360° Vendor Management

Understanding What You Have Before You Outsource

The challenges facing corporate operation units are daunting. Driven by Wall Street expectations, CFO-led budget tightening activities never understand seasonal operational demands, backlogs caused by technology or marketing SNAFUs, or the competitive job marketplace causing 40% (or more) annual attrition. Deeper, broader budget cuts just exacerbate operational problems and somewhere, deep in the bowels of your operation units, something is likely amiss.

Sure, there are little things, such as unknown caches of paperwork that haven’t been processed (the “secret backlog”) or reports that are less than accurate due to data inaccuracies. However, darker, scarier secrets lurk – skeletons of deal-altering proportions. These are the “mega-material changes” that keep an outsourcing executive up at night…and that can treble vendor charges, limit your vendor’s ability to achieve quality goals, or simply cost you time you don’t have. Here is a real-life story related to me by a colleague that demonstrates how important it is to confidently know what you’re outsourcing…very well.

Long before a 100-seat call center of a Fortune 200 financial services company (which we’ll call Greenfield Financial) was outsourced, a corporate metrics initiative caused the 40 or so different call centers at Greenfield Financial to report average handle time using reporting technology that laid bare to all Greenfield’s executives the operational performance of the call centers. The problem with the initiative, however, was that the common definition of Average Handle Time (AHT) was never enforced. Hence a handful of the call centers excluded After Call Work (ACW) from their reported measures (this is the time after a call during which an agent needs to perform certain offline tasks to complete the call, but during which the agent is unavailable to receive a new call). In fact, the training given to Greenfield’s call center agents asked them to use a phone status commonly used for breaks and lunches when performing after call work, which made it impossible to include ACW in their AHT reports. The result was that this small unit within Greenfield was understating results by 25% - and no one noticed for years.

When Greenfield’s executives decided to outsource this unit, the company’s procurement team and the vendor (which we’ll call Crown Call Center Solutions) agreed to use a cost per call methodology that was calculated based on the program’s AHT, which was contractually defined to include ACW. Greenfield’s procurement team never knew that the AHT they were supplied excluded ACW, and had been repeatedly reassured by their operations unit that the AHT was accurate.

Five months later, once Crown stabilized the operations and struggled mightily to achieve the program’s AHT, it became clear to Crown, who had deep experience its Greenfield’s competitor’s operations because Crown ran those operations, too, something was amiss. However, Greenfield’s operation unit reassured Crown that Greenfield’s internal results were accurate and, in fact, Greenfield remaining call center units were still achieving a similar results. Believing those reassurances, and faced with losing thousands of dollars every month (more than $1 million of lost revenue per year), Crown’s operations team put enormous pressure on their agents to achieve the AHT. Agents failing to achieve the AHT were reprimanded, attrition spiked, and Crown, somewhat predictably, failed to achieve the contractual Service Level goals. Greenfield complained loudly and Crown put more pressure on the “failing” agents – and things quickly got worse.

Crown’s agents discovered that they could hang-up on callers within the first few seconds of a call and as a result lower their AHT – to the detriment of Greenfield’s customers. This is a widely used practice in call centers throughout the world and it went unnoticed for a couple of months because the shorthanded vendor had assigned their internal audit team to the floor to answer calls. However, Greenfield’s astute auditors discovered the actions of the few agents and realized that shorted calls doubled the number of calls…and the Crown’s fees. Greenfield’s operations executives, accusing Crown of fraudulent practices, raised hell. Crown’s operations team retorted that the AHT was unrealistic. Greenfield’s operations executives called Crown’s staff incompetent and stonewalled them by telling Crown, “You already signed the contract.”

The issue quickly escalated, ending up with Crown’s CEO calling the Greenfield’s COO. Lawyers were dispatched and much needless ugliness ensued following many long hours of conference calls and negotiations – and Greenfield lost when the operations units revealed the facts. Rates increased by 25% and Crown was pleased to lift the pressure off their agents. Greenfield rationalized the results by stating they were still pleased, because even with the rate increase, Greenfield was saving over 50%. However, the Greenfield’s customers were the ultimate losers as they suffered from the shorted calls and bad service levels, and many internal hours were lost. I’ve heard that an element of distrust pervades the Greenfield-Crown relationship to this day.

