Management Information |
Balancing Power in Outsource Contract Agreements
The practice of outsourcing business processes has long been subject to the discussion how best to ensure optimal benefits for both parties involved in the outsource agreement. In conventional outsource agreements conflict often arises between the objective to minimize cost and the necessity to continually develop the service. This leads to unsatisfactory results for both parties. However, conflicts can be resolved by increasing the collaboration between both parties to a level where the service provider is considered a vital part of the purchasing company. This "annex" arrangement offers on-going and exclusive access to a customized service from the service provider in return for the advantages of a long-term contract granted by the service purchaser. Traditionally, a service provider will argue in favor of a long-term outsourcing contract while the purchaser will often opt for short term agreements. This allows the purchaser the possibility of sourcing more effective competitive services. Purchasers often believe this approach keeps the providers "on their toes" and ensures the best level of service, at the best price. This may be so in the short-term, but the service provider, having no guarantee of continued business, will be less motivated to undertake long term investments developing their service particular to that one client. Instead, the provider will concentrate on the safety net of being able to offer their service to the market in general. Considering the service provider an "annex" to the purchasing company can solve this power struggle to the benefit of both parties, but it necessitates a change of approach in many cases: although most companies claim that the reason for considering an outsource is strategic, the reality is often that the decision is purely financial, based on a calculated cost reduction. Annexing is only possible where the purchaser genuinely seeks to gain competitive advantage through competence or capability of service, as opposed to simply achieving an immediate lower cost. In this form of outsourcing, the service purchaser must choose a service partner who can sustain a long term delivery of service that continues to be more effective than a possible in-house alternative. In addition, and equally important, this service must remain superior to the provider's competitors. Winning the beauty contest today is good and well - but could the beauty fade with time? To ensure continued competitiveness, a number of measures can be taken that will lead to a partnership in which the purchaser finances its own superior position in the market, rather than buying a mere commodity service. Close Collaboration While many outsource dealings are conducted at arms length, and on a contentious basis, annexing relies on close long-term collaboration, or partnership. Collaboration between purchaser and service provider is not a new concept in outsourcing, but annexing takes it to a new level by treating the service provider as an internal entity. Still the purchaser shouldn't forget that the service provider (in most cases) knows its own business best and should be entrusted to conduct its own affairs accordingly, without unnecessary control or interference. Both parties must be confident that they are pulling in the same direction, and this necessitates free flow of information between the two partners, openly and without reservation on both the short and long term, on all aspects of the business. Funding Investment By entering into an annexing arrangement with a service provider, the purchaser must also rethink the financial objectives. Typically cost of service is a strongly negotiated factor, with both parties understandably looking for the best deal. However, with an annexing agreement, achieving the lowest cost or charge for the service may not benefit either party in the long run; it is worth keeping in mind that in an annex arrangement, the poor financial health of one partner can adversely affect the health of the other. By entering into contract at a cost which is too low, the service provider will be unable to realize a sufficient profit margin to allow for reinvestment in the further development of the service. Although, at the outset, the purchasing company may obtain a financial benefit from this situation, the benefit will be quickly lost as the provider's competences and capabilities diminish, and the service level consequently drops to a problematic level. Once at this stage, many service purchasers simply discard the provider and look to the competition in order to attain a better service. However, this constant change of provider means that a truly optimized solution is seldom achieved. To resolve this issue, a more transparent approach to costing must be taken. The cost-plus method, where the purchaser agrees to pay the operating costs incurred by the service provider, plus a percentage - which is taken as profit - is particularly suited for annexing agreements. This calculation forms the baseline price of service, typically set at unit level. To ensure continued competitiveness, an amount must be dialed in on top of operating cost and profit to finance continued investment. As discussed earlier, sufficient funding must be available to the provider in order to allow them to continue research and development on their service. It is the responsibility of the service provider to identify these opportunities for further improvement in the service, and it is also their responsibility to prepare a business case detailing the cost and benefit of any investment. Again, the service provider must act like any other internal department and go through the appropriate channels in order to procure the additional funding from the purchaser. Evolving Service Level Agreements Another point to consider when entering into an annexing agreement is the Service Level Agreement (SLA). The SLA is the mechanism by which expectations are contractually managed - the service provider is explicitly aware of what they must deliver, and the purchaser is explicitly aware of what they must accept and pay for. Due to anticipated and continued development of the service over time, along with expected changes in dynamics in the partnership, it is necessary for the SLA to be built with evolution in mind. After all, it is unlikely that the SLA applicable today will still be fully applicable several years into the contract. It is the responsibility of the purchaser to set ever challenging expectations from the provider. As soon as one service improvement has been realized, the relevant SLA must take this new capability into account, and "raise the bar" further. This ensures that the service provider is being constantly challenged to come up with more effective ways to do business and stay ahead of the competition - the source of the purchaser's competitive advantage. Two-way exclusivity Exclusivity, naturally perceived as a danger by the purchaser in a traditional service agreement, works both ways in this type of outsourcing contract. While annexing means heavy reliance on the long-term partnership with one selected provider, the purchaser also requires that the provider must provide exclusively to them. This mechanism protects the investment that the purchaser places in the provider and ensures that the corresponding competitive advantage remains out of reach of competitors. Through annexing, the exclusive collaboration coupled with ongoing investment in service development increases both parties' competitive position. When this is controlled by evolving service level agreements, the parties to the long term outsource contract can both finally deal from a position of equal power. © GA Advisory 2005 Gavin Campbell Gavin is a director at GA Advisory, a small and specialized consulting firm working with the Airlines, Express and Logistics industries. He has worked extensively in the area of performance improvement and organizational effectiveness in the manufatcurting, express and logistics industry, including 5 years as head of performance analysis at FedEx. Gavin has advised many of the worlds leading logistics and express companies, and has recently conducted assignments for DHL. Gavin holds a law degree and an MBA from Henley Management College in England and is based out of Brussels Belgium.
