Right from the horse’s mouth, as one would say.

Related posts:

1. A Cozy Stable for Outsourcing Vendor Management Professionals
2. How Relevant Is Forrester’s 2010 Sourcing and Vendor Management Roadmap?
3. Vendors or Partners?

How useful is Datamonitor's 2009 Black Book of Outsourcing Report?

About the Publisher

In 2005, Brown-Wilson penned the Black Book of Outsourcing, which served as a solid introduction to outsourcing for buyers.  At the time, it was one of the few published resources that touched on a wide variety of issues, including outsourcing strategy, vendor selection, contract negotiation, and vendor management.  It offered no vendor rankings, but they were made available online.  Douglas Brown and Scott Wilson know what they are talking about, so the book was well written, although it offered few resources for buyers to leverage, such as templates.

Then, in 2006 Brown-Wilson issued their first rankings. It was a bewildering group of 90+ sub lists of “Top 10 Vendors” in categories ranging from Identity Management and Access Controls to Investor Relations and Outplacement Services to Mining Engineering Firms.  All made publicly available.  Besides it appearing like a high school reunion-like method to find an award for every vendor, it became a vendor list for RFPs, used by analysts, advisors, consults, and buyers. However, it was difficult to use because of the number of sublists and the clear issue that not all subcategories made good sense.  For example, there was a bias towards India and no inclusion of Canada, the Philippines or Costa Rica – all very hot outsourcing locations at the time of publication.

Brown-Wilson must have seen the usability problem because in 2007 they simplified things when they published their first “Top 50″ vendor list.  They also included 11 clearly understandable categories that helped organize a baffling 100+ sub “Top 10″ categories of outsourcing vendors which included Agribusiness, Process Consulting, pay-as-you-go call centers, and Outsourcing and Offshoring Research Vendors (which did not include Brown-Wilson).  In an even more bizarre move, Brown-Wilson also rated outsourcing advisors and consultants by creating 15 different categories of “Top 10″ lists (as if this niche needed sub-niches).  Finally, Brown-Wilson named the top 50 green outsourcing companies.  As if non-performance, governance, and proper requirements definition wasn’t enough, Brown-Wilson suggested that companies were actually “dumping” outsourcing vendors based on their efforts to clean up the environment.  (I won’t go into the seemingly strange combination of carbon credits and emissions trading where companies really outsourced their environmental requirements and then terminated vendors for failing to meet environmental standards.)

In 2008, Brown-Wilson kept the format the same.  An overall Top 50 vendor list, and two subcategories, advisors and vendors, that were broken into seven (instead of 15) and 90+ (instead of 100+) subcategories, respectively.  The same “Green” top 50 category was reported, too.

Then, in April 2009, Brown-Wilson sold their business to Datamonitor (which had acquired a whole host of other companies, as reported by SageCircle).  In the 2009 results, the same Top 50 Vendor list was published, along with a single category of “top 10″ advisors, and just 50 subcategories of vendors were published.  Of course, now Datamonitor sells specific reports
based on the data collected for thousands of dollars per report.  So, it better be worth something, right?

Analysis of the Results of The Black Book of Outsourcing

Now, let’s look at how the results changed from year to year to see if the results are reliable.

A quick look at a few intra-categories’ differences between 2006 and 2007 results shows some really big changes:

• Health insurance/payors outsourcing vendors:  Only four vendors appeared in both Top 10 lists.  EDS remained last, despite six new vendors entering the list.  TriZetto dropped from first to ninth.  ACS, who didn’t even appear on the 2006 list, beat out all comers and took the top ranking.
• Overall BPO: Only three vendors appeared in both Top 10 Lists.  Accenture moved from first to last.  Cap Gemini moved from ninth to third.  WNS Global, who also didn’t appear in the 2006 list, beat out all comers and took the top ranking.
• Enterprise Application Solutions Vendors: Only 5 vendors appeared on both lists.  Satyam took the top spot in both years, but #2 and #3 in 2007 were new vendors to the list and the 2006 #9 (HP) and #10 (EDS) moved into 4th and 5th, respectively.

