Thursday, January 20, 2011

Defining Mediocrity


Sfsa;lj

Buying services requires a different skill set than buying products. This is particularly true when contracting for an outsourced service, or outsourcing a function currently done in house. Products can be specified using very concrete terms. Things can be seen, touched and measured. Services are a little harder to describe, and outsourced business processes even more so. This is particularly true when the outsourced service actually touches your end customer. Outsourced payroll is easy. Outsourced order fulfillment, not so much.

Instead of a product spec, we have a Statement of Work or SOW. Those initials often can be descriptive of the document in multiple ways. Anyone who has spent time on a farm or at the county fair knows that a sow (female pig) can be bloated, slow moving, destructive and hard to deal with. In the worst case a SOW makes your supplier like a sow.

Most of the time, there is a contingent of folks inside the company who have a proprietary interest in how the process to be outsourced is done, usually because they currently do it or used to. They see their expertise as a part of their value to the company. The hard part there is that usually a key reason companies outsource is to get more value or better performance from that process. Hopefully, companies are hiring a service provider because of their state of the art processes and equipment. By definition, superior methods imply different methods.

Human nature works against us here. The people we use to negotiate the spec are the subject matter experts, i.e. the people who defined how it is done now, and the procurement person, who's success criteria is tied to having a problem free start up. This produces a very strong bias to create a process at the supplier that reproduces exactly what is done in house.

Here of course is where most companies hit a stumbling block. They are contracting with a world class provider of a service, but their SOW defines the process as exactly what has been done in the past. This is like recruiting Lebron James to play basketball for you and then insisting he only use plays from his high school team. Opportunities to reduce cost and to improve service levels get negotiated away in defining the SOW.

So what to do?

Know what you want

You are outsourcing for a reason. Are you looking for improved service levels? Lower cost? Improved reliability? These things are what your agreement should be based upon, as opposed how many steps or moves are listed in a process. Hold the supplier accountable for what you are really looking for. The agreement needs to show hard target, with incentives for the supplier to meet targets. Let your supplier make money for making you money.

Let Lebron be Lebron

Here's an idea. Let the supplier write the SOW. Let them use their expertise to transform your process to gain some real efficiencies. When you own the details you hamstring your supplier. If your contract is tied to real outcomes, you don't need to worry about steps. If they cant improve your process, you probably picked the wrong people anyway.