An annual contract management study shows that every category of outsourced service from food service to engineering contracts has increased dramatically over the years. However, according to the Stamford, Connecticut based Gartner Group, “60% of such agreements will not be considered successful by executive management because they have not been developed and managed effectively.”
Building versus buying outsourced service decisions have changed over the last decade from organizations buying because they were desperate to find someone to take a problem or function off their hands, to making strategic decisions about building or buying centered on strategic issues such as increasing market share, better service, lower cost, higher quality, improved agility, and superior performance. What hasn’t changed is that organizations still aren’t developing and managing these contracts effectively, as evidenced by the Gartner Group’s studies.
As organizations’ management practices evolve in the 21st century, it saves dollars and makes sense to strike a balance of building some services and buying some services. Technologies are changing so rapidly that we must recognize we can’t be the best at everything we do or have the capital and resources to do everything we need to do, or we could risk extinction! Getting these decisions right means lower costs, higher quality, and improved agility and performance. Getting them wrong leads to costly mistakes, reversals, and stalled initiatives! To assist you with these decisions, here are some guidelines we have paraphrased from Scott Joslyn’s article, Strike a Balance with Outsourcing for your consideration:
1. Establish clear goals and objectives that are aligned with your business strategies: Lower costs, improved service levels, better technologies, etc., versus just looking for a better price.
2. Define the scope of services in detail to ensure that there will be no extra cost when you request a service you thought was in your agreement. The best way to do this is to ask your bidders to tell you what services and functions aren’t covered under your proposed agreement and what they recommend should be added to the agreement.
3. Know the cost of your current functions or services to be outsourced so that you can compare the bids to your actual cost of doing business now. This seems like an obvious first step prior to bidding any outsourcing contract, but surprisingly the usual method of finding out your costs is from the bidders who have surveyed your operations prior to presenting their bids. From our experience, these cost estimates are shaded in favor of your bidder’s offering, not your organization.
4. Develop fair but strong contracts in consultation with your corporate counsel to protect you from those “what if” scenarios that tend to happen when you don’t plan ahead. For example, what if your company merged with another? Could you renegotiate your current contract to add the volume of the two organizations? Or what if you decided to add or delete a service? How would that affect your contract prices?
5. Measure and manage the service by developing with your contractor key performance indicators, rewards and penalties linked to performance, and monthly scorecards. Don’t let your contractor give you their usual monthly reports as proposed in their contracts, since you will only hear the good news about their services, as opposed to pre-established cost and quality measurements that you can manage and control with their assistance.
6. Build flexibility into your agreement since things change and people change very quickly. Allow for expansion and contraction of services at set fees at the time you write your agreements. Above all, avoid long-term contracts without a 30, 60, or 90-day exit clause cancelable for any reason.
7. Retain key people and functions on your payroll to ensure that you have ultimate control and flexibility over your operations. You might want to keep your security director but outsource your security staff to an outside agency, or you might decide to contract out your mailroom or print shop but have them report directly to your supply chain director.
Most organizations in the country outsource some of their operations to contractors whether they realize it or not. Credit and collection agencies, facility management, and food services are among the most common outsourced departments or functions for which organizations contract today. The question we would like to ask is, were these outsourcing agreements based on strategic reasons or were they a cry for help?
If these outsourcing decisions weren’t based on strategic plans (such as Tenet Healthcare’s strategic decision to outsource 75% of their housekeeping and food service functions in 2000 to bring nearly two-thirds of their hospitals under the management of contract service firms to meet the tough financial challenges today), then why are they outsourcing them? Could it be that many organizations are just following their instincts to outsource challenging problematic operations or functions without truly evaluating their build versus buy options in a strategic manner?