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02 August 2004
A new level of engagement between clients and their outsourcers focuses on the greater gains of performance improvement
The outsourcing industry is maturing in service delivery and is living up to the expectations laid out in contracts. Now it's time for outsourcing to enter a new phase in which outsourcers focus on the higher level outcomes clients really want to achieve in their businesses. That will require a completely different level of engagement from both outsourcers and their clients.
"When I was first involved in outsourcing, as a client in the 1990s, each outsourcing deal was virtually handcrafted from scratch," says Xansa Sales & Marketing Director Fraser Winterbottom. "There were no templates or established best practices to cover subjects like service level agreements, TUPE arrangements and governance structures. Nowadays, with the number of deals being signed, these areas are well understood, and on the whole done pretty well."
A recent report on the performance of outsourcers by consultancy Morgan Chambers backs this view, showing that on the whole clients were reasonably satisfied with the way the industry handles these basic, transactional issues.
"The outsourcing industry has also shown it can deal with a much greater level of complexity," says Winterbottom. "We're outsourcing a wider range of activities, not just infrastructure and IT, but business processes. Most deals now involve some element of offshoring, with all that entails in selecting the right processes to outsource, managing the transition and dealing with issues of communication and legal and regulatory compliance."
New priorities for outsourcers
However, says Winterbottom, clients now want outsourcers to engage with a new set of priorities. In the same Morgan Chambers study, clients said they wanted more innovation from their outsourcers, more sharing of both risks and rewards, and more measurement of the softer outcomes of outsourcing such as customer satisfaction and brand perception.
"Clients also wanted more involvement from senior stakeholders after contracts were signed to discuss their changing needs and identify new opportunities," says Winterbottom. "Why is it then, so many outsourcing negotiations seem to revolve around cost savings? Cost savings are important and can be substantial. Yet gains from performance improvement can be even greater."
Winterbottom cites a recent offshoring engagement with a financial services client where the client successfully achieved labour savings which ran into hundreds of thousands of pounds. "But there's only so much cost that can be wrung out of a process," he says. "By applying people's efforts in a different way and improving the process to clear backlogs and enhance quality, extra savings and in fact, incremental revenue generated, ran into many millions."
Winterbottom says the priorities when setting up an outsourcing relationship are similar to Maslow's hierarchy of needs. Psychologist Abraham Maslow organised human needs into a pyramid with basics like food and shelter at the bottom. Higher level aspirations such as relationships and self-actualisation are at the top. As each level of need is satisfied, the focus moves up the pyramid. It's only if the bottom layer is threatened that people begin to worry about the basics again.
"Outsourcers and their clients need to recognise a similar hierarchy in their own relationships," says Winterbottom. "Once the basics are satisfied, we should be able to talk about the higher level possibilities such as innovation, risk sharing and identifying new savings," he says. "So why is 'labour arbitrage' still such a buzzword when competitive labour costs are surely part of the worthy but dull basics which any outsourcer should be able to deliver? If you spend the majority of time haggling over day rates, we miss the opportunity to identify far greater gains and a new level of performance."
Taking the engagement to a new level
To consistently gain these benefits, outsourcers and their clients need to engage on a different level. In Xansa's experience, as the business value delivered by outsourcing increases, so does the importance of relationship management. Management of the contract is still important, but it's no longer in the driving seat. Instead the contract becomes a flexible and ever-changing reference point shaped to reflect current business needs, not a rigid straitjacket which constrains the relationship.
"Outsourcers and their clients need to create a shared vision of the business value they expect to get from the relationship," says Winterbottom. "They also need to constantly revisit and repaint the vision so the way they work together can be adapted to take advantage of changing circumstances and new opportunities. This is the basis of an effective business relationship."
"Procurement processes should support this flexibility. A contract which covers only the bottom levels of the pyramid will prove to be a really poor outcome in the long run. Business requirements will change. Then the contract, which has had so much time and effort poured into it, will become redundant and an obstacle to progress."
"Of course the basics need to be covered. And we are responsive to requests than can entail hundreds of detailed questions about how the outsource plays out. But why not just tell us your business needs and we'll structure the deal to satisfy them?" says Winterbottom.
High performing relationships are instantly rewarding
Winterbottom says clients too must rise to the challenge of engaging with their outsourcers. Just as everything cannot be outsourced, neither can every part of outsourcing negotiation be delegated.
"It's good that organisations have specialist functions to ensure everything is done professionally and with clarity of expectations, requirements and responsibility," he says. "But there's no substitute for sponsorship and involvement from the highest levels of the business."
Without active, top-level sponsorship, it becomes too easy during negotiations to ask and answer the wrong questions resulting in a lowest common denominator solution. This makes it hard for outsourcers to deliver the very value-creating opportunities which clients say that want.
"Higher level stakeholder commitment enables both outsourcer and client to spot and capitalise on opportunities. It need not entail a great investment of time but it can be hugely valuable", says Winterbottom. "At Xansa, when we've renewed and restructured contracts, not on the basis of input costs, labour and transaction charges but on the basis of jointly-identified business opportunities, business outcomes and value delivered, the relationship has become much more rewarding, instantly."
Clients want more out of their relationships with outsourcers, but this can only be achieved if both sides are ready to move to a different level of engagement.
"It's been said that successful outsourcing requires not just a high performance outsourcer but a high performance client," says Winterbottom. "It also requires a high performance relationship to bring them together."