Those are some pretty major changes.  It’s like the New England Patriots dropping from super bowl contention to middle-of-the-pack performers.  However, unlike in American football, outsourcing vendors sign clients for multiple year contracts.  Why is there such variation?

The Top 50 Lists between 2007-2009 show significant variation:

• Just 16 vendors were rated in top 50 all three years (17 if you include EDS after HP’s acquisition).
• The 2009 top 20 vendors includes just nine vendors in the 2008 top 20.  Only seven of the 2009 top 20 vendors were in the 2007 top 20.  Only three 2009 top 20 vendors were listed in the top 20 in all three years.
• Not a single vendor in the 2009 top 5 vendors had previously been in the top 5.  Only one had previously been in the top  10.
• Xerox, ranked #3 in 2009, had never been previously ranked.

Why is there such variation?

The Problem

Nothing Brown and Wilson do in their survey methodology cause some vendors to appear high while other vendors to appear low – it’s really the customers who cause the ratings to be high or low.

However, Brown and Wilson’s presentation of the data is awkward.  Some examples:

1. The Top 50 Compares Apples to Oranges – How can Accenture, IBM, and Genpact be compared to Xerox?  Xerox is a one-dimensional vendor focused on managing printers and outsourced print.  While one could certainly try to make arguments about the best athlete and compare across different sports, how could you compare Michael Phelps, Tiger Woods, and Michael Jordan?  Their stats are hard to compare across categories.  This causes great variation in interpretation.
2. Non-Standard Scoring Methodology Skews Results – Brown and Wilson made a poor choice when they decided to use an 11-point scale.  Likert and semantic differential questions always use an odd number, and very, very rarely use numbers like 0 and 10 (because of their emotional value) and seldom exceed a scale of 9.  The reason is that respondents have a hard time differentiating between the numbers.  For example, Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree or Strongly Agree, Agree, Somewhat Agree, Neutral, Somewhat Disagree, Disagree, and Strongly Disagree.  Could someone please attach some verbal definitions between a 7 and 8 on Brown and Wilson’s 11-point scale?  Actually, the did it for you, and this is the shocking part: Satisfactory Performance is defined as a 7 AND a 8 on their scale.  So, they provide seven levels of dissatisfaction (0-6), two levels of satisfaction (7-8), and two levels of overwhelming satisfaction (9-10).  Then they average the scores, which makes the differences among vendors harder to differentiate.  As a result, one should expect the results at the top 50 vendors to be very tightly bunched together as a result, as they represent just 1% of the total vendors evaluated!  As a result, there are probably very, very small differences among the top 50 scores, making them highly susceptible to margin of error.
3. All Factors are Treated Equally – Brown and Wilson measure 31 different factors (they call them KPIs) in the most recent survey.  These factors are all treated equally in calculations, but few respondents likely feel they are equal.  For example, “Community Obligations and Stewardship” is weighted equally with “Results-Oriented Performance Culture.”  Furthermore, some of the factors are tablestakes, like “Lawful Conduct and Company Culture” and “Ethical Financial Leadership.”  If a company doesn’t do these things well, they are shut down by the government, regulators, or the courts.  These are “yes” and “no” type questions, but Brown and Wilson force them to be scored of a 11-point scale, too.  The net result here that truly important and differentiating factors are muted by less important or tablestakes questions.  Again, this causes respondents’ scores to be less valid and reliable.
4. How Much Do Vendor Managers Really Know – In certain total-outsource industries (like Payroll and AP), how much do the vendor managers really know?  For example, do you know how involved your payroll vendor is in the community or how much diversity they create?  With over 715,000  invitations to participate, how many of those vendor managers know the vendor well enough to differentiate across a 11-point scale on rarely encountered factors, including “Value, Mission, and Message Communication” and “Ethical Human Resources Leadership.”  How reliable are respondent’s scores in these areas?

