Working With Outsourced Suppliers
Communication and Clear Expectations Are Key
More and more companies are assigning people to roles in outsourcing management; and whether you work with an offshore supplier for IT technical support or a company closer to home for payroll and accounts receivable, outsourcing is a growing trend.
The leading motivation for outsourcing is cost reduction.
However, there are other advantages, including more efficient use of resources, improving service, and the ability to work with true experts in non-core business operations.
Regardless of why you're using an outsourced supplier, managing the ongoing relationship with that supplier is crucial. From the moment the contract is signed, you want to make sure your organization maximizes its benefits.
So, how do you best manage an existing outsourcing contract? How can you build a strong relationship that protects your company from unnecessary disagreements and conflict? And how do you avoid wasting valuable time and resources – and, perhaps, avoid losing some of the benefits of the outsourcing arrangement?
This article identifies some tactics to help you work toward a healthy relationship with your outsourcing partners.
For explanations of common outsourcing terms, see Words Used in... Outsourcing.
Understand the Contract Details
The contract with your supplier is an essential reference that allows both parties to be clear about their obligations. So it's important that you're completely familiar with details it should cover such as:
- The scope of the contract: what is and what isn't included within the terms of the contract.
- Which party is responsible for what.
- Exact deliverables, and any specified time frames.
- Intellectual property and confidentiality, and the approval processes needed for changes to the outsourcing relationship.
- The extent to which you can be involved in approving key appointments to the supplier team.
When an organization switches from carrying out an area of work internally to having this supplied by an outsourced provider, it's common for a large number of the people who had been doing the job internally to be transferred to the new supplier.
However, the organization will usually keep an internal team, which is often known as the "retained function". You need to make sure that these people are clear about changes to their roles, and how they are expected to work with their former colleagues.
Measure Performance Regularly
You want to be able to determine whether your supplier is meeting the Service Level Agreements that were defined as part of the contract. Make sure you have the right mix of qualitative and quantitative measures.
You may also want to consider surveying your colleagues who use the service, where appropriate.
It's common practice to establish a regular performance review process in the first year of an outsourcing relationship. This allows you to develop an effective communication system and keep in close contact with the supplier. It also gives you a way to move the relationship forward.
Having said that, initial performance levels shouldn't necessarily be taken as indicative of your supplier's true ability: although you will have chosen then as experts in their field, they will still need to learn things about your organization and your retained function will also be spending extra time passing knowledge over.
Maintain Regular Communication
It's important that you have a well-established communication system for regular checkups, and for managing occasional problems. You need to know what's happening, and you also need to ensure that you are consulted when something unusual happens. Outsourcing relationships are long term and ongoing , so you need to stay in close contact – even when everything seems to work well.
- Appoint a project manager, or similar, to communicate with the outsourcing partner on a regular basis – and establish a key contact person at the supplier.
- Keep senior managers and other stakeholders informed of activities, to ensure ongoing support of the outsourcing relationship. This is especially important during the first year, because unexpected problems may cause senior management to withdraw their support.
- Where possible, have someone available to answer questions if the outsourcer encounters a problem. Time zone differences often make this a challenge, so think about overlapping shifts, or an emergency contact number out of hours.
- Determine the types of issues that require the outsourcer to contact you – and what type of contact you expect.
- Visit the outsourcing site regularly.
- Agree to keep each other informed about material changes to the work environment.
- Ensure that communication channels are established between your organization and your supplier at all the appropriate levels. While it's obvious that there will be high level contacts, there may well be occasions when a project finance manager needs to query a transaction added to their project's account by the outsourced transaction processing supplier. They need to know who to contact directly at the supplier, without having to go upwards through you, to the supplier's account manager, and back down to the person who actually has access to the original document.
Create a Partnership
This is about going beyond the contract. An outsourcing relationship relies on mutual trust and respect. If you remember to treat your outsourcing supplier as a partner, you'll establish a business environment in which you can productively work through inevitable problems in the future.
- Be open with your business objectives.
- Discuss your goals and how you believe the outsourcing relationship will help you achieve them.
- Be flexible. Recognize that change happens, and work with your outsourcing supplier to find solutions.
- Establish hands-on support from senior management and other key stakeholders. Provide opportunities for these people to communicate with the outsourcing supplier as well.
Prepare for the Worst
Because this is a long-term relationship, there will probably be issues, obstacles, and changes in how the work is delivered over time. By establishing a process to deal with these challenges, you'll avoid a lot of confusion, frustration, and bad feelings.
- Determine who will communicate problems and changes that are needed.
- Brainstorm as many potential issues in advance, and prepare for them as best you can.
- Look at a variety of scenarios and solutions, and predetermine the best course of action.
- Establish how much discretion and independence you'll give the outsourcing supplier to work through issues by themselves.
- Have a contingency plan in case things don't work out. Decide who will manage damage control, and have a backup plan for completing the work in the interim.
Some Potential Risks in Outsourcing
Change in scope: One area where outsourcing relationships can go wrong is if your requirements evolve substantially, and the supplier is unable to meet your new needs. In this case, you may need to terminate the agreement early. As there are usually penalty clauses for doing this, the sooner that both sides are aware of coming changes the better: with enough notice, your supplier may be able to develop the type of extended service you'll need, for instance.
Staffing practicalities: If the business process that you've outsourced is being done by new people – off-shore or elsewhere in your country – as opposed to your old in-house team being transferred as a group to a new, specialist employer, you need to monitor whether the people who are actually doing your work are of the quality that you were led to expect in the tendering process. If the work you've outsourced is substantial, then your supplier will have taken on new staff to carry it out. And when a lot of people have to be recruited in a short space of time, their knowledge and standards may not be at the ideal level.. In addition, they won't have had time to get to know the supplier's processes, or attend all of their training courses.
To mitigate this risk, ensure that you and your team know what the process is to alert your supplier as soon as standards are not being met, and be proactive about using that process. If possible, ensure that the team working on your account contains at least a mix of new and established staff.
Data security: Data security legislation varies from country to country. If your outsourcer is off-shore, you'll need to ensure on an ongoing basis that the people at your supplier who are handling your data are maintaining the standard required by your national legislation. Otherwise, you could be breaking the law, as well as opening yourself up to commercial risks if your customers' information is misused.
The more prepared you are when you begin an outsourcing relationship, the greater the likelihood of a successful outcome.
Understanding your expectations and building a strong partnership are keys to long-term success. Set clear definitions and boundaries, and maintain regular contact – this will help your relationship, even when there are problems. Successful outsourcing ultimately relies on good communication as well as mutual trust and respect – leading to benefits for both parties.