Innovation & Continuous improvement in outsourcing contracts

Ever heard of an outsourcing deal dying out, after a few years down the road?

Many stories run like this:

• Company A decides to outsource one of its tasks (IT, marketing, legal, facilities, HR, accounting, etc.). They selected Provider B as their best choice.
• After an often-demanding ramp up period, everything goes basically alright.
  Note that according to several research, at this point, already 25% of the deals broke. And even further, only 50% of all outsourcing bring the excepted value during its initial term.
• In our story, Company A and Provider B are continuing their journey, with some unavoidable ups-and-downs, for say about 3 years and more.

Now comes the third breaking point that we want to address here: almost all outsourcing deals are breaking overtime, either by external events (such as change in management, technology, etc.), or by time erosion

The reason for that is that continuous improvement and innovation has not been dealt with adequately.

As a result, almost all outsourcing deals are hit acutely by it.

Obviously, in the beginning, the client company made some strategic considerations. But then onward, the client and the provider are usually focused on operational issues, both ensuring the deal is profitable.

As a matter of fact, by then, the client is concerned about reducing costs, and the provider is worried by its profit margins. These are indeed conflicting objectives, opening the door to a variety of conflicts. By now, the discussions focus on price and scope and become increasingly contentious.

The good news is that it is there is a way to avoid such erosion and conflicts.

However, the remedies involve several key aspects to be considered.

In August 2019, IACCM published an interesting research on “Supplier-Led Innovation and Continuous Improvement”.
The full study can be found on the IACCM site (you may need a membership account to access it): https://lnkd.in/dqdWJds
We base ourselves on this excellent research work, while adding some practical tips from our experience.

It all starts by realizing that in an outsourcing, client and provider are on the same boat.
In other words, the first item is that there a need of a good basis of mutual trust.

Secondly, and this is the most challenging to resolve: both parties need to drop their cost or profit margin as their fore most objective.

Although costs and profits are to be monitored closely, if there is no compelling driver for a fair long-term relationship on both sides. Such must exceed the notions of costs and profits, to include innovation and continuous improvements.

Sadly, the average large outsourcers and procurement driven clients are disqualifying themselves. And only the top quartile performers are able to reach this point.

Thirdly, you need a specific governance.

The new governance model you will need should have the following structure:

• A sole dedication to Innovation and Continuous improvement, entirely separated from operational tasks
• Regular meetings (say on a 6-month basis) in the ‘green’
• With an independent expert moderating between client and provider
• Topics to be discussed will depend on the deal, but it should tackle subjects as:
  – True needs, current and future
  – Market evolution (regulations, competition, national and international trends, research material, technology evolution, etc.)
  – Pains of client, provider and end users
  – Out of the box considerations are wanted
• Initially, discussions need to be entirely agnostic of personal and company interests

Some contracts have clauses on ‘Technology watch’, or ‘Innovation’, or ‘Continuous improvement’.

However, a clause is by far not sufficient. And making it a provider obligation is not working.

Here is the way to do it properly.

Most importantly, the principle is that is must take into account the interests of both parties, each obtaining a fair share in the benefits (a “win-win”)

• An equitable share of outcome benefits means, for example:
  – Provider needs to agree to sometimes reduce its revenue, when it involves efficiencies in turn, client agrees to compensate for partial revenue reduction and agrees to prolongation the contract duration
  – Client needs to agree not to discontinue the contract for a period of time
• Its the Client that remains in the chair seat, but it has to share its strategic plans and wishes to collaborate, at least on strategical level, with the provider
• Client should agree to pay for such services on top of contract scope, as it would for strategic consultancy.
• In turn, the provider needs to contribute with value-add input, as a true strategic contributor, not as a sale, or an operational person
• Other actors are involved (in addition to the moderator), with a prior reasonable agreement
• Provider should have the first right to implement innovations, exercising such right in a responsible and trustworthy manner (in practice, provider will either do the job, subcontract or coordinate, unless it doesn’t make sense)
• Provider must propose its services at market value

Lately, we have been involved in four cases in which erosion has crept in outsourcing deals, one on the client side, three on provider side. One ended up in a traumatic situation, one did not wish to act upon it, two are taking steps to truly implement innovation and continuous improvement.

We found those cases to be categories as a cancer with 4 stages. In the last stage, all you probably can do is to prepare for ending the relationship in the best way possible. Stage 3 is still possible to turn around, but it will require a lot of good will on both sides. Stage 2 and 1 is very common and can be ‘healed’ easily, provided that there is some good will on both sides.

In conclusion, the question for you is probably, in what stage is the deal you work on. And how will you tackle it?