Conclusion and Recommendations

Brown and Wilson have admirably attempted a nearly impossible task: asking vendor managers with different seniority, experience, and industries to compare almost 5,000 vendors who belong to one or more different outsourcing niches.  Kudos for the attempt.  However, their survey design methodology is deeply flawed and results in reliability and validity errors.  The result is that potential and current customers’ perspectives are deeply affected by these types of lists, as they generally form the starting point for vendor selection lists.  They also create false perspectives among the vendors.

However, here are my recommendations regarding the use of the top vendor lists:

1. Don’t believe the vendor hype regarding position in the results.  Scoring is not reliable or valid.
2. Don’t rely solely on the top vendors in each category – go deeper into the list to find the gems that may be 10 places below, but have a margin of difference among scores of less than 2%.
3. Use the factors Brown and Wilson ask respondents to evaluate to drive vendor selection, alignment and governance activities

Finally, here’s the recommendations for Datamonitor to consider:

1. Get scientific and use solid, proven survey design to drive value in the Black Book of Outsourcing
2. Consider using the Analytical Hierarchy Process to compare vendors’ performance.
3. Consider using an “importance” and “effectiveness” methodology, that asks respondents to rate both for each factor.  That would provide valuable feedback to customers and vendors, as well as create a basis for weighting factors differently.
4. Don’t allow multiple responses from one company.  In other words, don’t let Kraft submit 50 responses for one vendor.  Ask them to consolidate their responses as a corporate response to get better feedback from all levels in the organization.
5. Reevaluate some of the factors scored and remove tablestake factors, like lawful and ethical HR actions.

The book is great, and should be required reading for any outsourcing professional, buy it here:

Related posts:

1. The Business of Outsourcing Certifications
2. Offshore Outsourcing RFPs: Are They Encouraging Copy and Paste?
3. Offshore Outsourcing Vendor Governance Organizations

“It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” — Adam Smith, The Wealth of Nations, 1776

We find ourselves in uncertain times caused by globalism and the talk of self-preservation.  Where the Western world once sat behind the wheel, driving technology and automation into our businesses and personal lives, poorer countries are now poised to operate, maintain, and improve the technology the West created.  Adam Smith’s great “Invisible Handle” metaphor contains a balancing paradox.  The West’s businesspeople moved factories and service operations to foreign countries to take advantage of low wages.  These wages improved, creating new economies in once poor countries.  Over time, an equilibrium will be found and will persist until new entrepreneurs drive innovation, which will again make certain countries mighty until these innovations are outsourced or imported to other countries for the poor countries’ benefit.

And so the seesaw rocks back and forth.

One of the great frustrations of those who see the pattern of globalization is the extent to which the normal, non-entrepreneurs will go to protect their world from change.  Like a great freighter’s anchor, the protectionists will dig deep to prevent natural change rather than hoisting anchor and going with the natural flow.  The natural flow is unstoppable, because unnatural barriers to change will cause catastrophic disasters.

Your only choice is preservation of self-interest – to become rich and wealthy through innovation.

In the outsourcing world, which started in manufacturing, moved to information technology, and now is squarely focused on services, the challenge is innovation.  Driven by economic pressures, more often than not, a company outsources XYZ and takes the entire savings to the bottom line.  The savings is just temporary, as the labor arbitrage or a vendor contract negotiation will find equilibrium again.  Consequently, outsourcing critics speak truthfully about the impact of outsourcing to local jobs, although most see only the short term impact.

A company that outsources and does not invest in innovation or transformation misses the great value of that could be created by infusing the freed capital back into its operations.  The long term impact of the failure to innovate is devastating because competition will, eventually, find balance again.

The problem with outsourcing critics is that the laws they seek to enact are noting more than the proverbial finger in a dam’s leak.  Eventually, innovation will be exported and the competitive equilibrium will bypass the very communities the critics wish to preserve.  Halting globalism is simply impossible.

