outsourcing

The Shell drivers strike shows failings of simplistic outsource evaluation

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Shell Drivers strike and close down business – how not to outsource

So the Shell drivers are striking because they have had enough of relatively low pay – squeezed by their employer ever since they were transferred in an outsourcing deal.

Clearly someone at Shell decided that driving tankers was not their ‘core’ business, and/or that they could do this more cheaply if they could transfer it to another company who ‘specialises’ in this sort of thing.  Research shows that, particularly in service jobs such as driving, cleaning, catering, outsourcing companies do squeeze the salaries and terms of contract – how else do they make money?

But the one thing Shell clearly forgot is how important the work is to their success. You should never outsource things that are business critical! I have heard a number of senior managers say things like ‘well it doesn’t matter if the staff are upset about the outsourcing, they don’t work for us anymore’ – but they do!

I have written about these issues elsewhere – and I know we have some experts on BizFace who understand the contractual aspects in detail (my research is on the staffing side), so I hope this generates some discussion. I suspect a few outsourcing companies will be miffed – but have a look at the advice below and think whether the Shell situation fits:

  • Don’t outsource a ‘problem’ – get your own act in order first.
  • Don’t outsource purely to save money – there are many hidden costs in outsourcing and management time is often spent on the contact for years ahead.
  • Don’t outsource something that may be critical to your service function – think carefully about what is meant by ‘core competency’
  • Do work through all the potential problems that may occur – you will be relying on the law of the market not the law of employment contracts. Risks are often underestimated – particularly the employee aspects.
  • If transferring staff do follow procedures in a fair manner and ensure that you ‘over communicate’ so they understand what is happening and the rationale.

Also consider:

  • Assess links to business strategy and potential for activity to yield competitive advantage – if low outsourcing may be a solution.
  • Also assess the internal capability of your enterprise to perform, and how difficult it would be to improve – if low, outsourcing is a possibility.
  • Consider the future, how clear is your understanding of whether and how this activity will develop and change in importance – if stable and certain, outsourcing may be considered.
  • How integrated is this function with other areas – if highly integrated and complex, outsourcing may not be useful.

And always remember – if something goes wrong, how much of an impact will this have on your business?

What are the key starting points for a successful Outsource deal?

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The key starting points for a successful Outsource

Knowledge of what you want

There must be clear scoping of the demand and what is being put to the market. Within the objectives for the outsourcing there must be consistency and reasonableness of demands – cost reduction, as a key aim together with increase service may be inconsistent. Sign off internally why we are doing this and determine what is driving the whole process is agreed within the organisation – this is important from the Vendors perspective as well. If the vendor knows that cost reduction or technology refreshes are key objectives the response can be tailored to precise needs. Furthermore, objectives can change over time and the original case for an Outsource can be undermined by events. Revisiting the rational is an important task during the process – don’t be driven by the running train.

A clear process of acquisition

Decide sole source versus competitive sourcing to the market. Sole sourcing usually suggested (particularly by the vendor) if there is a history with the supplier and there is a time constraint – but there are significant negatives. Loss of leverage, not being able to compare alternatives, less aggressive pricing, and a sole source could have high impacts such as the legitimacy of the deal. Last but not least, the process may actually take longer as there is no time pressure that comes from a competitive environment.

In a competitive bid position cost savings have a better chance of being realised, suppliers can come with more innovative proposals that the in-house supplier – at least in principal. The process can actually be quicker as the client can drive the competitive process – by a strict time based approach to the process for example. But on the other side competitive bidding is more resource intensive, for the supplier as well as the client.

Be precise, not prescriptive, comprehensive but concise in the layout – focus on key objectives. We need the ‘what’ not the how – avoid laying down all sorts of preconditions about how the service is to be delivered – that’s the suppliers job in the proposal. I have seen in several RFP’ s detailed specifications of what packages to use and how precisely the service is to be delivered – effectively closing off all innovative solutions that may have been available from the vendor.

RFI is a high-level document inviting general response and can be used as a test for possible solutions and to pre-select candidates for the bid. Usually there is no bid price given by the suppliers – nor should we expect too much detail here. An RFP invites a formal response and takes longer for the vendor and the customer to evaluate. Ensure we are being realistic and take care that the quality and clarity in the RFP promotes conformance in the proposals received.

