The valley of despair in an outsourcing relationship is when vendor managers consult with their legal counsels. Disputes that go “contractual” (the vendor management version of “nuclear”) can irreparably damage a relationship. Your job as a vendor manager or vendor account manager is to ensure the client-vendor relationship never sours. However, what do you do when it does?
Today, we take a deeper look at dispute resolution.
One of the most challenging aspect most outsourcing relationships are now facing is the impact of the declining value of the US dollar in the face of the growing foreign economies in India and the Philippines. When the US economy was stable with gradual growth, the impact of foreign exchange rates was manageable. However, with divergent directions, many vendors are faced with significant financial challenges - and they aren’t hesitating from discussing the materiality with their clients.
Most US clients have not budgeted for the level of increases they are now experiencing. Furthermore, the financial business cases associated with offshore labor can be shattered by dramatic price increases. Even if higher rates do reflect savings in comparison to US domestic rates, the multiple is no longer as advantageous…and with no end in sight, it is unlikely that US buyers are going to experience 1:6 savings again. 1:2 or 1:3 savings simply isn’t as appealing when one calculates the high cost of telecommunications, vendor management, and the risk a company assumes by outsourcing (which could cost millions to transition).
Most offshore vendors with experienced financial teams have deep experience in currency hedging, but few vendor managers do. Vendor managers should consult their treasury teams to seek a fast education on the available options. We aren’t financial advisors, don’t wish to offer you financial advice, and don’t make any recommendations. Get advice from the experts.
Keep in mind that most vendors do protect themselves from currency fluctuations. Consequently, don’t necessarily allow your prices float based on indices. Everything is negotiable, but also remember that your vendor will provide lower service if they are not profitable. Vendors track project profitability on a weekly basis and over the entire multi-year contract term. Remaining a strategic client means that your vendor must be profitable.
One element that all outsourcing executives should keep in mind is that labor arbitrage is a fleeting opportunity. Outsourcing should provide your company with significantly improved capabilities and performance. If you’re just outsourcing for cheaper labor, you are truly missing out on the greatest opportunity that outsourcing provides.
How do you manage currency risk with your vendors? Leave a note below or send us one.
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.
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.
