Managing Outsourcing Relationships for Value Creation

Outsourcing customers and providers usually enter into?agreements with optimistic intentions and expectations.?Customer executives look forward to quality service, new thinking, extraordinary responsiveness, and a vendor that shows both a partner-like caring about the customer's success and an intuitive understanding of the business.? The customer executive may imagine that this will be an arrangement that yields immediate and continuous business value.?The provider, in turn, hopes to provide all of that and more while making a fair profit and getting more business with this customer and others in the same industry.?The provider also believes that we can enjoy this relationship for many years-it will be a reference account that we can proudly write and talk about for years to come.

Thus, the relationship begins.

Making outsourcing relationships work takes a lot more than good faith and committed people, and too few such arrangements actually come anywhere near reaching their desired goals.? Even with the best of intentions, relationships can end up in what we call a "value-shrinking" loop.? Once in such a loop, customers and vendors are headed down the spiral to failure.?Both seem to get stuck in negative perceptions and behaviors; find it difficult to share information; waste time on unnecessary activities; and fail to share mutual gains and responsibility for failures.?

Fortunately, some relationships get into a different loop, one we call? "value-expanding"?in which suppliers and customers work together for mutual benefits.?Over time both parties are able to find and distribute joint gain, make more efficient use of time, structure and make wiser choices, enable continuous improvement and share both gains and failures.?

Given today's increased pressures on organizations to deliver against ever-changing requirements, it is easy, and the consequences of falling into a value-shrinking mode can be costly.?

Although both providers and customers benefit from effective relationships, the customer usually stands to benefit the most from good relationships, and suffer the greatest from bad ones.?Customer executives need to ensure that their organizations have the ability

to systematically and repeatedly develop value-expanding relationships by focusing on building relationship management capacity at both the relationship and organizational levels.

Lots of Focus on the Substance, Not Enough on the Relationship

Customers and vendors fall into value-shrinking loops for a host of reasons and due to a myriad of challenges, yet many of those problems and challenges can be avoided - or at the very least their negative impact minimized - with a systematic focus on building and managing the working relationship.?To do so, it is helpful to distinguish those things that relate to the substantive aspects of the arrangement (e.g., ensuring that the terms and conditions of the contract make sense; making sure that SLAs are tight and well constructed), from those that go to the quality of the working relationship (e.g., the extent to which trust and respect exist). Managers who hope to gain the most from their supplier relationships understand this critical distinction and focus on both.?

Unfortunately, this is generally not the case.?Managers on both the customer and vendor side may not fully understand the relationship management challenges and dynamics that complicated, interdependent sourcing relationships create.?Fewer still seem to have an idea of what can be done to effectively deal with such challenges.?

Managers fall into classic customer- vendor dynamics in which they assume that it is solely the vendor's responsibility to focus on the quality of the working relationship, or that if the customer expresses an interest in the relationship that will be perceived as weakness.?In any event, relationship issues are easily perceived as fuzzy, it can be tough to make the business case for investing in relationship competence and, beyond that, few people have any idea what one could do to build such competence even if prepared to do so.?With all of this, it's obviously not much of a surprise that focus tends to be solely on the substance.?Indeed, the substantive focus is so strong that managers try to overcome relationship problems with substantive solutions ("we seem to be having a real trust issue here - better tighten up the SLA!").?At core, it is this mindset and approach that gets customers sub-optimal relationships and, therefore, sub-optimal value from their vendors.

Working Relationship Challenges

The first step toward building organizational capacity to systematically develop value-expanding relationships is to develop an understanding of the kinds of specific relationship challenges that have the potential to derail or undermine the value of the arrangement.?Different challenges exist at different phases of the relationship.?

IT leaders who understand why these issues have the potential to derail effective working relationships, and how they play themselves out in dysfunction when not well handled, are prepared to begin to take steps to enable their organizations to build the capacity to systematically deal well with them.

