Outsourcing Practices to Avoid

negotiations_silkegerstenkornTraditional negotiation tactics all too often include hiding authentic intentions and using scare tactics to help tilt the playing field to their advantage.

While aggressive tactics may get a short-term win, they often backfire, especially when used in longer term strategic supplier relationships and outsourcing contracts. These five scary practices should be avoided:

  1. Penny Wise and Pound Foolish

If you are buying a relatively low value item at the flea market, negotiating on price is effective and even fun. But if you are procuring outsourced services it can backfire.

A common perverse incentive associated with buying on lowest price is supplier change orders. Suppliers that are beat up on price will often “get even” after the contract is signed with change orders.

In extreme cases, the buying organization might even force a supplier into bankruptcy – such as Apple’s notorious relationship with GT Advanced Technologies in 2014.

The University of Tennessee’s “Unpacking Best Value” white paper suggests organizations should look at a supplier’s overall value– not just price. Other papers confirm this because the focus is on the supplier’s expertise and thinking win-win.

  1. The Outsourcing Paradox

When contracting for outsourced services it is tempting to be as prescriptive as possible about what you are buying to avoid ambiguity and change orders. This only works when buying commodity type goods and services in areas where what is bought is a core competency.

. In this case, avoid the Outsourcing Paradox. The Outsourcing Paradox happens when a company contracts with a supplier as the “expert” and then proceeds to tell the provider with excruciating and often annoying precision exactly how to do the work. The company develops a “perfect” set of tasks, frequencies, and measures—a perfect system—but paradoxically fails to get any input from the supplier it has hired to implement the perfect system. Contract failure is almost assured: it is the company’s perfect system, not one designed collaboratively by the company and its partner.

  1. Measurement Minutia

Too much of a good thing can be bad for you; this applies to bingeing on Halloween candy or to the exhaustive measurement of service providers. Measurement Minutia is an unfortunate contracting practice where the buying organization falls into the trap of trying to measure everything.

Few companies have the diligence or resources to actively manage all of the metrics they create. In fact, experts suggest five to seven metrics is the optimal number.

I recommend a great open source tool developed by University of Tennessee researchers known as the Requirements Roadmap. It’s a free download and provides a simple and effective way to make sure the measures you select for your outsourcing agreement align to your Desired Outcomes.

  1. Risk Shifting

Anytime a company chooses to outsource there are risks. But too often organizations seek (or are mandated) by their legal, finance and corporate risk managers to shift as much risk as they can to their suppliers. This often means pushing suppliers to sign unlimited liability clauses as part of “standard contracting agreements” that legal departments often view as “non-negotiable.” These same agreements will also contain unilateral open-ended indemnity provisions in favor of the buying organization.

Risk shifting may seem like a logical choice, but it is myopic for two reasons. First, the supplier will almost certainly factor in risk into its price. If there are unknown risks it must guess high. For example, let’s say you are outsourcing facilities management services that include snow removal. Asking the supplier to provide Gross Maximum Price for facilities management contract that includes snow removal will just mean the supplier has to guess high at the number of times it will likely snow.  Isn’t it smarter to just pay for the services needed?

The second reason is that risk shifting does not necessarily mean the risk has gone away. Rather it means it was simply shifted and the supplier bears the costs. Better for the buyer and supplier share risk and reward. Having the buyer and supplier share risk and reward aligns the buyer and supplier to one simple fact: collaborating to eliminate or mitigate risk is the best path.

  1. Strategic drift

Even the seemingly most well-crafted contracts and business relationships can suffer from Strategic Drift.

.

Many outsourcing deals start out with good governance, but over time key governance practices can slip. This is especially true after a first-generation outsourcing deal has operated successfully: perhaps a certain amount of complacency sets in as quarterly business reviews begin to slip—or drift—to bi-annual or even annual events.

When this happens, a vicious circle is often the result: suppliers can lose sight of priorities and thus can become less proactive in driving solutions to problems or connecting the dots to arrive at new solutions to new priorities.

Image: Negotiations by Silke Gerstenkorn via Flickr CC

Speak Your Mind

*