One of the most critical elements of a successful outsourcing project is an early focus on the relationship between the manufacturing client and the service provider. Because outsourcing involves two different companies with varied cultures, expectations, assumptions, behaviors and incentives, we have found that creating a partnered approach from the beginning enables all levels and teams involved to establish how they will work with one another. Focusing on a partnered approach after a project gets underway is often too late, because mistrust and "siloed" mindsets and behaviors may have already taken root, preventing teams from working effectively together. In this article, we'll explore why and how to get those outsourcing relationships right, and offer tips for managing the relationship over the life of the project.
In our experience, client/service provider teams grossly underestimate the role of trust and the importance of working dynamics. For example, a technology manufacturer undertook a seven-year, $200 million human resources outsourcing effort, only to find that mistrust between its retained HR team and the service provider steady-state team was the root cause of rippling implementation issues. These included resistance to information-sharing, missed deadlines, and costly penalties for failed service level agreements of upwards of $100,000 per month. These teams are so interdependent that if they do not trust one another, then blame, finger-pointing, and animosity will swell. Because outsourcing efforts are complex, communication within and between outsourcing partner teams is crucial for meeting deadlines and avoiding costly delays and service performance issues.
Lack of transparency about one another's work often lies at the root of misalignment and mistrust. We often see a tremendous amount of fear around providing transparency among the manufacturing client and service provider teams because of the us versus them mentality. One year into a finance and accounting outsourcing initiative, a food and beverage manufacturer found that lack of partnered planning with their service provider counterparts deeply divided the two sides. Without mandated shared accountabilities and regular communications, there was no transparency about team members' work and they had no mutual understanding of how one team's work impacted the other.
Risks and Benefits
What happens if problems like mistrust and lack of transparency between the outsourcing partners persist? The most critical risks associated with not establishing a solid foundational partnership at the start include missed deadlines, milestones and the actual go-live date. The ripple effects of any one missed deadline can have dramatic financial consequences, requiring extra resources or contract and/or requirements changes, creating additional costs for the client and service provider. Systemically, a cycle of animosity and costly problems can continue, further deteriorating the relationships and impacting the end customers.
Sometimes outsourcing projects are thrown far off schedule due to serious cultural misalignments. A pharmaceutical manufacturer outsourcing certain products to its specialized biotech partner found that achievement of key milestones was jeopardized by the lack of agreed-upon working relationships and process misunderstandings. The larger pharmaceutical manufacturer followed very bureaucratic procedures, while the smaller biotech partner had a less rigid and process-oriented style. As a result, project teams from the outsourcing partners worked in separate silos, creating a constant state of re-doing work due to an inability to partner and collaborate. Frustrations grew and animosity cascaded throughout the project team layers, causing costly delays and persistent, systemic fragmentations.
Another case in point was our experience with a technology services organization that was outsourcing human resources (HR) services from a major pharmaceutical manufacturer. We quickly deduced that a reinforcing loop of mistrust, animosity, and financial penalties (due to continuously delayed steady-state service projects) had created two years of deeply rooted, ineffective mindsets and behaviors. The manufacturer's employees were deeply impacted by these highly negative dynamics. For example, in a single HR department, case escalation volume was at a monthly high of 300 cases a week, demonstrating an increased level of service issues customers were experiencing. An internal customer service survey found that only 50% of the pharmaceutical manufacturer's employees were receiving call-backs regarding their HR needs from the technology service provider (a clear indication of sub-standard service levels.) Persistently negative and siloed mindsets for both the service provider and the client teams contributed to an inability to jointly address these significant service issues.
But suppose the outsourcing partners put in place a methodology and systems to measure and monitor the relationship from the beginning and throughout the project. The benefits include risk mitigation, effective and efficient working teams, on-time deliverables, manageable processes, and higher quality work experience for the outsourcing partner teams. We have seen these benefits result when a focus on relationship management within an outsourcing engagement has remained as important as measuring and monitoring service performance levels throughout the project.
By engaging in a focused relationship and strategic alignment process, the reinforcing loop of destructive mindsets and behaviors in the aforementioned example was dramatically improved. This work enabled the partners to turn around their troubled outsourcing relationship and the end result was smoother delivery of HR services to the end-user -- as well as new hardware sales of over $200 million for the technology service provider. The pharmaceutical manufacturer client and the service provider partners succeeded by leveraging their focus on the relationship and their mutual objective of delivering innovative human resource services to the manufacturer's employees. This relationship focus let the teams utilize a partnership mindset to help them implement such critical tactical improvements as open sharing of financial details and metric and process refinements.
Tips for Managing Relationships
During the Strategy Phase, manage an outsourcing project with these steps:
- Build true alignment among the manufacturing company's leadership on the impact of outsourcing initiatives and how these support the business strategy.
- Co-create and rigorously co-develop the business case, including a clear ROI, to ensure a common purpose along with vision and the strategic reason for outsourcing. This conversation enables people to begin gaining alignment, establishing buy-in, and laying down foundational trust.
During the Contracting Phase, take these steps:
- Compare organizational cultures to understand potential road blocks in process, communication, and relationship management.
- Avoid mistaken assumptions and expectations by having specific conversations. Agree upon on how to have the unavoidable difficult conversations, e.g. future-state changes occurring across the business and the people. Manufacturing companies should re-visit this step during each phase when new team members become involved.
- Create upfront agreement to design high standards for realistic service level agreements (SLAs) whereby both parties, together, will monitor and adjust accordingly - create shared accountabilities and responsibilities. This process requires on-going, transparent dialogue about concerns and ideals, and will allow outsourcing partners to quickly surface areas that may show up later in the project.
- Involve and align both the manufacturer's and service provider's senior- and mid-level management to ensure consistent strategic focus is carried through from the contracting phase to pre- and post-transition to implementation.
During the Transition & Implementation Phase, do the following:
- Develop a game plan that defines how the teams will operate with a one-team mindset through shared accountabilities, project responsibilities, and outcomes. It is crucial to focus on this mindset which impacts peoples' actions upfront and throughout the project life cycle. Having an understood mindset and pre-defined outcomes exponentially increases the success factor of an outsourcing effort.
- Organize and plan a series of strategic alignment meetings with the manufacturing client and service provider teams to ensure a seamless transition process - co-led by a partnered leadership team. These meetings allow the team to evaluate progress, understand shifts and changes, and plan for future deliverables. Creating a systemic understanding among team members encourages partnered behaviors, information sharing and trust.
- Assess team members' leadership and management skills for supporting and driving a partnership approach to the outsourcing effort. Coach or replace individuals who impede project flexibility and success and/or fail to influence an effective partnership.
- Co-celebrate major success milestones and the impact the work is having on the client's business. Document best practices and lessons to continue the successes.
During the Go-Live Phase of the outsourcing project, remember to:
- Continuously revisit the long-term path set forth during contracting to assess strategic needs and support, and to surface other partnership opportunities that support business transformation goals.
- Design and implement a succession plan that ensures continuity of the mindset, partnership approach, and lessons learned throughout the life of the engagement for new team members.
Starting an outsourcing relationship off on the right foot by taking a partnered approach can create a higher level of efficiency, and save time and money for both partners.
Jessa McIntosh is a consultant for Stone + Company www.stoneandcompany.com