Avoid Outsourcing Headaches

Open communication sets the stage for a more successful outsourcing relationship.

Outsourcing is expected to be a booming business again in 2010. Some 62% of outsourcing service providers in the latest survey from Duke University's Offshoring Research Network and PricewaterhouseCoopers reported plans to expand the scale of their existing offerings. And 82% of respondents to a Grant Thornton survey reported that some portion of their supply chain is purchased internationally.

With that level of business given over to third parties, be they located domestically or globally, there's bound to be relationship issues that arise. And indeed, the Duke/PricewaterhouseCoopers survey shows just that. For example, some 30% of outsourcing deals in 2008 were not renewed at the expiration of their first contract. The reason? Unrealistic client expectations and the lack of a client outsourcing strategy were the two leading causes, according to the outsourcing service providers. Talk to clients, however, and it's typically relationship management, as well as governance and innovation, that are identified as factors that most impact outsourcing decisions, says PricewaterhouseCoopers Managing Director Charles Aird.

Blaming the client is simply a joke, adds Lance Heft, CEO of International Tube, a specialty metal tubing company in Pottstown, Pa., that provides outsourcing services to producers in the medical, electronic and industrial markets. A more likely cause is that the service provider failed to perform the due diligence required to meet the client's expectations, Heft says.

Wherever the truth lies, it's clear that actions can be taken on both the client and the provider side in an outsourcing arrangement to better assure success.

Larry Harding, founder of international services provider High Street Partners, suggests clients create a task force for an outsourcing project as opposed to having a sole owner of that project. In his experience, clients sometimes get caught up in the enthusiasm of an outsourcing arrangement "and listen to the good news, but filter out the bad," he says. A task force, which may include finance and human resource functions, can help temper that enthusiasm, he suggests.

Heft, too, likes multiple sources of contact at the client firm, but for different reasons. What works best for International Tube, he says, is to include as a contact the person who put together the outsourcing arrangement, as well as a contact in engineering and the quality department. "That way we can know who to get in touch with, and if it's a quality issue we don't need to bother the first point of contact for something that could be a very simple question," he explains.

"It's also important that the contact points be responsible and available to address questions from the service provider," Heft says. "At that point it becomes a true partnership."

The International Tube CEO says the best advice he can offer to create a successful outsourcing relationship for both parties is to establish open communication from the start, as cliche as he acknowledges such advice sounds. "And the only way that you get open communications from the onset is by interviewing one another," Heft says.

That means it's important for the company that is readying to outsource a product to be as prepared as possible when entering discussions with potential outsourcing providers. Have an internal meeting first and include all parties with a stake in the results, Heft says. "At that meeting collect every question from every angle -- from quality, from purchasing, from shipping, from engineering, from the marketing department. They should get all those people in a room and say, 'What's important to you?'"

Heft stresses that it's just as important for the outsourcing provider to quiz the client as it is for the other, more typical exchange to occur. "What we try to do is when [a potential client] asks us a question, we try to read between the lines as to what and why they are asking. Normally by asking, 'What do you mean? How does that help you? What are you trying to glean from that information?' -- that lets us make a list of exactly what that customer expects from us as a manufacturer and as an outsourcing partner to deliver exactly what that customer needs," he says. "And then we make sure we can actually perform in the manner that they want us to perform in, and we walk away from business if we can't."

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