The critics need to focus on innovation, not preservation.  Thomas Friedman’s “The World is Flat” was not so astounding for its exposure of the extent of outsourcing.  Rather, the exclamation point of Friedman’s book was the last few chapters that explained the souring of Western education, the very fuel of innovation.

Companies who take outsourcing savings to the bottom line are no less at fault than our governments and societies.  Companies that outsource and do not gain great competitive advantages through their partnerships also are at fault.   Communities and politicians who expect protectionist measures to work are at fault, too.

In this global environment, the winners are those who realize their self-interest is tied to creation, not preservation.

Related posts:

1. Human Resources Outsourcing: Where’s the Value?
2. The Black Book of Outsourcing – Invaluable Resource or Red Herring?
3. Impact of Foreign Currency Exchange Rates on Outsourcing

Despite the never-ending flow of positives clients, vendors, advisory firms, and the Philippine government use to describe the Philippine outsourcing market, the present day reality is much different.  The Philippines actually poses a significant future risk to your operations.  Here’s why:

• Workforce Attrition – Less than 3-4 years ago, more than one well-known CEO in India explained to us, “There is an unlimited labor pool.  Wages will never increase.”  Well, that certainly wasn’t true.  Vendors and captives also exploited low wages by bidding-up labor markets in a savage back and forth talent war.  Many companies sought shelter in Tier 2 cities, but the peaceful period was brief, and companies turned for shelter in Tier 3 cities – where the same fate ha occurred.  The Philippines are experiencing the exact same phenomenon.  In fact, one CEO even recently pitched opening a center in the Southern islands, which is a place no company should consider, unless tapping into Tier 2 cities along the Indian-Pakistan border or Pakistan-Afghanistan appeals to you.
• Complex Services Meet Inexperience – One aspect of BPO that differs from ITO is that there is no education program to develop call center and backoffice outsourcing operations leaders.  Consequently, there are insufficient quantities of talented middle management in the Philippines.  Now that most companies have outsourced a little “easy stuff”, they are  outsourcing significant amounts of simple work, more complex work, as well as acquiring transformational services.  The management challenge is huge.  Where a call center used to get by on relatively easy workforce management planning, large operations demand sophisticated WFM skills.  These skills are incredibly hard to find in the Philippines, unless you import them or buy them from other vendors/captives (see the attrition issue above).
• Political Uncertainty – One of the great underestimated aspects of the Philippine political scene is its complete uncertainty.  You’ve probably already read the annually updated US State Department Travel Advisory.  However, take a moment to review all the other countries with similar warnings.  Pundits will argue that 1) the problem is in the south and 2) no government would stop the expansion of the outsourcing industry.  We generally agree, with two major caveats.  First, it takes but one election to ruin a country’s future.  Second, if the Philippines become an unsafe destination for business men to visit or for long term deployment of vendor management personnel, outcomes become difficult to manage.
• Currency – Currency instability is challenging in the Philippines.  While Indian companies took significant steps to hedge their currency, most operations in the Philippines are owned by foreign companies.  These companies don’t hedge, so they pass their costs onto you.

Essentially, the Philippines of today is the India of 3-4 years ago.  There is no reason to expect a different outcome.

However, while there are challenges, sophisticated vendor managers can mitigate every one of these challenges if they focus on strategic, long term issues that accompany outsourcing efforts.  Vendor managers who focus solely on day-to-day issues will run into profound problems if they don’t diversify locations, manage financial currency risk, or seek creative ways of bridging the middle management talent gap.  If managed effectively, the promise of the Philippines is definitely positive.

Related posts:

1. Impact of Foreign Currency Exchange Rates on Outsourcing
2. Another Tale from “When You Don’t Have Vendor Management Governance”
3. Human Resources Outsourcing: Where’s the Value?

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.

Related posts:

1. Onsite Vendor Management in a Global Outsourcing Environment
2. Human Resources Outsourcing: Where’s the Value?
3. Outsourcing Governance and “Who Owns Supplier Performance Management?”

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.