Relationship Management Infrastructure

Organizations that want to maximize the value of its relationships must build the capacity to do so.?Unfortunately, even executives who understand the importance of and challenges to maintaining effective working relationships, rarely attack those challenges through an organizational approach.?They instead develop an approach that is fundamentally individually focused-one that focuses on either hiring people with strong relationship management skills or on putting those who have such skills through curricula of soft skills training.?

The individual focused approach suffers from an inability to be effective across broad ranges of relationships and periods of time.?While an organization may have a few good people with people skills, there are never enough to cover the full range of arrangements that need to effectively function.?While an investment in skills training is helpful, such an investment risks walking out the door as the trainees leave for other opportunities.

Finally, organizations that focus their relationship management efforts solely on building and relying on the personal skills of individuals miss the opportunity to identify and institutionalize best practices; identify systemic relationship management gaps; and systematically build greater and greater organizational relationship management competence.?Instead, leaders should focus on building and implementing what we call relationship management infrastructure.

Organizations that have relationship management infrastructure have a set of processes and tools designed specifically to enable it to systematically build and manage its stable of complex relationships.?For an organization to claim true corporate capacity in relationship management, key enablers such as skills, incentives, organizational design and leadership messages must be in place, as well.

The following describes a standard relationship management activity or tool that senior managers can put in place at each stage of the relationship management process.

On-Going Internal Alignment Process

Without the "buy-in," understanding, and acceptance of key internal constituents (e.g., executives, internal individuals responsible for delivering against commitments, regional offices whose markets are impacted by a decision) on e.g., the goals of a particular relationship, the overall need for the relationship, the reasoning for why the supplier was chosen, the trade-offs made, and the arrangement's implications, barriers to the effective implementation of a decision often arise.?These barriers make it quite difficult for the relationship to meet its goals, fulfill its commitments, and meet expectations.?In other words, if the organization does not have its own internal house in order, it is likely the supplier relationship will be sub-optimal and / or the supplier will not be able to be effective.?Senior management should therefore develop and implement an internal alignment process covering the entire relationship life cycle.?

The purposes of such a process are:

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Inclusion: ensure that all appropriate internal constituencies (decision-makers, those responsible to the relationship for delivering a customer commitment, those impacted by the decision) are included in the decision-making process in the appropriate manner (as a decision-maker, as someone to be consulted, etc.)

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Information: ensure that relationship managers have all necessary information prior to making a decision

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Communication: ensure that all decisions, and the reasoning behind those decisions, are communicated in a timely way to all appropriate parties

Customers are often unhappy with a supplier without recognizing the customer's own contribution to the difficulty - in the form or lack of internal alignment and the mixed messages, missed deadlines, etc. that come with it.?An internal alignment process can help minimize that contribution.

A Relationship Due Diligence Process

Buyers sometimes enjoy the luxury of choosing a supplier from a large menu of possible companies, and other times there is no choice at all.?In either case, as part of their exploration and selection phase, organizations that hope to create value-expanding relationships ought to engage in a standard relationship due diligence process.?

The purposes of such a process are:

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Relationship Challenges: identify significant relationship management challenges likely to be encountered with a particular vendor

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Relationship Risks: assess the risks that those challenges might pose to a successful arrangement

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Supplier Potential: assess the capacity of the potential supplier to overcome the challenges that may arise

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Relationship Mechanisms: preliminarily identify the kinds of relationship management mechanisms that the customer and supplier would need to put in place to minimize the likelihood of such challenges arising and maximize the probability of handling them successfully

Engaging in a relationship management due diligence process as a standard practice enables customers to both make better choices about which suppliers to work with and, even more importantly, helps set the stage for successfully working with those that are chosen.?Customers can use the gathered information in their broader exploration conversations with potential suppliers (e.g., "we anticipate these kinds of conflicts as we work together - what might we do to minimize their likelihood and deal well with them if and as they arise when in the on-going management phase?).?Additionally, in the same way that evaluating suppliers on quality control over time creates a supplier pool with competence in quality management, explicitly building relationship management into the vendor selection process ought to create suppliers with greater competence and demonstrated capability for effective relationship management.

