Unisys’ Joe Hogan says companies are increasingly looking to outsource some or all of their processes to cut costs.
The deals that do best are the ones seeking value, not just savings. The costs of expanding a business or entering new markets can obviously be daunting. In response, many companies are looking to outsourcing or multi-sourcing deals as a way to pass some of the costs onto others — whether in the U.S. or, increasingly, offshore.
But if your motivation for outsourcing is strictly to save money, you are already doomed to disappointment, according to Joe Hogan, vice president of strategic sourcing at Unisys Corp.
“Saving money is important; to the company doing the outsourcing and to the outsourcer. But if that is your only reason, that is a strong red flag,” Hogan advises senior executives.
The problems here, Hogan says, are that there are so many variables over the course of an outsourcing contract that you can’t bank on the initially forecasted savings. From the time you first seek out an outsourcing partner, to when the contract expires (presumably a few years later), a lot will change. And that includes many of the people responsible for sealing the deal; those assigned to staff and manage the project, and the ones who see it through to completion.
Hogan is a leading expert on corporate sourcing — outsourcing business processes to a single vendor, or so-called multi-sourcing, where a customer partners with several complimentary vendors that handle various pieces to a larger whole solution. Hogan has spent years managing outsourcing and multi-sourcing deals, and advising others on how to do the same. And he has gained a wealth of insights into why contracts and relationships work, and don’t.
The best reason to enter an outsourcing arrangement is not to reduce cost, but to increase value, Hogan says. By outsourcing a process to a firm that specializes in that area — whether as a consultant, integrator or implementer —your company can tap industry and skills expertise that is lacking internally. That is especially true in a multi-sourcing arrangement.
“The upside is that you get the best of what several companies have to offer, especially in very specialized areas,” Hogan says. “Most of our deals are in multi-sourcing arrangements, where, for example, if you wanted someone good in the claims processing area, we’re good at that, but if you also wanted to implement SAP, you would bring in someone else for that.”
But the more players you bring into a sourcing arrangement, the harder it is to manage. Consider the analogy of a juggler, adding more balls to the act as it unfolds.
“The client should also evaluate whether these companies have worked together before,” Hogan says. “We all have a joint responsibility to the customer, but how do you determine who is responsible for what?”
That is where strong governance is critical in a multi-sourcing arrangement, according to Hogan. Simply put, governance is the pre-established set of rules, defined responsibilities, and organizational structures for a company or project — serving much like a constitution.
In a sourcing relationship, Hogan says good governance would clearly define what the goals of the customer are with the arrangement; what the responsibilities and expectations are of the outsourcer(s); how deliverables will be measured during the life of the contract; who will be involved with managing the relationship on both sides; and how changing conditions during the course of the contract will be addressed.
“Five years from now, you don’t want to have the same contract in place,” Hogan cautions.
To emphasize the above points, Hogan says there are three primary reasons why outsourcing deals go awry: the failure to predict change; a lack of governance principals; and the absence of a clear strategy on what value the relationship will bring to the customer.
The good news is that many companies are getting a grasp on what it takes to really manage a sourcing relationship, especially if they have one of two under their belt.
“Some clients, as they are going through a second, or a third project, have a good idea of what to expect,” Hogan says of the customers that work with Unisys. “If they are going through one for the first time, they depend on us to advise them on what the best practices are.”
That is another important lesson for those considering an outsourcing arrangement — seek out a partner that will not only handle the processes you need, but advise you on how to best integrate their role with your existing business systems, operations, and — most importantly — mission.
Unisys has developed a detailed matrix formula for defining and managing sourcing relationships, Hogan says, especially when the project involves multiple partners.
“It defines who is responsible for what, and how each brings value to the customer,” Hogan says.
For companies in the outsourcing space, such a strategy is not only a valuable tool for managing the contract, it can also help the company land it.
Hogan gives the example of one company that Unisys hoped to do business with (he could not identify the company for propriety reasons), that it prepared a sourcing matrix for, without having their business.
“We took the trouble, along with our partner, of developing a project matrix. We then took it to the (would-be) client,” Hogan says. The two vendor companies had never worked together before, “but because we could show the client how much thought we had put into their needs, and how we could bring value to them, it convinced them to go with us.”
Another reason that executives need a strong governance agreement with a sourcing deal is to reduce potential conflict with the vendor partners, where they begin to compete instead of cooperate.
As Hogan explains, each vendor is ultimately in the arrangement to benefit themselves. It is easy for a vendor company that actually provides multiple products or services to view a multi-sourcing deal as their way to get the foot in the door with the customer. In those cases, the vendor may only have one eye on the outsourcing deal, while the other is on the look-out for new business.
Advice on how to avoid the common mistakes in outsourcing deals
Having worked in the sourcing trenches for many years, Joe Hogan has dug up a treasure trove of advice on how to guard against the pitfalls of outsourcing deals. Here are his top seven tips:
Patience- First, he advises against the “fools rush in” syndrome. “Customers usually have a lot of pent-up frustration and demand,” Hogan says. That becomes more obvious when you consider why a company turns to an outsourcer in the first place. That makes it all the more imperative to talk up front with all parties about goals and expectations, before the pen is put to the contract.
Flexibility- Second, “the change management process is critical. It keeps both sides honest on what you want to change, and how to do it,” Hogan recommends.
Practicality- Third, executives need to be aware that unrealistic expectations in a sourcing contract don’t just come from the customer – they also come from, or are compounded by, the outsourcer. “If there is an unrealistic expectation on the customer side, then there is a problem on our side also,” Hogan says. “It takes two to do that.”
Quality- Fourth, the contract governance must be crystal clear to all parties. “The people who sign the contract usually are not the ones that review it,” Hogan continues.
Responsibility- Fifth, an important factor in the success of an outsourcing project is that the customer assign people to the effort who understand the goals of the relationship, have the authority to get things done, and can communicate at all levels about the project’s needs and status. “What ever level the people would be working at if the project was being done on the inside, that’s the level they should be at when assigned to work with the outsourcer,” Hogan says.
Priority- Sixth, it is easy to try to include too much in a sourcing deal, Hogan warns. “Choose what processes you really want to live with — what’s important, versus what’s nice to have.”
Accountability- Seventh, executives should know up front that not everything is likely to go according to plan, hence the need for strong governance, clearly defined roles and flexibility. The lesson here is that “bad news doesn’t improve with age. Mistakes will happen — know how you will deal with them.”
— David Weldon
dweldon@whitedm.com