360° Vendor Management

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.

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.