MORE RESOURCES: Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exiting |
RELATED ARTICLES
Effective Email Communication Email, when used properly, can generate additional direct sales and leads; can be used as a tool to communicate with your existing client base to let them know of upcoming events which may affect them; and as a means of ongoing promotion for your business.The following is a list of simple guidelines and tips that will help you become an effective email communicator. Avoiding The Sheep Dip It is a sad fact that many employees are still being subjected to the age old training ritual of "sheep dipping". This is a process by which employees are "refreshed", "cleansed" and "re-invigorated" by ensuring they attend set training courses or, perhaps, are placed on the ubiquitous "refresher" course. Managing Meetings Plan/prepare - lack of purpose causes aimless meetings. Know why you're there - what the meeting is for. Outsourced Learning: Are You Ready for Learning BPO? As the business world enters a period of hyper-competitiveness, every business process will be subjected to examination and possible restructuring. We have already seen outsourcing and offshoring used to an extent what nobody would have dreamed of a few years ago. Cross Cultural Solutions for International Business Globalisation, the expansion of intercontinental trade, technological advances and the increase in the number of companies dealing on the international stage have brought about a dramatic change in the frequency, context and means by which people from different cultural backgrounds interact.Cross cultural solutions to international business demands are increasingly being viewed as a valid and necessary method in enhancing communication and interaction in and between companies, between companies and customers and between colleagues. Avoid Outsourcing Pitfalls in the Injection Molds and Stamping Dies Markets When looking to outsource overseas for Plastic Injection Molds or Stamping Dies there are many things to consider.Usually price is the first thing to be looked at, that's probably why you're looking overseas for a new mold or die source-to save money. Hiring Productive Employees: A Checklist for Assessing Their Appeal The characteristics of job applicants have a strong influence on whether or not they get hired. Their characteristics also indicate the level of their productivity. The Compliance Officers Killer Application It used to be that only the largest multi-nationals needed a Compliance Officer. Today most practices, regardless of size, would be wise to charge someone within their organisation with the responsibility of keeping abreast and managing the compliance process. 10 Ways New Managers Become Great Leaders "It is a terrible thing to look over your shoulder when you are trying to lead and find no one there." - Franklin D. Delegate, Dont Abdicate One of the key skills for the leaders of growing businesses is to 'get' the distinction between delegation and abdication.Many managers and business leaders fall into one of two extreme categories:They delegate too little and try to do it all themselves or they give too much away, abdicating both their responsibilities and the prerogatives of power. Implementation the Catalyst of Change for Management to Reach that Next Level of Success From the personal and professional experiences of other colleagues and myself, one of the more critical success factors for management is implementation. Through my observations, I have discovered that people and organization spend a great deal of resources including time, dollars and the cumulative total of the energy generated from these efforts to create business or strategic plans. A Rare Leadership Skill: Dealing With People Who Want Out By Offering Crowns For Convoy As a leader, you'll inevitably be faced with people wanting to leave your team or organization. Dealing with the challenge is critical for your leadership success. The Seven Cs: Partnership Danger Signs - Competitive, Not Complementary Action A series of articles exploring the seven critical areas that can indicate a partnership is in trouble.Competitive, Not Complementary ActionJames Carville and Mary Matlin are public relations spokespeople for the Democratic and Republican parties, respectively. 4 Simple Steps to Successful Delegation Last month, my featured article was about creating a "Stop Doing" list. Hopefully, if you followed my suggestion, you now have a list of tasks that you are looking to delegate away. Increase In-House Nursing Homes Collections The following nursing home collections report outlines 11 guidelines you can follow to increase the amount of in-house long term care collections your facility collects.1] Have A Defined Long Term Care Collection PolicyOne of the major causes of delinquent nursing home receivables is that the facility has not clearly defined to its residents/responsible parties and business office staff when the accounts are to be paid. Five Overlooked Ways To Hire Winners Here is a true story. My dentist did a "clinical" evaluation of my teeth. Employee Motivation: It's More Than A Paycheck Managers often ask, usually with exasperation, "How can I keep my employees motivated? I pay them decently. What else is there?"Offering competitive salaries is certainly important. Business is About Making Money Ask most people why they are in business and they will give you any number of reasons. Things such as wanting to improve the lives of others; make the world a better place; provide for their family; have more free time; the list goes on and on. How to Meet Quality Standards with ISO 9001 In today's hectic business environment, it is vital that we are all on the same page, right? But how do we know if we meet those standards? Business owners and executives can avoid the uncertainty, and that's where ISO 9001 certification comes in.Standardizing Quality SystemsThe ISO, or International Organization for Standardization, was established in 1947 to develop international standards for everything from electronics to management systems. Ten Business Reasons Why Asking for Help Works In fact, bringing your people - any of them - into your confidence and asking for help, is a very powerful tool indeed. The form of words' "I need your help", works best. |
home | site map | contact us |