing Client and Vendor Satisfaction in Outsourcing Relationships

Outsourcing relationships sour for a wide variety of reasons, but satisfaction, if properly measured, is probably a key leading indicator that executives everywhere should track as a signal of problems to come. Satisfaction is a concept that has been discussed by academics for decades and there are no shortage of publicly available studies. The most importance concept for everyone to know is that satisfaction is created when reality exceeds expectations. If reality equals expectations, satisfaction can be maintained - particularly if this occurs over a long period of time. However, meeting expectations simply isn’t anyone’s goal any more. Think about your own annual review. Does meeting expectations make you an all-star? We doubt it.Today’s blog entry attempts to explain its role in governing outsourcing relationships.Every outsourcing executive should rigorously track satisfaction. If you’re a vendor manager, you should measure your company’s satisfaction with the vendor’s performance - even if that includes departments to which you don’t belong. If you’re a vendor account manager, you should measure your client’s satisfaction with your company. We’d argue that effective vendor managers track BOTH aspects.Measures of satisfaction with vendors should include:

1. Overall Satisfaction with Vendor
2. Satisfaction with Vendor Account Management Team’s Performance of Day-to-Day Activities
3. Satisfaction with Vendor’s Operations Unit’s Performance of Day-to-Day Activities
4. Satisfaction with Vendor’s Hiring Program
5. Satisfaction with Vendor’s Training Program
6. Satisfaction with Vendor’s Reporting
7. Satisfaction with Vendor’s Quality Management Program
8. Satisfaction with Vendor’s Reporting Process
9. Satisfaction with Vendor’s Value Add Contributions (e.g., strategic insight, process improvement, proactive improvements)
10. Satisfaction with Vendor’s Invoices
11. Satisfaction with Vendor Technology

Measures of satisfaction with clients should include:

1. Overall Satisfaction with Client
2. Satisfaction with Client’s Vendor Management Team’s Performance of Day-to-Day Responsibilities
3. Satisfaction with Client’s Operations Unit’s Performance of Day-to-Day Responsibilities
4. Satisfaction with Client’s Communication of Changes and New Training Requirements
5. Satisfaction with Client’s Quality Management Team Performance
6. Satisfaction with Client’s Reporting Process
7. Satisfaction with Client’s Value Add Contributions
8. Satisfaction with Client’s Invoice Payment Process
9. Satisfaction with Client’s Technology

We’d suggest quarterly surveys that use the Likert style questions on a five point scale (1 = very dissatisfied, 3 = neither dissatisfied or satisfied, and 5 = very satisfied). Allow respondents to use a “N/A” category if they have insufficient ability to score the survey question, but also give them a “comments” area under each question to gather insight. Ask as few questions as possible - maybe one question per category, sometimes two. Keeping it simple and short encourages people to respond. With the availability of so many online survey tools, you can quickly generate surveys and collect reports.We believe that surveys should be anonymous, but feel free to collect sufficient demographic data (department, title, role) to understand the audience. Resist the desire to tinker with the survey each quarter. Instead, use the same survey in order for you to detect shifts in opinions. Review the results with both the clients and vendors in your quarterly review meetings. In a high performing relationship, 80% of respondents will score overall satisfaction as either a 4 or 5. Anything less is a sign of potential problems.Should satisfaction be a contractual service level? We’d say no because the measure is too flimsy. Instead, satisfaction should be a key measure the great executives track rigorously.

An Overview of The Outsourcing Statement of Work

We previously blogged on on the Contents of an Outsourcing RFP, but we didn’t dive into the detail of what goes into a Statement of Work (SOW). Here is a quick guide to get you started writing SOWs for outsourcing services. Your lawyers and consultants will be able to assist you further.