Communication

In negotiation avoid shortcuts and set specific goals – and ensure they are delivered. Evaluate, clarify and frame negotiations to keep competition alive. Document all discussions and carry out frequent self-assessment. Use a term sheet, this helps drive and track the discussion and allows apples to apples comparison – over time the term sheet can evolve into a contract

Manage the up and down communication channels carefully. Make sure no seniors speak to vendors and control vendor access to senior management. Some vendors are good at getting around the formal process to the senior management and exploiting this to short-circuit the tender process. We all know of ‘golf course’ deals that cut through a bid process and enable vendors to return to the customer team informing them they ‘know’ the requirements of senior management.

Keep talking to vendors and meet frequently to discuss the proposals – the more open and interactive the better the eventual outcome.

Experience

First of all vendors to this for a living – often the vendor sales team have been doing this for years and when this is done will move onto the next. The customer side on the other hand may have not done this before or at least the team carrying out the supplier proposal evaluation may be completely new compared to the last time the outsource process was done.

Also some of the customer team will also have a day job to contend with – don’t forget this (or holidays etc.) plan capacities well. Plan well, resource well and set realistic time scales – time pressure can act in the vendor’s favour and allow skipping of important details. Never let issues that should be solved at negotiation drift into ‘we will solve this later’ discussions. They never are and these can be a source of major conflict later. In an old course, some time ago on bargaining it was said: ‘It is better for the negotiation to break down rather than the agreement’. All-important details must be cleared before signing a contract.

Partnership rhetoric will appear at some stage in the discussions from the vendor side. Partnership usually means giving all the risks to the vendor from the customer side or to closing off competition from the vendor side (sole sourcing). Partnership can be invoked to get over tricky points and put them off until later stages or to close out competition. Partnership should be based on performance and strict business principles not waffle

Maximum gain minimum vendor pain during the proposal stage – and remember to ask what we are looking for from outsourcing until we know what it is!

Royston

Why Outsourcing often does not deliver value

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Why are the benefits of outsourcing only rarely achieved

In a recent Dun & Bradstreet report they noted that “25 percent of all outsourcing fails” completely and over 50% of all outsource deals do not deliver any substantive benefit at all. Outsourcing failures are often the result of companies rushing into transactions with unrealistic or unsubstantiated expectations of cost savings and performance improvements that cannot be met because the client does not communicate its requirements in a clear way either internally or to the potential vendors. The outsourcing of many business processes besides IT also has the same less-than-stellar results – call centre problems are almost a
cause célèbre. Some people believe you need hundreds of pages of detailed specifications as complex as War and Peace to make outsourcing work at all tying up the whole thing in a tight contract that covers every possibility – clearly not a practical proposition.

The main causes of failure in an outsource in my view are :

  • The buyer’s unclear expectations up front as to its objectives – poorly defined goals and requirements and a lack of outsourcing contract management capability are two of the top reasons for IT outsourcing failures.
  • The parties’ interests maybe aligned up front but become misaligned as the buyer’s business environment or needs change over time (as they will inevitably)
  • The provider’s poor performance against service level agreements – which in some cases is dramatic.
  • The parties do not consider each other’s interests to ensure their relationship is mutually beneficial – the naturally conflicting objectives and the need for vendors to make money are often not really internalised by clients.
  • Poor governance structure for managing the ongoing relationship – in some cases this is left just to account management.
  • Poor cultural fit compatibility of the parties – asymmetric sizes between client and vendor as well.
  • Poor communication; the parties do not proactively share necessary information with each other – the relationship deteriorates rapidly when information is hidden

In another recent work I have been involved with there have been several instances of buyers and outsourcers in direct conflict and not inclined to acknowledge their own influence on outsourcing failures. The blame game starting early on in the relationship. Hidden costs, high staff turnover and poor cross-cultural communications are also some of the key causes of offshore outsourcing failures. Another big source of outsourcing failures is the way that outsourcing vendors tend to “sell high,” pitching their projects to the CEO rather than to the IT staff and managers who really know how to run the business – this enrolment of ‘C’ level managers is often the source of great difficulty when the real discussions take place. They have bought into a process based on high level aphorism that have little practical value on the street corner.

If you choose to look at global outsourcing as an opportunity, as numerous companies do, you may quickly realize that making it work requires a carefully planned and orchestrated approach. I suggest, though, that the current failure rate of performance improvement in outsourcing is only tolerated because the full extent of failure is disguised; few organizations or individuals are willing to admit the extent of failure on a major outsource contract. Failing at this game can have career damaging consequences.

See more at Bizface in the Outsourcing forum