?/span>A Standard Negotiation Preparation Process

We all know that preparation is key to effective negotiation.?In most organizations, however, preparation is frequently ad-hoc and often non-existent.?From the standpoint of the working relationship, preparation is almost never done with the goal of reaching an agreement that meets both parties interests very well, leaves all feeling fairly treated, and sets the stage for effective implementation.? For that to happen, organizations need to institute a standard preparation process.?

The purposes of such a process are:

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Instructions Development: clarify not only the organization's positions but also the interests that underlie the positions, their relative prioritization, and tradeoffs

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Team Alignment:? develop clarity around team member roles and responsibilities, as well as overall strategy

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Creative Vision: building on the idea that value-expanding relationships can be developed, ensure that some creative and potentially mutually valuable deal terms and other possible joint gain agreements are imagined

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Prepare to Persuade: develop, by looking for objective criteria, accepted formulae, precedents, etc., the ability to persuade the other side about what is fair and / or is appropriate or "on the merits"?(as opposed to hoping to coerce them into doing what you want them to do given any power imbalance)

A well-designed preparation process can reduce the variability of negotiated outcomes and create a platform for a more collaborative negotiation.?It should allow negotiators to look back on effective past practice and provide for them to put themselves in the shoes of the other side and truly look at the situation from a second point of view.? Finally, it should work in tandem with the alignment process to ensure that the organizations is not making commitments at the negotiation table against which it is unprepared to deliver.

A Negotiation Launch Process?

Negotiations are a time during which customers and suppliers often inadvertently fall into a value-shrinking loop.?This is normally not because of bad intent or ill-conceived tactics, but because of a lack of a common and agreed upon structure and process for how the negotiations will proceed.牋 As discussed above, in negotiations both parties are wise to ensure that they are: 1) maximizing joint gain (truly getting to "win/win"); 2) moving forward as efficiently as possible; and 3) building a good working relationship along the way.?A way to help the two parties do just that is a standard negotiation launch process.?

The negotiation launch process builds on the preparation activities.?Designed well, it creates the necessary foundation for an effective, collaborative and joint gain negotiation.?

Its purposes are:

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Shared Vocabulary:? develop a shared negotiation vocabulary and tool set among both the negotiators and any others who will be called to play a role in the conversations

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Sound Working Relationship:?begin to build the working relationship

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Negotiation Process:? discuss and agree upon a clear process for how both parties will prepare for and conduct the negotiation

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Relationship Issues: identify, discuss, and plan for relationship issues that may be encountered over the course of the negotiation.

Given the complexity of outsourcing negotiations, a negotiation launch generally consists of a 2-3 day off-site meeting.?While this can feel like a significant investment, the time saved in the actual negotiation process, as well as the increased substantive value and relationship benefits, make the investment a sound one.

A Relationship Launch Mechanism / Process

Many customers understand and espouse the importance of getting their supplier relationships off to a good start, but few actually do it.?Indeed, as we have said, customers generally assume that such activities are the vendor's responsibility and, therefore, if the vendor doesn't arrange for it, it doesn't happen.?Alternatively, proactive customers who want to ensure that they maximize the value they get out of an arrangement standardize their approach to launching supplier relationships and insist that launches indeed do happen.?

The purposes of the relationship launch are to:

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Relationship Goals: jointly define the key characteristics of the type of working relationship necessary to achieve a successful relationship, and ensure that all have a common picture of what such a relationship would look like in action

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Relationship Metrics: design metrics and tests for monitoring the above

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Relationship Mechanisms: building on the relationship due diligence process, discuss likely challenges to the relationship and design and agree to relationship management mechanisms for dealing with such.

