Companies choose to outsource their operations for a
variety of reasons, one of which is usually lower
costs.
But it is not long before the outsourcing customer moves beyond
this initial focus to examine what additional – and wider – returns
it can get for its money.
This involves the company asking itself some fundamental
questions. Is cost still the main priority, or higher quality? Or
is it effectiveness and efficiency on an ongoing basis? Time and
again, our experience shows that these questions bring the CEO of
the customer to the conclusion that – from a technology standpoint
– higher quality is the biggest plus-point of the outsourcing deal.
And that the path to higher quality is innovation from the
supplier.
In recent years, this growing realisation has driven fresh
approaches that have radically changed the way outsourced
operations are handled. Crucially, these approaches are based on a
clear and explicit path to the future quality benefits that
innovation will deliver. And IT operations is an area where this
trend is especially marked.
The shift in focus from cost to innovation-driven quality
represents a significant change in the customer’s mindset, and it
is important that the outsourcing supplier changes with the
customer.
This shift requires both sides to revisit the original agenda
and adjust the balance between cost and quality, since it is
unreasonable for the customer to demand post-deal a rise in quality
at the current cost-base and service levels.
However, many customers – especially those with little prior
experience of outsourcing – move unilaterally to a quality focus
without even telling their outsourced provider. This inevitably
puts severe strains on the relationship. The customer starts to
criticise the supplier for a lack of quality-boosting innovation in
service delivery, but the supplier, quite justifiably, counters
that it is meeting the cost requirements under the contract. The
result is a fractured relationship and damaged trust.
The best way to tackle this mismatch is to prevent it from
happening in the first place. The customer should recognise that,
while it may have entered the relationship for tactical
cost-focused reasons, the context has changed.
With the costs now contained, and the business positioned to
climb out of the “hole” that prompted the decision to outsource,
then the time may be right to push the button for a greater focus
on quality. And the route to quality is through innovation, above
and beyond the original innovation used to deliver the cost
agenda.
This route then needs to be mapped out in hard deliverables. If
innovation has not initially been built into the agreement on a
formal basis, now is the time to do so. The most fruitful basis for
innovation in the long-term is for both parties to come together in
a regular, planned and structured way to discuss possible
innovative initiatives.
The output from these meetings should be reported upwards to
senior management and, where requiring far-reaching change, to the
board.
Crucially, suppliers and clients need to agree that nothing is
out of “innovation bounds”. So instances where innovations are
suggested by the outsourcing supplier and rejected by the
customer’s contract management team, need equally high-level
sanction and debate as those that are approved.
The importance of a formal innovation process is underlined by
our experience of auditing and mediating in outsourcing
relationships that have gone wrong. All too often the customer
claims it entered the agreement for innovation, when in fact the
main motivations were price first and quality second.
Having successfully migrated from an in-house department that
was both high-cost and low-quality, the customer has developed a
“false memory” that it always wanted innovation – and has then used
this misconception as a basis for criticising the provider.
How does this false memory come about? Here is a particularly
telling observation. When we sit down with both sides of a failing
outsourcing relationship, we generally find that the customer’s
contract management team – the key interface between the customer
and supplier – has nobody left in it who was actually around when
the deal was done.
This can have massive repercussions. The objectives for entering
the agreement have become a memory handed down from a previous
generation of managers, and have changed in the telling. A new set
of people have come on board who believe their primary function is
to keep the costs of the outsourcing down.
And this is what they proceed to do, partly by refusing to
approve proposals for innovations that might increase cost as well
as quality.
Often this basic premise is wrong. Innovation can be about
saving costs through application of technology. Or it can be about
enablement which more than offsets higher costs through better
return on investment.
Either way, when we examine the supplier side, we usually find
there is a clear audit trail of innovation that has been put on the
table and rejected.
Meanwhile, the CEO and board of the customer, unaware of the
gridlock lower down, continue to protest that the outsourcing
supplier is failing to deliver innovation and thereby higher
quality.
How can this gridlock be broken? The first step is to
demonstrate that innovation has been repeatedly put on the table by
the supplier, but has been rejected by the customer’s costs-focused
contract management team.
Once this problem has been pinpointed, there are proven
techniques for addressing it. These include building governance,
reporting and escalation procedures to ensure that any proposed
innovation offering a given level of potential savings is escalated
to senior management on both sides. Summaries of innovation
offered, accepted or rejected then need to form a regular part of
six-monthly discussion sessions between the client and supplier
executives.
Whatever processes are put in place, the most important driver
to support innovation in outsourcing is that both the customer and
the supplier should stand to gain from it.
This means striking a win-win arrangement under which each side
gets a fair share of the benefits. Otherwise, that innovation
logjam may remain stubbornly stuck in place.
Jean-Louis Bravard and Robert Morgan are authors of “Smarter
Outsourcing”. Robert Morgan is a founder director of sourcing
advisory firm Morgan Chambers. Jean Louis Bravard is managing
director at EDS Global Financial Services Industry.