Switching Objectives
So long as both client and vendor understand where their objectives and capabilities reside, the relationship will likely succeed. Difficulties arise when either party is unsure of, or changes, their position or stated objectives. Such shifts naturally lead to organizational and contractual tensions - sometimes ending in claims of contractual default.
Consider, for example, the client who emphasizes access to world-class capabilities in interviews with potential vendors, but who then negotiates solely on price. In essence, the client is asking for "added value" - but wants it at a discount. Similarly, vendors who represent themselves as providers of world-class capabilities, but who then staff an engagement with junior or inexperienced practitioners to save costs, are just asking to be treated as commodity providers.
Clients who over-spec contracts are frequently frustrated by the lack of flexibility demonstrated by their vendors, while those same vendors are frustrated that they can't demonstrate their creative capabilities to the client under the constraints imposed by the contract.
Occasionally, clients declare functions to be commodity-type services that really aren't. A number of insurance and financial services firms learned this lesson the hard way, after customers voiced dissatisfaction with service levels provided by outsourced contact centres. As a general rule, direct customer contact in service or retail businesses is best considered to be a strategic function and not to be outsourced to commodity-type vendors.
Freeing resources for other, more strategic purposes might seem like a viable goal, but only if the outsourced operations don't require significant two-way communication between client and vendor, or an in-depth understanding of the business that the vendor can gain only over time. A number of high-profile sourcing contracts have unravelled after outsourcers, particularly offshore outsourcers, failed to demonstrate adequate knowledge of the client's business and customer needs.
Picking and Choosing
For clients who take the time and effort to truly understand the costs and strategic implications of their non-core operations, "selective" sourcing is often the best approach. In other words, a client that needs access to world-class capabilities for some operations outsources those operations to a world-class provider under a long-term, relatively flexible contract, and then listens to that provider's advice. For this level of service, the client should expect to pay more than "best market price" and in return regularly receive value-adding input.
This same client can then outsource operations not requiring world-class capabilities to a commodity provider under a tightly-constructed, cost-focused contract which includes provisions for termination should the provider fail to meet expectations, or should a lower-cost provider come along. Under the best-case scenario, the client will optimize the cost and performance of these operations before outsourcing them to the commodity provider.
A well-managed approach to selective sourcing offers the client the potential for the best of both worlds: strategic help and access to world-class capabilities to add value, and low-cost provision of non-core services to maximize efficiency. As a side benefit, the client can free resources for other purposes, hopefully purposes that improve the company's focus.
John Kopeck is president of Compass North America
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