Vendors make money too

by Anthony Baldo

What’s the surest way to infuriate a supplier of outsourcing services? Ask him how much money he’s going to save you.

“There has to be an appreciation of the relationship for more than lower costs,” says Bruce Caldwell, the principal analyst for Gartner Inc.’s sourcing and servicing group. “They need to make a business profit.”

Granted, price will always be a major flash point whenever a buyer and seller of any product or service get together to negotiate a deal. However, it’s a lot more than about money when it comes to negotiating an outsourcing arrangement.

This is perhaps the most important message vendors and consultants offer to buyers of outsourcing services. The reason: The buyer and seller of an outsourcing arrangement must live together and trust each other for a number of years.

“Because these tend to be large, long-term relationships, you (and the vendor) have to trust each other,” cautions Pat Quenan, the delivery services leader for Hewitt Associates’ HR services practice, which counts Sony Electronics as an outsourcing client. “It’s like a marriage. There are ups and downs.”

This is why vendors continually remind potential customers that an outsourcing deal must be mutually beneficial. Says Caldwell, “They want to grow the relationship. They want to meet clients’ expectations, as well as their own.”
Indeed, one outsourcing vendor says it isn’t in the customer’s best interest to financially starve service providers since doing so puts potentially years’ worth of effort in jeopardy. “If there are concessions in the beginning, then there should be rewards at the end through additional work,” Caldwell says. “In other words, when new work comes up, [the outsourcing vendor] should get some of it.”

Vendors also recommend that buyers fully understand why they are planning to outsource in the first place before even entering into negotiations. This is easier said than done, however.

Afterall, just 43% of the 500 CFOs and senior finance executives with $1 billion or more in revenue surveyed by Hewitt Associates in January 2002 said they had a formal outsourcing strategy. This low result suggests that outsourcing customers may need to pay more attention to preparing for an outsourcing deal before they can even think about closing one.

“Good clients will work with us to identify a solid service strategy,” says Greg Secord, v.p. of marketing and business development for ADP Inc.’s national account services unit, which provides payroll, HR benefits administration and other outsourcing services to companies with 1,000 or more employees.

Vendors also recommend that buyers be as open as possible during the negotiating process. Otherwise, a lack of candor can undermine an outsourcing deal or relationship shortly after it begins. “Customers think they have to hide all kinds of information,” says Quenan. “So the vendor has to guess. And the more a vendor has to guess, the better chance he’s going to guess wrong.”
ADP, for example, runs an annual conference for all of its outsourcing customers called “Meeting of the Minds,” which generally attracts 850 or so of the company’s clients who engage in roundtable discussions about best practices and training courses. “They make a conscious decision to be active in the relationship,” says Secord.

Secord concedes that the art of business negotiation has always held that the one with the best bargaining position is the one with the most information. But that can backfire when an outsourcing supplier is trying to become part of a customer’s corporate culture in a seamless manner to the outside world.

“This isn’t an event transaction. You’re not buying a car,” he says. “You’re buying a relationship to last a decade or more. The outsourcing provider is trying to provide a service, but if that provider doesn’t have all the information he needs, you get hurt as a client.”

He says the best thing an outsourcing customer can do in prepping for a deal is develop the criteria for an outsourcing arrangement internally, rank each of them, and then let everyone who’ll be involved in the relationship, including the vendor, respond in an open manner.

Customers should also know thyself. For example, many companies attempt to enter an IT outsourcing arrangement without knowing the number of applications they have or how many servers or desktop computers they maintain. Many don’t take the time to inventory those assets or to assess how well they are performing prior to the outsourcing deal.

Customers can have unrealistic timeframes or goals for an outsourcing deal. Clients frequently get broadsided not by the people laid off but by the people who are left. Time and energy must be devoted to getting people to understand new processes and activities. “It’s an unknown,” says Quenan. “You know how data will react with a change in a system. But it’s unknown how people will act.”

Setting and achieving consistent benchmarks will also improve an outsourcing deal’s chances of success, vendors counsel. Vendors, however, can quantify for their customers just how effective their outsourcing service is. For something like payroll or benefits administration, it could be the service provider’s average response time in dealing with questions from the outsourcing customer’s employees. If it’s an IT outsourcing arrangement, it’s the amount of time the help desk solves a problem.

Suppliers also feel that a deal’s efficiency is increased if a chain of command is set up by the customer. “The worst thing as a provider is when you don’t know” who is making decisions on the outsourcing customer’s behalf, says Quenan.