Structuring Outsourcing Relationships
Best Practices For Ensuring Long-Term
Partnering and Flexibility
Written by Peter Bendor-Samuel
CEO, Everest Group, Chief Executive Officer and founder of Everest Group
Outsourcing arrangements face a constant flow of forces from evolving economic and market conditions, competitors’ innovative products or services, or the client’s desire for innovation. These forces require change. But change is a risk for a supplier and its client and causes a struggle or even resistance. When companies start pulling apart the contractual boundaries in their original deal, it disrupts the supplier’s inherent need to maintain stability and perform according to the contract.
To achieve mutually beneficial outcomes, both companies must value the force of change more than stability. Many buyers of outsourcing services make a major mistake when structuring their agreement: If they do not create incentives to add value, they actually build incentives into their deal for the supplier to resist change.
The best-practice approach in structuring an outsourcing relationship that will value the force of change more than stability is to build flexibility into the contractual agreement. Buyers inhibit flexibility when they structure the agreement from a classic procurement approach, pushing for the lowest price, locked-in service levels, specific milestones and defined outputs and time frames. Suppliers take an equally difficult approach and inhibit flexibility when they look to always mitigate their risk, use only repeatable processes, manage to specifications and deliverables rather than value, and do not structure services to exceed delivery expectations.
While such mind-sets and decisions have some benefits and reduce risks, they ensure rigidity that does not allow for new approaches at times of change. They also prevent innovation because they only allow delivery of what is specified in the contract.
Hundreds of the world’s best outsourcing relationships, nominated for and studied in Outsourcing Center’s annual Outsourcing Excellence
Awards program, reveal that the buyers of all the winning relationships share a common phenomenon: The suppliers they selected demonstrated a partnering and flexible approach from the first day of presenting a proposal or jointly designing a solution.
From their first meetings, both companies in highly successful relationships clearly demonstrate to each other that elements of a contract are not as important as working together to have a relationship on which they can build to drive more value.
Written by Kathleen Goolsby
Although on the surface most outsourcing agreements appear to incorporate requisite factors for success, some fail to deliver anticipated outcomes. Perot Systems’ relationships are exceptions, as demonstrated by its having won the categories of “Best Partnership” (with Harvard Pilgrim Health Care) and “Best First Steps” (with National Life Group) in the 2008 Outsourcing Excellence Awards, as well as awards for outstanding relationships in prior years.
Perot Systems believes that delivering on clients’ unique objectives depends not only on having worldclass technology, a strong portfolio of
service offerings and critical domain expertise, but also executing within a culture of excellence and servicing clients with the best people and process discipline the market offers. The company’s leadership tapped Russell Freeman, COO, to reinforce its customer delivery process and to discipline and institutionalize this culture of excellence through methodically assuring the firm’s core values in attracting, developing and rewarding its associates to build the right team to meet a client’s needs and drive outstanding satisfaction.
The core values — integrity, personal accountability, teamwork and a passion for excellence — that Perot Systems seeks in its people are pillars of the cultural foundation for client relationships.
These values, “especially integrity, are the bedrock of what we stand for and a key part of our value proposition,” states Freeman. “These are our basic ethics — the way we treat others — values that are held dear by Ross Perot, Sr., and are his model of success. We’re in a services business; it’s our people who make us what we are and give us competitive advantage.”
Personal accountability refers to associates’ deep-seated willingness to account for their actions, including the way they treat others and how they accomplish results. Teamwork involves identifying common objectives, beliefs and processes that are key to delivering great services as a global team (including the client), rather than a collection of individuals. The final core value, a passion for excellence, refers to “winners” — people who have a passion to excel at what they do.
Throughout the years, satisfied clients have also attributed their successful outcomes to Perot Systems’ transparency in its communications, flexibility and partnering mind-set, especially at times when a client needs change. These are also key components of the Perot Systems culture.
Freeman states that, while “a contract provides governance and an expected operational path, we recognize that in a long-term relationship contractual challenges will arise.” They then collaborate on reworking the agreement for a mutually beneficial way to meet client needs.
As an example of such partnering, Freeman cites the Harvard Pilgrim relationship. “We just signed a new 13-year, $1 billion contract extension with them. It is a testament to our willingness to work creatively together through a changing and challenging business environment.”
Perot Systems recognizes that all relationships experience challenges along the way. However, its partnering approach, core values in people, passion for excellence and commitment to client service and satisfaction constitute a proven methodology for mutually rewarding relationships.
In 1999, Harvard Pilgrim Health Care was broken; Harvard had never rationalized business processes or IT systems after multiple mergers. “The environment was an indigestible spaghetti of convoluted interfaces between platforms fed by broken business processes,” says Harvard’s Bob Trombly. When Harvard fell into receivership, Perot Systems delivered skills and management acumen to fix things and stage a remarkable turnaround.
Transitions from one outsourced relationship to another are always challenging. The magnitude of the issues that came to light after
National Life signed a contract with Perot Systems threatened their new relationship. Both parties were committed to working through the challenges. The relationship survived and now thrives because they established a trusting relationship from day one.
Page 1 2
