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.