• Scope - One of the principle purposes of a SOW is to provide both the vendor and the client a high-level description of the work the vendor will provide - and the work the vendor will not provide. Remember, the vendor will be bidding on the work described within the SOW. The better authors avoid ambiguity and uncertainty in a SOW, the less risk vendor will “price” into their bid. Furthermore, it’s important that both parties know what they are supposed to do - a point that becomes incredibly important during discussions on material changes or when there is a contract dispute. I often ask the authors describe the transaction types and customers (internal or external) the transactions support in this section.
• Business Process - The purpose of describing a business process is to allow vendors to fully understand the work their agents will perform. Descriptions of business processes are generally medium-level, numbered outlines. Every action needn’t be described (leave that to the detailed design documents co-developed by the company and vendor). Swim-lane diagrams are a wonderful manner of clarifying tasks and processes - and they’re even better when each action is cross-referenced and elaborated in a sentence or two beneath each diagram. Be sure to define the service level expectations for each process. Consider quality, turnaround time, and backlog expectations. We’re going to blog an entire article on SLAs soon.Remember to include all processes. Frequently forgotten processes are vendor returns (the transactions vendors return to the company, typically because they are out of scope), exception processes, and reporting.
• Transaction Volumes - The purpose of describing volumes is to allow vendors to develop accurate capacity and staffing models. Describe the types of transactions and quantify them. Provide annual, monthly, weekly, and daily volumes. Be sure to depict accurately days when transactions are received and when they are not received, including weekends and holidays. All seasonal fluctuations need to be described. In addition, typical transaction processing should be included for each transaction type. You should expect that vendors will improve upon current productivity rates, but it gives them a good benchmark. Finally, describe any year-over-year expectations of transaction increases or decreases.
• Technology - Technology can be an enormous enabler, but it can also present limitations. Batch windows, system latency, and large high-quality, bandwidth-hogging file transmissions can cause tremendous challenges in an outsourcing relationship. In addition, system stability can be a key issues - especially when its the company’s system that’s hampering a vendor’s productivity [gasp!].Describe every system that will be used and the corresponding desktop PC and bandwidth/connectivity requirements. Provide physical and logical system infrastructure diagrams that show how systems connect. Where interfaces are required, describe the file formats or real-time interfaces. Finally - if systems don’t exist, be sure you say so…Remember, vendors’ capital investments are critical to calculating pricing and setting your implementation time frames. Spend time to get this correct.
• Responsibilities - I’m not an attorney, but I can’t count the number of times that lawyers have stared dumbfounded at vendor and clients’ writing and asked, “Okay, so who is going to do this?” Contracts and SOWs are the exception to the rule that there is no “I” in “Team”. SOWs should contain no “We” or undefined responsibilities. Each party should know what they are going to do, including who is going to write training manuals, deliver training, provide training facilities, provide systems and PCs, etc. The absolute last thing you want is for either party to say to the other, “I thought you were going to do that.”
• Contractual Language and Cross-References - SOWs should be subject to contracts, so don’t replicate language in each place, otherwise you’ll just create unintentional conflicts in language. The best example is term of the contract versus term of the SOW, including termination rights. Try to avoid conflicts and just point to the contract, and leverage terms that were defined in the contract. Consult with your lawyer…

Outsourcing Negotiations for Beginner Buyers

Let’s begin by saying that beginners really shouldn’t negotiate outsourcing contracts. Outsourcing contracts are among the most complicated deals to negotiate. The negotiating team must account for transition plans, disposition of assets and people, scope control, service levels, indemnification, liabilities, complex pricing schedules filled with escalators and descalators, governance, etc. It’s similar to a divestiture deal - except that you cannot escape the results as easily. Wall Street divestitures are handled by mega-legal firms…so, the odds are that your company doesn’t have the right level of experience.

The most interesting dynamic is that the vendors have negotiated many more deals than customer has - and they’ve managed many relationships, so they know where the risks are and what your pressure points are. Most operations people spend the bulk of their time managing internal functions and politics. Maybe you have experience buying cars or homes. Outsourcing deals are nothing like this type of transaction. If possible, find an outsourcing pro to assist with negotiations. What follows are considerations if you are budget strapped and fool-hardy
Know What You Have and Fear Material Changes - The number one issue buyers should manage is being sufficiently self-aware to know what you know - and to know what you don’t know. There are so many processes, procedures, and exceptions in today’s operations areas, its difficult to know them all. In addition, there are areas where good performance is challenging, season volumes ebb and flow, and your customers’ needs are the exception to the rule. It could take 2-3 months to document everything. Do it and do it well. There are two reasons for this. First, experienced vendors know that their customers always have skeletons in their closets and that they cannot come hat in hand begging for price increases for each one. So, they inflate pricing to give themselves contingency. The less risk vendors have to take, the lower the price you will need to pay.