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Relationship Barriers: proactively deal with any relationship barriers coming out of the negotiation phase

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Communication Plan: jointly develop a communication plan for how all of the above information will be communicated out to relevant parties

The relationship launch is foundational to the ability of both customers and suppliers to gain the maximum value they can out of the arrangement.?Without it customers simply can't expect the relationship to function as well as they would like and will therefore get less value out of it.

Standard Integration Procedures and Protocols

The period after the relationship launch and before individuals start working together and learning about one another is a time rife with relationship risks.?Concerns and fears are elevated.?Silences and / or gaps in communication are filled in with guesses and negative attributions.?Unintended slights have extraordinary impact.?Poorly handled, these and other dynamics put the relationship at risk for quickly falling into a value-depleting loop from which it will be difficult and time consuming to escape.?Thus, as the parties move from relationship launch into ongoing management, it is quite helpful to have a standard set of integration procedures and protocols.?

The purposes of such procedures are:

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Communication: ensure that all results of the relationship launch and any and all other important information is consistently communicated to the right parties at the right times

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Conflict Management: prior to the implementation of any standard conflict management mechanisms (as discussed, below), ensure that conflict is surfaced and efficiently and effectively handled

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Trust: enable and facilitate the creation of trust along multiple dimensions, including trust related to intent, competence and commitment management

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Decision-Making: provide clarity as to who is making what decisions (and on what basis), who will be consulted prior to any decisions, and who will be informed (and through what mechanisms) after

Through a well-designed and implemented integration process, customers and vendors can reduce early inefficiencies and dislocations, start finding value, and set the stage for a value-maximizing ongoing management phase.?As with all of the activities discussed herein, customers need to be proactive in ensuring that they and their vendor will efficiently move forward.

Standard Conflict Management Practices and Tools

No matter how effective the relationship planning, conflict will of course flare up and cause disruption on the customer / vendor interface.?A good working relationship, however, does not mean an absence of conflict.? Rather, it means having the capacity to deal well with difference and conflict as it (inevitably) does arise.? To have that capacity, participants in complicated sourcing arrangements ought to have and use a relationship friendly, learning oriented conflict management process.?

The purposes of such a process are to encourage the following:

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Working Together: provide a way for those involved in the conflict to collaboratively work together to reach resolution

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Diagnose: enable the parties to search, together, for what might be the underlying or root causes of the problem

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Joint Contribution: help the disputants to look, from a systems perspective, for what role each of them and / or their organizations are playing in creating the problem

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Legitimacy: ensure that any resolution is one that both parties understand and can accept as being "on the merits"

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Collaborative escalation: when unable to reach agreement, provide a way for the parties to escalate in a way that is not damaging to the relationship

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Aggregate: track conflict so that recurrent or systemic problems can be identified and proactively dealt with

Conflict management is an area where we see some of the greatest reliance on the individual skills of individual relationship managers.?Thus, it is also an area where we see some of the greatest opportunities for improvement.?Well, handled, conflict is actually an opportunity to enhance, rather than detract from, the quality of the working relationship.

?/span>A Standard Relationship Audit Process

As outsourcing arrangements progress over time, relationship managers are of course wise to take a step back, pause and evaluate how things are going, what changes can and or need to be made, learn for the future, and the like.?Unless such efforts are systematized, organizations lose the ability to not only ensure that the activities are as useful as possible but also to look across its many relationships for overall learnings and systemic difficulties.? Thus, organizations can build and implement a standard relationship audit process.?

