Good outsourcing contracts contain service level agreements, which define performance parameters of the services companies procure from their vendors. In previous popular articles, we addressed the general structure of Outsourcing Vendor Metrics and provided more detailed information on Operational Service Levels and Metrics. However, operations are data rich environments with a multitude of metrics that an experienced vendor manager could use to manage the vendor. While typically 4-7 different metrics will be memorialized in the contract as formal service level agreements that trigger penalties and incentives, these alone are insufficient to effectively manage the vendor.
The rationale is quite simple. Believe it or not, but outsourcing vendors have tremendous pricing discipline. They analyze Net Present Value and Internal Rate of Return on their investment in the client contract. All factors are included, such as labor, facilities, technology, telecommunications, etc. More importantly, savvy vendors develop probability models of anticipated performance against service level agreements (which is what they do with your internal performance metric data - if you give it to them). They use SOX-driven corporate guidelines when developing these models which force them to assume some degree of failure. This failure is then built into the price - essentially allowing the vendor to obtain desired financial performance even when performance fails to meet client expectations. This dramatic difference in rewards and incentives between clients and their vendors should encourage clients to drop “partnership” and “partner” from their lexicon, except for the fact that overcoming this financial gap requires true relationship building.
In a nutshell, service level penalties are insufficiently severe to drive vendor performance. That means successful vendor managers must use other levers to compel vendors to perform. One of those levers is a comprehensive key performance indicator program.
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With increasingly complex vendor management programs and more interest in developing outsourcing and services relationships, it is no surprise that measuring vendor performance is an increasingly important topic on vendor management executives’ agendas. We previously wrote a very popular article on Outsourcing Vendor Metrics. Our readers have provided plenty of positive feedback via email. Overwhelmingly, vendor managers have asked for more detail and examples of each category of metric to improve their service level agreements. In this article, which is part one of several upcoming articles, we delve deeper into detailed operational service level metrics outsourcing executives can use to manage their projects effectively
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Most good outsourcing contracts require the customer to fulfill only two primary obligations: protect the vendor’s intellectual property and to pay for services in a timely manner. While most buyers have little challenge with upholding it’s confidentiality obligation, vendors universally will point to timely payment as the number one problem they experience with their customers after implementation. As an executive managing an outsourcing vendor, mundane invoice processing unfortunately gets second billing. The process of paying vendors actually is more strategic than you think - and it is the subject of this article. Read on to learn how to manage this important vendor management process more effectively.
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Performance management is a fundamental aspect of managerial effectiveness. Establishing clear goals with your boss, peers, and employees is essential. With vendors, you have contractual service level agreements.
At certain points in the year, good managers check-in with their team members to provide feedback on progress to goals. At the end of the year, employees get final reviews - complete with bonuses and merit increases. With vendors, you have the quarterly review - one of the most important tools in a successful vendor manager’s tool belt.
In this article, we review the essential aspects of quarterly reviews.
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A couple of weeks ago, Phil Fersht kicked off a firestorm of conversation with his Horses for Sources article on HR Outsourcing. We shared our opinion on the topic in our article debating the value of HR Outsourcing.
Well, this week, Jason Busch published his opinion on procurement outsourcing on Spend Matters. Jason is one of the preeminent strategic sourcing, procurement, and spend management experts, and we encourage strategic sourcing and spend management professionals to keep a keen eye on his blog.
In our opinion, the value of procurement is more than the output of it’s processes. Procurement’s specialized category and commodity knowledge, as well as it’s deep relationships with customers that takes years to develop to the high level of trust necessary for business executives to allow procurement to be a strategic partner, are the key fundamental core aspects of “procurement”. Vinnie Mirchandani, of Deal Architect fame, comments on this in his recent article, “Procurement Outsourcing Perspectives“.
We simply do not believe that wholesale procurement outsourcing can realize the value of an internal organization because of the entrenched customer relationships that enable and empower strategic sourcing initiatives. A deep analysis of core procurement would show that procurement functions have a few key processes: sourcing, spend management analysis, and requisition/purchase approval. Fortune 100 procurement teams add: supplier diversity, ethical sourcing, supplier performance, and green alternatives. Organizations that allow procurement teams to have real influence, also further differentiate their sourcing expertise by direct versus indirect goods and services.
In our opinion, there is little opportunity to achieve value in procurement outsourcing after analyzing these core processes. Here are a few opportunities:
Application Development and Maintenance - outsourcing application development and maintenance of the procurement/spend management software the team uses. Given the high fees Ariba and similar companies charge for software support, there is opportunity, but there is little offshore expertise in this application, much less knowledge of a strategic procurement function. With more and more companies are using hosted solutions, there’s dwindling value here.
…that’s it, and here’s why:
Not Offshore Compatible - The greatest savings in an outsourcing deal is frequently arbitrage. In this case, the internal customers are highly unwilling to accept the difficulties of offshore accents, culture, and relationships. At the very least, it wont motivate them.
Insufficient Scale - Each of the processes we’ve identified have very small scale, frequently amounting to 5-15 FTEs. For most companies, that’s too small to consider viable. The savings are minimal, too.
