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Table of Contents

The Importance of Buyer Flexibility

Heigh Ho, Heigh Ho, It’s Off to Work We Go

(i)Structure Creates Model to Chart IT Outsourcing Performance

The CIO Role in Healthcare IT Outsourcing

Easing The Pain Of The Residual Market

Seven Key Questions for Drafting Effective Exit Provisions

Many outsourcing buyers unintentionally diminish the value that their service providers provide to them. This typically occurs because buyers exert overly inflexible controls upon their service provider, often in the form of dictating the processes, people, and tools the service provider must use to run the outsourced process. Although these controls are well intentioned, they often result in hidden costs and barriers to the service provider trying to deliver the full value desired by the buyer.

Providing service providers with flexibility in key areas gives them the latitude and incentive to put their unique capabilities to work for the buyer - one of the primary reasons many companies chose to outsource. This article will explore two simple ways outsourcing buyers can ensure they provide service providers with sufficient flexibility:

1. Providing greater access to the buyer's organization.
2. Accepting the service provider's service model.

In our experience, thoughtfully providing appropriate flexibility to service providers benefits both buyers and service providers by fostering a more productive relationship. Those who chose to ignore this opportunity do so to their own determent.

Providing Greater Access to the Buyer's Organization

Buyers can hamper the effectiveness of their service providers by arbitrarily, intentionally or unintentionally restricting the contact between the two organizations.

Often, at the outset of an outsourcing relationship, the buyer creates a governance team responsible for managing the outsourcing relationship. Problems can arise when the governance team has members who formerly owned the outsourced process and maintain an inherent bias against outsourcing. They may be worried about their future with the organization; they certainly don't want their roles to be cut out. Governance teams motivated by this thinking have a tendency to install arbitrary restraints on otherwise constructive information flows that monopolize contact with the service providers.

Regardless of the reason, the results of these restrictions can be deleterious. Lack of information can cause the service provider to make mistakes that it could have avoided. Or, the service provider may miss opportunities to improve its service because it denies crucial user feedback.

Business units within the buyer's organization that are denied access to the service provider do not get to capitalize on the service provider's expertise and experience in this process. These units generally benefit from what becomes a learning experience as they learn how the service provider solved the same problem in another industry or with another client.

For example, say the buyer is outsourcing its billing function. The company's business units are the ones who are taking the heat from its customers for the inadequate invoices. They want to share with the service provider the problems they've had and hear how the service provider cleared up similar mistakes and addressed the needs of its other customers.

The governance team needs to understand it must control the strategic vision of the outsourcing relationship without monopolizing all the information relevant to the relationship. For these reasons, our first principle of flexibility is:

Give the service provider access to the broader organization

Accept the Service Provider's Service Model

As we discussed in a past article, one of the keys to outsourcing success is building relationships around the service provider's strengths. These strengths should form the foundation of a relationship that includes incentives, monitoring and feedback mechanisms.

Buyers who have done their due diligence generally select a service provider with a track record of success based on these strengths. Chances are, this company already has a service delivery model that works; it's what made this service provider profitable and notable in the first place. Buyers who create a governance model that forces their service providers to alter the service provider's successful model to accommodate them run the risk of destroying the potential value in the outsourcing relationship.

Typically, in situations like this, the service provider will create an interface between the buyer's process and its own to make the buyer feel comfortable. Here's why this Band-aid solution generally doesn't work. Say the buyer has an antiquated billing system. The service provider has a state-of-the-art billing system that it uses with 50 other clients. It has built best practices into this system.

Even though the service provider's billing system is far superior, the buyer insists on using its old, familiar system. So the service provider writes an interface between the buyer's system and its own to appease the buyer. The interface, however, is inefficient and adds cost to the transaction. The interface also erases the advantage of economies of scale that the service provider brings to the transaction if the service provider has used (or is using) the system across several relationships. Sometimes buyers require a service provider to use the in-house staff that used to perform the outsourced function. Even worse, they require the service provider to have these people to work at the buyer's headquarters. This cuts off the buyer from the superior process expertise of the service provider's staff and may add cost if the service provider has an off site or offshore service center that is able to provide the same level of service at a reduced price.

Our second principle of providing sufficient flexibility is:

Create a governance model that is compatible with the service provider's delivery method

There Is No "Best" Governance Model

The governance model is the crucial bridge between the buyer and its service provider and the mechanism to manage the relationship after the contract has been executed. In our experience, there is no single "best" governance model. Instead, the parties need to forge a relationship that takes into account the similarities and differences between their corporate cultures. For example, if the buyer organization's culture is modeled after the military and the service provider's culture is entrepreneurial, the two parties have to work together to devise a governance model where both parties feel comfortable despite their different approaches. Often, it makes sense to use the service provider's preferred governance approach as a starting point for designing the governance model.

What if the buyer is dealing with multiple service providers? Our experience consistently reinforces our view that clear accountability and objective standards of success are themes common to all governance models; buyers can use multiple approaches that are consistent with those themes.

Once again, flexibility is the key to multiple governance models. By applying these common standards, buyers don't have to create a new set of detailed processes for each one.

Clearly buyers should not accept everything the service provider says wholesale. However, they must understand the dynamics of the outsourcing relationship and how it creates value to ensure they don't inadvertently cut out the service provider's ability to create value - the reason they outsourced in the first place.

Like a ballerina, flexibility is required to get the job done well. Don't confuse flexibility in the process with flexibility on results. Put the service provider's strengths to work for you, take governance seriously and enjoy the value the service provider can create.

Lessons from the Outsourcing Journal:

• Buyers often try to control outsourcing relationships to guarantee the outcomes they want. It often happens, however, that they hamper the service provider's ability to create value by insisting on inflexible controls over the service provider.
• Two ways to provide flexibility that improves the service provider's ability to create value include:
  1. Giving the service provider access to the broader organization.
  2. Creating a governance model that is compatible with the service provider's delivery method.
• Clear accountability and objective standards of success are common themes to all governance models. Multiple governance models can be consistent with those themes.

Publish Date: August 2002

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Copyright © 2002 - Everest Partners, L.P.

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