The purposes of such a process are to:

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Evaluate: evaluate the performance of the relationship by monitoring: (i) the substantive value created and distributed to both sides of the arrangement; (ii) the quality of the working relationship

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Adjust: identify ways the management of the partnership needs to be adjusted so as to achieve previously defined goals

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Surface Breakdowns: ensure that inevitable breakdowns in communication, misperceptions, and conflict are easily and regularly surfaced and constructively addressed

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Find Value: uncover new opportunities to expand the scope and/or shift the focus of the relationship

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Best Practices: identify effective relationship management practices and tools to share and implement on other relationships

?span style='font:7.0pt "Times New Roman"'>牋牋牋牋? Learning: provide the basis upon which an organization can look across all of its relationships and determine where it is doing well at managing its relationships, where it is doing less well, and why

A relationship audit is quite different from customer satisfaction surveys or SLA performance evaluations.?Rather, the relationship audit is something that is done by the vendor and customer together, with the goal of joint learning so that they can both be?better at, and find more value in, working with one another and others in the future.?As such, it can be foundational to the development of a relationship that can grow, adjust and deepen over time.

Getting Started

Senior managers know that they should care about effectively managing their supplier relationships.? Often, however, they don't know how to actually do so.?As we have said, at best they focus on getting the substance of the deal - the terms, conditions, SLAs, etc. - as good as possible.?While it makes sense to do that, it leaves out a focus - and the possible resultant value - on the relationship side of the arrangement.? Well-designed relationship management processes and tools can help organizations focus on both substance and relationship so as to systematically develop value expanding relationships and avoid value depleting one.?An institutional focus simply works better and creates more value over time than an individual one.?To get started, we recommend that managers undertake an evaluation of the quality of their complex sourcing relationships, determine what is working well, less well, and why.?From there determine what relationship management capacities the organization currently has in place and which need to be built.?From there the road to more value from supplier relationships is clearer.

About the Authors:

Dr. Wendell Jones, CEO, Outsourcing Advisors International, is an internationally acclaimed consultant and speaker and a senior executive with thirty years of management experience in the securities, aerospace and computer industries.?The winner of the PricewaterhouseCoopers and Michael F. Corbett & Associates Outsourcing Achievement Award for thought and practitioner leadership, he is the author of several management and IT articles, and co-author of Outsourcing Information Technology Systems and Services, a book recently published by Prentice Hall.?A frequent speaker at executive conferences, he appeared on a CNBC outsourcing special and has been quoted for articles in Business Week, Investors Business Daily, Wall Street Journal, Fortune, Information Week, CIO, Wall Street & Technology, and Information Systems Management.

As a customer he led the evaluation, negotiation and management of a $3 billion, 10-year IT outsourcing agreement at McDonnell Douglas and he later managed selective onshore and offshore outsourcing while Senior Vice President of Technology Services at NASD/NASDAQ Stock Market.牋 He joined Compaq Services (formerly Digital Equipment Corp.) as?Vice President of Operations Management Services in November 1997.牋 An Operation Management Service (now business Management Services) is Compaq's outsourcing business unit.

His education includes an MBA and Ph.D. in general management and information systems from the University of Georgia, a bachelor's degree from the University of Arkansas, and a post-doctoral fellowship in computer science at Cornell University.

Dr. Jones can be reached at (845)452-0600 or via email at wendelljones@corbettassociates.com.

Stuart Kliman is a founding partner of Vantage Partners LLC.? As a management consultant, Mr. Kiln's practice focuses on helping clients build the capacity to negotiate, build and manage stronger and more mutually valuable customer, vendor and partner relationships.?He has worked on the ideas discussed in this article with clients in pharmaceuticals, financial services and manufacturing industries.

Mr. Kliman is a former member of the Harvard Negotiation Project, and practiced as an attorney with the law firm of Aren't, Fox, Knitter, Poltroon & Kahn in Washington, D.C.?Mr. Kliman is a member of the Maryland Bar and received his JD cum laude from Harvard Law School and his BA magna cum laude from Franklin & Marshall College.?He is a contributing author to McGraw-Hill's Handbook of Management Consulting Services.?Mr. Kliman is a frequent writer and speaker on issues of negotiation and relationship management.?

Mr. Kliman can be reached at (617)354-6090 and Skliman@vantagepartners.com牋 Vantage Partners web site is at www.vantagepartners.com.