Theoretically, outsourcing elements of your business’s operations frees up resources to be used in the more profitable areas in your business. Unfortunately, in reality outsourcing an existing headache can sometimes become a costly migraine.
There are several reasons why outsourcing services like maintenance contracts can sometimes go astray. The most common causes are in the contract’s design. If the external supplier is not given enough incentive to maximise the customer’s profit, then it’s rare for the supplier to outperform.
Outsourced contracts involve a lot more work and skills to manage than you might expect. So it’s important to get it right from the beginning, because it’s much harder to fix poorly performing contracts once they’re underway.
Other reasons why outsourced contracts can sometimes miss the mark include:
• a poor initial decision on whether to outsource or not
• the customer doesn’t understand maintenance or how to manage it
• the outsourced supplier doesn’t have the skills or resources to deliver on the promised outcomes
• the supplier gets slack when the customer doesn’t have a system in place to measure their performance.
Outsourcing doesn’t necessarily have to end in tears. With some careful pre-planning, research and proactive contract management, you can ensure that you maximise the supplier relationship, and reduce the chances of any nasty surprises. This should all be done before engaging any external service providers.
There are five golden rules for outsourcing success. These also apply to organisations that need to adjust their outsourcing contracts to bring them back into control.
1. Know why you are outsourcing.
Firstly, identify the core reasons why you want to outsource, and ensure the benefits of outsourcing outweigh negatives. Develop clear, measurable performance indicators, and make sure your own people understand how to manage the business you are outsourcing. Make sure there are alternative suppliers of the services you want to outsource in your location.
2. Understand how to manage the area and keep the right controls.
The last thing you want is for your supplier to assume control in a way that makes you vulnerable if they leave or unable to change them. Do not assume that by outsourcing you can abdicate responsibility to the supplier. Do not outsource what you cannot manage.
Ensure you have all the right processes, key performance indicators (KPIs), accountabilities and skills in place to proactively manage the supplier and know what is going on at all times. Make sure you retain ownership of the data rights, or you run the risk of becoming captive to your supplier.
3. Select a supplier who can deliver.
Just because a supplier is a “specialist” in a particular area, don’t assume they have the personnel with the right skills for your specific business. Confirm who will take the key roles in your business, rigorously check supplier staff references and lock in the right to refuse future replacements. Be aware that it’s common for suppliers to siphon off their top performers to more demanding customers.
4. Set up a tight contract.
Make sure the contract contains enough incentives for the supplier to maximise your profit, not simply minimise your costs (or maximise their profits). Make sure all contractual details can be tracked and managed. Check for and eliminate hidden mark-ups and define the timing and format of contract reviews.
5. Proactively manage the contract.
Make sure you have the necessary resources in-house to manage your supplier and upgrade if you don’t have them. Resource the contract according to its value to you. Often contracts worth tens of millions are overseen by junior managers which can result in a considerable loss of value.
Ensure you have enough resources to cover the KPIs, reviews, targets and baselines. Don’t underestimate the ongoing time this requires – managers often forget this.
Ian Woods is an Associate Principal of operational improvement firm Partners in Performance.
