Outsourcing business model is usually a long term contract, in which part of the operation of is managed by an external vendor and most likely his interests is not fully align with yours. In order for these types of contracts to hold a long term partnership, the business model needs to be constructed in a way that serves both parties interest, share the risks and contains some flexibility to make changes along the way. In this article, we have gathered 7 common mistakes that can jeopardize this long term partnership, and outlined 24 ways to avoid them.
Mistake #1: insufficient Internal Training
The mistake: Outsourcing involves resistance from internal management, mainly caused by stake holders feeling loss of management control or impact their job security.
How to avoid it: (1) Create a comprehensive internal training to include: the basis for the outsourcing, the targets to be achieved, and the current management role in the new process, responsibilities in achieving targets. (2) Openly discuss management concerns and achieve their commitment to the success of the process. (3) Adjust incentive plans to comply with outsourcing goals. (4) Keep uncommitted people outside the process.
Mistake #2: Alignment of interests
The mistake: Any organization outsourcing services or processes has goals set up to the process. Any vendor participate in the RFP process has also goals to achieve. In most cases, those goals create conflict of interests – client wants to cut cost and improve quality and vendor wishes to improve profitability.
How to avoid it: (5) Create pricing plan based on SLA level achieved. (6) Let supplier benefit from the cost savings achieved. (7) Perform on-going assessment of vendor goals and help him achieve his goals.
Mistake #3: Alignment of financial risks
The mistake: Outsourcing creates risks. Main risk is financial risk of the vendor – mainly in fixed price engagements, caused by wrong estimations made by the vendor or unexpected events. Many organizations prefer to leave all risk with the vendor.
How to avoid it: (8) Create hybrid pricing plan to share the financial risks. For example: instead of a fixed-price model, use hybrid pricing with lower rates if vendor exceed the pre-defined budget. This way the vendor will be incentivized to meet the budget (assuming the over-budget rates are not profitable), and you will have the incentive to meet the budget as well.
Mistake #4: Inability to change the model
The mistake: In most outsourcing process, the actual result is very much different than plan. This is mainly caused by requirements not set forth correctly or unexpected events such as changes in load of work.
How to avoid it: (9) Create agile engagement that can be changed to some extent along the way. (10) Build exit points to allow both parties to negotiate any change in a good faith. (11) Build a steering committee to evaluate any change in the process. (12) Use and external “arbitrator” or other change management process to address changes required.
Mistake #5: Innovation and creativity Blindness
The mistake: During RFP process, procurement often likes to “compare apple to apple”, so the base of the RFP’s format is well defined, and there is hardly any room for new suggestions. The results is inability to assess creative and innovative models and benefits of specific suppliers.
How to avoid it: (13) Keep open RFP as much as possible, and leave room for creative thinking of the vendor. (14) Communicate your goals, risks and constraints and let vendors suggest how to better assess them. (15) Involve people that are open-minded to new ideas.
Mistake #6: Insufficient Targets/SLA
The mistake: Many organizations have static SLA plans (deliverable X will be submitted within 3 business days from kickoff, fines apply), or static targets like defining a minimum grade for customer satisfaction service. In fact, these types of SLA targets align the vendors to perform specific tasks to meet the minimum SLA requirements, and performance is not necessarily improving.
How to avoid it: (16) Define a dynamic SLA model with predefined relevant targets. (17) Apply a yearly evaluation of the vendor. (18) Add periodically performance satisfactory surveys and predefined measurements of quality related KPI’s (e.g quality of products delivered, average time for handling a service call etc.). (19) Create a calculated grade for the overall performance of the vendor, and apply incentive according to the final grade.
Mistake #7: Lack of exit strategy definition
The mistake: All contract has expiration date. Most of them has an automatic renewal mechanism. Many of them do not include exit strategy, making it very difficult to end contract with outsourcing vendor. Questions like who is responsible at the transition phase? What to do with ongoing activities? Who is responsible for training the replacer?
How to avoid it: (20) Take the time and generate an exit plan. Add it to your contract. (21) Keep the option to recruit vendor’s key employees. (22) Create incentive plan for the transition period. (23) Create Knowledge Management system and process with a central repository of all relevant data. (24) Define training plan delivered by the vendor.