That’s right, HR outsourcing provides very limited value other than labor arbitrage and reduced capital spending for a vastly neglected internal department (which we’ll explain the reason for in a moment).

The proponents of HR outsourcing tout the savings outsourcing provides, which is generally focused on centralizing and providing state-of-the-art Tier 0 or Tier 1 self-service and call center functionality and supposedly standardizing/providing better deals with enormous number of HR vendors (e.g., printing companies, benefits/insurance, regulatory filing consultants). In some cases, outsourcing provides a significant one-time upgrade to poorly performing internal organizational process: employees wait less to speak with HR teams, self-service information reduces costly high-tough transaction volumes, and outsourcers’ internal teams or their external vendors for insurance provide vastly improved leave of absence management, and other services.

The problem is that these solutions all focus on the cost of the Human Resources department. Let’s be honest here and say that it’s true many human resources teams have long ago lost their strategic focus. Consequently, they have lost their relevancy to the company and justify their existence based on reduced risks (e.g., fewer lawsuits, better employee attendance). Not surprisingly, HR teams receive low or even substandard funding. In tough years, they get even less. Luckily, technology costs have dropped substantially, and many HR teams can now afford HR intranets and portals to provide policies, tools, and communication to managers and employees.

Still, HR teams are pressured greatly by ever dwindling budgets or budgets that do not support expanding employee counts in other teams. The ratio of HR employees to other employees has climbed from 1:50 to often 1:200 or 1:300…or even more. Stuck with the need to provide services on a reduced budget, HR executives turn to Human Resource Outsourcing companies. We’ve met with all the big names and seen their sales pitches about how HR can improve its process performance by outsourcing.

Sadly, most of these companies provide service from costly locations, often from the US or Western Europe. So, labor arbitrage is a one time 10-20% “benefit” companies get from eliminating tenured HR professionals or HR professionals located in expensive areas and hiring the vendor to provide less expensive, less-seasoned employees in cheaper locales. Maybe the company will get that big PeopleSoft upgrade that it so desperately wants (or needs, if Oracle stops supporting older versions many HR teams use). That saves a few million dollars, for sure, as does the reduction in IT staff necessary to support expensive packaged applications.

By now, you can sense our skepticism about Human Resources outsourcing. There’s a pretty good reason, too.

That’s because, with all respect to Philip Fersht’s blog entry at Horses for Sources, and he’s a pretty on the money guy you should trust, the purpose of HR isn’t to be a “driver and facilitator of sound HR practices”. That’s table stakes and represents the bare bones minimum requirements of HR’s service. It’s also the core competence and sole solid service of all the human resources outsourcing vendors.

The purpose of human resources is to manage the cost and performance of human capital. Human capital represents a significant cost to companies – it’s what we pay for our employees. It’s the organization, alignment, and performance of teams and individuals. The true purpose of human resources is to help the company reduce the cost and improve the efficacy of human capital.

Let’s put it this way: a 20% reduction to the cost of delivering human resources services in a large company with a $50M human resources budget is a miniscule $10M as compared to the other $1.5B the same company may spend on human resources.

A good HR team attempts to create a 3-5% impact to the the $1.5B cost of employees. Now, that’s a big impact that absolutely no HR outsourcing vendor is going to contract to. In fact, HR outsourcing vendor don’t even have that level of competency or, in the case of the consulting firms who have created/purchased outsourcing teams, are too expensive and too distant from the clients’ core operations to create an impact.