Objectively, this was a fair result as the AHT was in correct. However, the road to get there was needlessly bumpy and is a lesson to all outsourcing experts – thoroughly understand what you’re outsourcing as early as possible.

Outsourcing Service Level Agreements: The Monthly Close

I was recently asked to escalate a back office program’s dismal performance with a vendor’s executive staff. In preparation for the executive conversation, I asked the client to provide me an overview of the program’s Service Level Performance. Two weeks later, an analyst sent me a MS Excel spreadsheet that contained data for the last three months.

“Where’s the prior 6 months data?” I asked.

“Oh, we didn’t start tracking the metrics until the middle of November,” I was told.

The management team, in fact, hadn’t been tracking any metrics until the problem hit critical levels and government regulators began to hear complaints.

It doesn’t take an expert to understand that this program lacked a disciplined management processes. However, the dirty truth is that many programs lack the discipline to track and review metrics – and you won’t know this until the program implodes. Finger pointing immediately begins and the vendor inevitably takes the fault because “it was their responsibility to deliver services.” The business unit’s lawyers reach for the contract as the business executives look for the opportunity to deflect blame and force the vendor to pay through their noses. This program, in particular, was billing a paltry $1,500 per month and the business wanted me to pass on the regulator’s $500,000 fine to the vendor. Holy indemnification, Batman!

The problem is that most vendor managers and vendor account managers just don’t have the discipline or skills to manage relationships. That’s why the Monthly Close is an essential management process. It’s the one time each month that effective executives review the program’s performance in sufficient detail to identify performance issues, negative trends, and opportunities for improvement. It’s essentially a monthly operational review.

The Monthly Close occurs monthly and is NEVER skipped or integrated into another meeting. It occurs typically one week after the end of the month and lasts two hours. The format is a working session, not a presentation. However, that doesn’t mean the team didn’t prepare in advance. In fact, the core of every meeting should be the analysis generated by the day-to-day vendor management team. The key operational executives should take part in this meeting (typically directors and vice presidents), as well as the vendor’s counterparts. In addition, IT, Quality, and Training representatives should take-part in the meeting.

The first topic of the Monthly should be to review the program’s performance against its contractual Service Level Agreements (SLAs). The last 12 months of data should be included, at minimum. Pat yourself on your back if you achieved every metric and every trend is positive.

However, if a SLA is not achieved or trends indicate future problems (trending is essential), supplemental metrics should be supplied to assist with root cause analysis. For example, if a program fails to achieve a turnaround time SLA, information on transaction volumes, transaction volume forecast accuracy, staffing accuracy, and IT system performance should be provided. Several action items should result and will be reviewed in future Monthly Closes until the root causes are rectified. Each action item should be categorized by Key Performance Indicator.

The next agenda item is to review the program’s non-contractual Key Performance Indicators (KPIs). KPIs are the lower level metrics that are typically leading indicators of a program’s ability to achieve the contractual SLAs. Transaction volumes, forecasting accuracy, and staffing accuracy are examples of metrics that typically drive turnaround time SLAs. Percent of agents trained, percent of agents who passed daily quizzes, frequent error types, and quality calibration variance are examples of metrics that typically determine a program’s ability to achieve Quality SLAs. Don’t forget to review the program’s IT stability, too.

As you review each KPI, open action items related to the KPI are to be discussed, in addition to any new failure to achieve goals or any recent negative trends. New action items should be tracked.

The last topic of discussion is the vendor invoice. Each line item should be reviewed. All charges, including transaction fees, telecommunication/IT fees, incentives and penalties should be substantiated by earlier conversations. The benefits of discussing the invoice now is that the vendor was required to provide invoices on time and that the conversations regarding service level failures, quality results, and measurements are completed.

Following the Monthly Close, executives should provide feedback to the vendor management team regarding the quality of the Monthly Close, and the executive should track both the timeliness of the meeting, as well as the team’s ability to accurately provide numbers. Late meetings and missing or incorrect data are early indications of issues in the metrics’ integrity – and you definitely don’t want to be surprised!

Do you have an effective monthly close? Share your comments with us!