Process Improvements - The second greatest savings opportunity, and frequently the greatest savings lever, is outsourcing a function to an expert vendor that can make major improvements to the process due to their domain expertise. The main process of a procurement function is the management of purchase approvals, which is likely already electronic and automated. The costs of moving to a new platform are unlikely to offset the very tiny incremental value of moving to a new platform and the process improvements are likely to be equally small, with the greatest opportunity lying in the ability to provide better and more granular analytics.
Core - Generally speaking, companies should avoid outsourcing core functions. Sourcing direct goods and services that makeup of a company’s product or service is about as “core” as Michael Porter’s “core” gets.
Vendor Management Challenges - Managing outsourcing vendors for results is very, very difficult. Other than ensuring requisition approval processes flow smoothly (and these are frequently slowed by internal customer reviews anyhow), what operational metrics can be established to ensure a smooth running procurement function? There are a few, but they are difficult to track and you will frequently excuse excuse the vendor from paying penalties because your company was at fault for the failure.
Finally, and this is the most important item:
Lack of Vendor Expertise - Review the list of procurement processes and then compare that to the vendors’ expertise and you will see a significant gap. Most outsourcing vendors have little to no expertise in strategic sourcing, domain knowledge, supplier diversity, negotiations, etc. Vendors entering this space will play up their domain expertise in accounts payable and receivable functions. While there is a great opportunity for outsourcing those areas, the type of domain expertise necessary to run a spend management function is not the same. Given the specialization necessary to run this function, CFOs who really consider outsourcing procurement teams, don’t understand strategic sourcing.
Instead of outsourcing procurement functions, CFOs, CIOs, COOs, and CPOs should consider building vendor relationships with niche specialty consulting firms that can assist with specialized and infrequent sourcing activities or that can jump start ethical sourcing or green initiatives. In fact, more and more procurement functions should consider allocating 30%-50% of their budget to consulting or advisory firms to assist with strategic initiatives that their internal teams lack the skills to manage. Outsourcing vendors could not begin to tackle items such as outsourcing and advertising, among many others.
In summary, ignore the hype of outsourcing vendors and their paid advertisements in “research” papers and news articles. Procurement outsourcing is a dud today. However, we look forward to a vendor developing sufficient expertise and internal teams developing sufficiently strong performance metrics to make procurement outsourcing viable some day.
Operations teams have historically organized themselves very effectively around their core operations centers. Dedicated training, quality, reporting, and operations professionals were located very closely to the daily riotous call center and back office operations. With little argument, close proximity ensured clear lines of communication, close collaboration, and the ability to quickly bring the right talent to daily operations issues.
As Phil mentions in his article on globalization, your focus as a vendor manager or outsourcing executive is on the global labor market. Now that your operations are located in India, Jamaica, Central America, or the Philippines, effectively managing operations from North America or Europe is far greater challenge. Your domestic teams are asleep during the action, or they are separated by thousands of miles and significant cultural differences. In addition, reading real-time or daily reports does not give you the same information that a walk through a call center floor does, where you can see opportunities to improve efficiency and keep the peace among agents. It’s simply more difficult to manage operations from a distance. If you have not considered an alternative management model, maybe you should. In this article, we will address some of those opportunities.
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We recently completed an analysis of the value a series of outsourcing programs had created for a very large company. That company had never truly baselined and tracked value outsourcing programs had created. So, the exercise was similar to a paleontology event trying to find the old bones. The client had created value through offshore labor arbitrage, but because senior executives didn’t enforce a “take it to the bottom-line” approach to outsourcing, which is what they had desired, day-to-day operations leaders years later continued to expand outsourcing relationships - with absolutely no savings. Instead, continued expansion was driven by limited investment in automation and process improvement. If the client had invested in technology and process improvements, there would be no need to keep some resources - regardless of where they were located.
Human resources outsourcing has a similar problem…and today we’ll look at the value Human Resources Outsourcing provides. Rather, what it fails to provide.
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Vendor managers often are overwhelmed with metrics, but these metrics do not always give a complete picture of the outsourcing vendor’s operations. We’ve mentioned a variety of metrics to date, and today we’re focusing on the major categories of metrics vendor management teams should focus on.
In short, there are operational service level metrics, key performance indicators, and transformational metrics.
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Outsourcing vendors’ sales executives make well more than $200k per year. Needless to say, if you have made the right choice to run a RFP despite the vendors’ sales team’s best efforts (sales teams never want objectivity, they want to sell based on their relationship with your executives), you can pretty much ignore much of the vendors’ written responses. Behind the scenes, a well-paid group of junior salespeople are busy copy and pasting responses given to other companies into your proposal format. Of course, a well-written RFP prevents much of this, and we’ll soon be publishing more on that topic, but needless to say, it’s fairly impressive how much sales jargon, three letter acronyms, and cryptic diagrams a vendor can jam into a proposal.
This is why site visits are essential. You have to see the actual operations management team that will process your work. The trick, however, is to have absolute control over the agenda, otherwise the vendors’ sales team will copy and paste their same lame material into a PowerPoint.
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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.
