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Value Chain Marketing: Obtain Business Value via Outsourcing



[Editor’s note: This installment is part of an ongoing series. You can start at the beginning in order to follow its logical sequence.]

outsourcing strategyby Kenneth Rudich

Let’s operate under the premise we’re negotiating a deal with an outsourcing vendor from the client perspective.

The main objective is to drive business outputs that deliver business value.

These outputs should then ripple down to the outcome level, favorably influencing any or all three attributes shown in the accompanying graphic, either through cost reductions in operations for context activities (equal or better than you can do on your own) or higher revenue-generating power for augmented specialization services.

outsourcing strategyThe crux of the matter is to ask and answer what the outsource vendor will do that you can’t do or don’t want to do in-house.

How will they perform it better than you can in-house, especially in terms of cost (savings), productivity (effectiveness), serviceability (customer support) and consistency (minus errors and deficiencies)?

If unavoidable trade-offs emerge (wiggle room issues), what constitutes an allowable tolerance for engaging the vendor instead of doing it yourself?

Can a competitor of the outsource vendor do a better job of closing that gap? Can your competitors do a better job of closing that gap? If so, how do they do it — and at what cost?

outsourcing strategyHelen Huntley, a research vice president and IT outsourcing analyst at Gartner Inc., a Stamford, Conn.-based consultancy, advises against using the vendor template when drawing up the contract.

This is especially true for bigger or more complex contracts, where much is riding on the cost-benefit ratio and/or it involves a long term service relationship.

She warns, “They’re inherently slanted toward the vendor, and it’s going to take a lot to modify it.”

Tap your own legal counsel, she says, and don’t be afraid to turn to a third-party for direction if the nature of the work exceeds the boundaries of your in-house expertise. As we learned from Herb Cohen, exposing cracks in your knowledge or depth of understanding can provide grist for their master negotiators and salespeople to exploit.

Other Considerations

In addition to the above, here’s a short list of other considerations to include:

—What performance metrics should they live up to? Make them reasonable and fair, and limit the number of them to the few that matter most (especially when more costs more) — make sure they tie into an operational benefit or revenue-generating benefit. Will penalties result in the event of failure, and/or bonuses given for exceeding them (two different motivational mindsets)?

—How long are the terms of the contract? For longer term deals, what benchmarking points should be established?

—Protecting yourself also includes crafting proper out-clauses. “Termination language has to be very clear,” Huntley says. It should include three provisions: one for cause, if the outsourcer materially breaches the contract; one for convenience, if your own business needs change (you may have to pay some early termination fees); and one for transfer of control if the provider ownership gets changed due to a buy-out.

—Especially for data storage or IT outsourcing:

  • Is the vendor well-funded and secure? Will their business exist tomorrow and into the future? How much downstream damage will there be if they cease operations?
  • Is there an escrow agreement which covers the data in the event they cease to exist? Is there an agreed export model in the event you want out? Is there an agreement in terms of notice periods?
  • Do they have pre-existing arrangements with other parties that could help in the event they go out of business — or is the responsibility on you as a customer to ensure there’s always a “Plan B?” In the latter case, should you think about data storage in a hybrid way — perhaps by using solutions that backup your data onto either another third party or to your own local storage (is your data important enough for you to go to these extra lengths for protecting it)?

Before Signing Outsource Contract

outsourcing strategyEstablish these criteria before signing the contract — recognizing that amending them later may be difficult, unfeasible or too late (e.g., after you’ve lost your data or your customers).

Where possible, also chat with current or previous clients about their experience with the provider.

Seek the disclosure of both favorable and unfavorable characteristics; ask probing questions and assess the credibility of each response — actively listen for consistencies or inconsistencies in their answers.

If it’s a harsh assessment, encourage elaboration — and try to determine if it’s likely an accurate portrayal of what happened or perhaps a case of misplaced blame. This information may speak to the integrity of the outsource provider.

While it’s true this type of upfront investment will consume extra time and energy, it’ll be far preferable as a precautionary measure than encountering problems later on owing to a lack of due diligence.

Keep in mind that a win-win scenario is a lofty ambition, but also a worthwhile one. It translates into a mutually satisfying arrangement; and isn’t that, after all, the end game when seeking an outsourcing partner whose sole task — from your perspective — is to support your value chain?

Continue: Value Chain Marketing: A Fundamental Concepts Summary Review


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