Second, any major change to an assumption (e.g., systems that won’t work internationally, customers who refuse to allow you to process their transactions overseas) will become a Material Change. Material Changes can carry significant price increase, and always open the door for vendors to renegotiate pricing. Throughout the duration of the contract, vendors will actively defend their profit margins by requiring price increases for any Material Change, such as wage inflation, system changes, new training requirements, etc. Think about it. You’re going to have to have a Material Change anyway, but why open the door for them early in the process when internal acceptance of outsourcing is at its weakest point?

Performance Expectations - Commonly referred to as Service Level Agreements, performance expectations can encapsulate day-to-day performance requirements of the program, as well as planned milestone achievements (e.g., on-time implementations, system conversions). Every performance expectation should be very well documented, quantifiably measured, and carry incentives/penalties for performance. The biggest mistake beginners make is to exclude key expectations. The second biggest mistake beginners make is define a performance expectation that cannot be measured.

A quick word on incentives and penalties: while you clearly cannot expect a vendor to lose 100% of a program’s revenue for every failure, don’t have too much sympathy for your vendors. Profit margins in this business are fat and you shouldn’t allow your vendors to think of your program as an annuity with guaranteed profit margins. That’s not how you view your business, and it shouldn’t be viewed differently by your vendors. Make your expectations clear up front, and don’t back down.

Give Vendors Incentives to Manage Your Risk - Contracts, in a large part, are about managing risks and rewards. If you’re handing over your call center business to a vendor, and they now have access to extremely confidential types of customer information, you are at risk. Vendors will attempt to limit their risk, typically to some portion or multiple of anticipated annual fees. However, what happens if a breach of confidentiality occurs, which results in a class action law suit? Such cases could have legal fees that equal your annual vendor invoice amounts alone, and carry penalties many times more than this. Who pays for this? This is why you need a good lawyer, experienced with outsourcing, to assist and advise you. Whatever you do, don’t take everything your potential vendor has to say at face value. Just like any politically biased journalist, the message contains a twist.

Vendors need to have sufficient skin in the game to put necessary controls in place to prevent a catastrophe. What incentive does a vendor serving a mega-international bank have if their liability is limited to $250,000? The cost of notifying your customers of a breach of confidentiality could exceed this many times over if you consider just postage and printing costs. What about potential lawsuits or regulatory fines?

Give Yourself An Out - Times change, people change, and businesses change. Experienced outsourcing professionals understand that relationships evolve and that deals must be sufficiently flexible to support change. One such consideration is termination for convenience. Again, vendors want predictable revenue and to protect their employees (and their companies’ reputations in the local job marketplaces and regulatory environments). However, don’t fall for guaranteed minimums or huge payments. Termination for convenience should always be priced at a sufficiently high price to avoid impulse decisions and to make the vendor reasonably whole, but keep in mind that the outsourcing business is growing fast, which allows vendor employees to be allocated to other projects, given sufficient notice and planning.

No matter what you negotiate, leave absolutely no ambiguity or placeholder. A specific amount of money and a required minimum notice provision should be included. I terminated one outsourcing relationship that was negotiated by an attorney many years prior, and the language didn’t define the specific amounts to be paid. Instead, it allowed the vendor to calculate the amount of unamortized investment it had made in the account. Pretty soon after our letter was received, the vendor provided a very, very lengthy list of investments (including sales incentives given to salespeople!). Of course we negotiated the outcome, but the situation could have been avoided altogether with some forethought.

This is a snippet of what beginner buyers should consider. As always, work closely with your legal counsel and consult with a professional if at all possible.

Outsourcing Governance: Why You Didn’t Do It

For the vendor managers and vendor account managers out there, here’s our list of the top 10 reasons why your program doesn’t have a governance model:

10. Governance?! BINGO!9. Managing a vendor is a one-person job.8. Your vendor performs it’s own “independent” monthly SLA audits.7. Vendor invoices are accurate and clients pay on-time.6. Your client provides regular, accurate forecasts.5. Your client doesn’t require change control procedures.4. The consultants left at the end of the project.3. You calibrated you quality audit scoring when the project launched.2. Your contract has dispute resolution language already.1. Governance doesn’t have a positive ROI.