The truth is that HR teams’ small capital budgets and thusly low efficiency is the result of years of focusing on intranets, portals, IVRs, etc. that create a minor impact to HR budgets. Mired in years of underinvestment, its no surprise HR executives are pulling their rip-cords and outsourcing the entire lot of expensive service for a tiny 10-20% one time savings (that will continue to increase year over year due to vendor COLA adjustments) and a nice one-time upgrade of HR systems they could otherwise not afford. Afterwards, they look pretty good with a smaller budget and better service that is impenetrable to further budget cuts due to vendor contractual requirements. There’s no where else to cut after an HR outsourcing deal, except if you want your employees to talk with Indian HR agents. It’s all great until the contract is up and the vendor raises their rates to “market”, as all vendors do when they own your butt at the end of a 4-6 year outsourcing contract. Explain that to your CFO and your business partners…

Furthermore, I’d suggest that HR is the one part of the company with the lowest level of vendor management skill. Compare HR to IT or Operations. Who understands operational know-how most? Who is more likely to employ a true operational-focused vendor manager in the key vendor management lead role? Hence all the problems already in HR’s core operations.

Now, ask yourself if HR outsourcing brings a company closer to their true strategic mission. Ask yourself if HR outsourcing automatically brings a company more than a one time, minor savings event. Ask yourself if HR outsourcing as managed by a HR professional is more likely to succeed as compared to a call center outsourcing program.

The contrarian will now make the Michael Porter “focus on the core” argument, suggesting the HR outsourcing will free the HR team from focusing on associate complaints or open enrollment and allow them to focus on strategic issues. There is some truth in that argument. However, I cannot remember the last time I saw an outsourcing deal which 1) reduced $10M in annual internal costs, 2) avoided $5M in capital expenditure over the contract term, and 3) funded a larger team, costing an incremental $2M, of super strategists that would focus on core responsibilities. Outsourcing professionals know that #3 doesn’t happen often and good business practitioners would guess that the same team that had $10M of “opportunity” and a litany of service issues probably wont pull of a transition from being a poor operations manager to a enterprise strategic player. At the very least, few business executives are going to put their butts on the line and suggest that $2M can reduce the cost of human capital by 3-5%. That’s the type of gamble that few will take and fewer can succeed at.

Otherwise, they’d already be doing it…

We’d love to hear your thoughts! Let’s us know what you think by commenting below.

Related posts:

1. Definition of Vendor Management
2. Insights on Procurement Outsourcing
3. Onsite Vendor Management in a Global Outsourcing Environment

• Establishing Goals – Just as employees need clearly established goals, operations need clearly defined performance parameters.  When selecting or managing vendors, vendor managers must optimize their opportunity to achieve these goals by using third parties companies.
• Selecting Vendors – The fine art of vendor management is essential to optimizing operational results.  Different vendors have different strengths and weaknesses, and it is the vendor manager’s responsibility to match the right company with the desired performance characteristics.  Failure to consider this comprehensively could lead to complete failure.
• Managing Vendors – On a daily basis, vendor managers must monitor performance, provide feedback, champion new projects, define or approve/disapprove change control processes, and develop vendors.  There’s a tremendous amount of detail to this aspect of the discipline, and we’ve covered this in many posts here.
• Consistently Meet Goals – Operations must perform within statistically acceptable upper and lower control bounds.  Everything the vendor manager does should focus on meeting goals, from providing forecasts to defining requirements, from ensuring vendors have adequate staff to ensuring the staff have completed all required training.

Note that vendor management is not the same as operations management, although it is remarkably similar.  In an outsourcing relationship, vendor managers must understand the drivers of the relationship in order to ensure the vendor is successful.  Vendor managers are not empowered to perform all aspects of the outsourced operation.  Rather, they must influence the vendor to perform.  This level of influence is different from managing employees because of the economic differences in the relationship: a company typically represents 100% of an employee’s income, but rarely represents even 5% of a company’s revenues.  More to the point, most outsourcing contracts are priced by vendors in a way that even if the vendor paid the maximum nonperformance penalties they are likely to still be profitable.  So, the conundrum vendor managers face is how to influence profitable vendors to meet performance objectives when reaching these levels are likely to be less profitable in the near term….

Related posts:

1. Human Resources Outsourcing: Where’s the Value?
2. Vendor Management Job Descriptions
3. Vendor Management: Quarterly Review Methodology

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.

Related posts:

1. Another Tale from “When You Don’t Have Vendor Management Governance”
2. Outsourcing Vendor Management Organizations