Shock Value – What Suppliers Say About Clients and Governance
Service providers would tell their clients many home truths – if they could. Upsetting clients is a double-edged, often losing game. Going public harms confidentiality and trust, perhaps it is better to bottle the frustrations and get on with the job. Yet most of their comments made to us over the last five years would seem to be in the client’s interest to know.…after all, it is not as if it’s all going well. On our latest estimates about 20% of ITO deals are putting in ‘great’ performance, 30% ‘good’ performance, but 35% are only ‘doing OK’ while 15% are ‘poor’ (BPO figures are 20% great, 25% good, 35% OK and 20% poor)[i]. After several articles in Professional Outsourcing with my colleague Mary Lacity, I lift the lid further, one final time, on suppliers’ views, hoping the combined shock value will galvanise better practices out there in key areas[ii]. The focus here is on post-contract management. On client capabilities suppliers say: where are your good people? Don’t do man-to-man marking. Stay on your own side! On relational governance they point to their own self-interestedness, but also suggest that trust needs to be a two-way street. Let’s look at the admissible evidence on these.
Post-Contract Managing: Does It Add Up?
Most clients understand they need to retain a different set of capabilities after outsourcing. Instead of managing resources, client managers must learn to manage the inputs to and outputs from suppliers. Client managers must also co-own the responsibility for the success of outsourcing. When internal users grumble, good client managers diagnose and manage user response in cooperation with the supplier. The number of retained people on the client side is also an important factor. On some engagements, too few good internal people are left managing the relationship. On other engagements, too many internal people are left to micro-manage the supplier. Suppliers want customers to know three things about client management. The first thing suppliers ask is:
“Where Are Your Good People?”
Suppliers report to us that clients frequently do quite a good job of getting to contract, not least because they hire advisors and tend to put their best people on the task. But they also report that some clients treat outsourcing as a “fire-and-forget” missile. The problem child has been handed over and only a skeleton crew on the client side is left to monitor performance against the contract. A small retained client group is also justified (weakly) as protecting the business case by keeping the internal headcount to a minimum.
According to suppliers, some clients underestimate the amount of managers needed to facilitate outsourcing. Talking of his recent work in the (European) financial and government sectors, a senior supplier executive said, “I have to say that clients often do not know what it takes to manage, really manage, outsourcing until quite late into their outsourcing experiences.... nor do they get particularly quickly what it takes to become a customer.” Sometimes a range of tasks need several client people with distinctive expertises, but land upon the desk of one person. In one major US bank a supplier described the person he dealt with who carried the title of contract manager but was in fact a surrogate CIO, a service facilitator, a contract administrator, and a technology handyman. He suggested that the bank had misjudged the amount of sheer management that needed to be done once outsourcing become operational.
In several companies, the transfer of too many technical people to the supplier caused gaps in client capabilities. In one energy company the CIO admitted that, in retrospect, he had let too many technical people go, “We never had a ‘techie’ to discuss the architecture with. They flew blind for a long time and we found it very difficult to get their agreements to what we proposed.” At one bank, technical architects and their role were handed over to the supplier. Finding little use for them on a ‘sweat the assets’ contract, the transferees were moved to other contracts. The supplier admitted that he was reluctant to fill the positions, because “there was little in-house technical expertise in the bank to dialogue with.” Subsequently, four years into the deal, the client began rebuilding its technical capability, and to reclaim its position on technical issues.
Part of this ‘hollowing out’ of the retained function is that clients tend to focus on what is outsourced rather than what needs to be retained to manage outsourcing. The belief is that only a ‘residual’ IT function is needed, since most of the management tasks and responsibilities have been handed over to the supplier.
Ironically, clients promise themselves that outsourcing will make them more demand-led, business-focused and more strategically adept, but then under-resource their internal management capability in ways that cause their over-pressed and under-trained staff to end up fire-fighting much of the time. Suppliers also remark that clients often use the same staff they had before rather than recognising that outsourcing requires different skills and capabilities – something our own work has frequently pointed out.
At the opposite end of having a “residual” in-house function is micro-management. Suppliers say:
“Don’t Do Man-to-Man Marking”
Some clients over-staff outsourcing oversight for one of several reasons: a determination not to lose control, the desire to maintain a tight rein on the supplier’s on-going performance, or an inheritance from how things were managed as an internal IT shop. Moreover, previous chastening experiences of outsourcing may colour the determination not to be caught out once more. For example, one IT bank executive said he would not allow a power imbalance to develop in favour of the supplier ever again. He described a seven year deal, “The bank outsourced the whole thing, and the supplier was seen as the holder of knowledge. Now, four years in, if you want anything done, you have to have one of those ‘Come to Jesus’ meetings with the outsourcer.”
From these factors, one can understand how the rationale for tight control of the supplier develops. The problem comes when such factors accumulate, get out of balance, and for which the sight of the goal is lost. This can lead to micro-management of a distorted kind. According to suppliers, the results can be very counter-productive.
One supplier managing a contract with a major international bank described his own version of this phenomenon, “Meetings – they bring representatives of all their units, and ask us to do the same… lots of audits, ‘people in the loop’, sign-offs to be made, lots of waiting for the nod from someone.” According to another supplier account executive in a health care outsourcing deal, “We spend 40% of our time being productive, and 60% preparing for, or in, client review. Exception reporting is just that – the exception.”
Man-to-man marking develops under several scenarios. One scenario happens when clients erect mirrored organizations, with a corresponding client position for every supplier position. This leads to redundancies, excessive oversight, and delayed results. Another scenario occurs when existing in-house function has built up large numbers and complex structures and processes, partly as an inheritance from previous mergers of companies or functions. In one European bank that outsourced to six suppliers in 2005, in-house staff reduction was also restricted by labour agreements and legislation. The result? While the bank retained a relatively large in-house capability, its use was not particularly optimal, with processes often designed to reflect the employees available rather than what needed to be done. In Europe, in 2010 one central government department had to make 20 percent cuts in its total operating budget, including in IT, within a year. A supplier representative commented, “They have 850 staff and two outsourcing contracts. They plan to reduce internal numbers to 660 but we reckon they only need 330 – i.e. half that.”
Suppliers reveal that clients often get the staff numbers wrong in terms of retained in-house capability. One scenario described in this section is that, for a variety of reasons, client organizations may keep too many staff in-house, and deploy them in sub-optimal ways through over-complex, often redundant, structures and processes. While this may seem a mistake in the right direction – control is better than lack of control? – it can be counter-productive for supplier performance and business outcomes, with too much activity diverted into monitoring, checking and responding, and too little being done on the critical tasks that make the difference. As one supplier told us, “Don’t do man-to-man marking; it wastes your time and our time.” From our research, clients spending more than 10% of the annual contract value on managing outsourcing may be overstaffed. One consequence may be suppliers having to say:
“Stay On Your Own Side”
One of the hardest things for clients to understand is that outsourcing for managed services is different from managing it yourself or managing augmented staff. With staff augmentation, clients are hiring a particular person to perform a particular job. For staff augmentation, the client quite rightly reviews supplier employee resumes, interviews supplier employees, and may even administer skill tests to candidates. With outsourcing, clients are paying fees in exchange for managed services. Suppliers want clients to understand that ‘managed services’ means a service managed by the supplier. Our own definition of outsourcing reinforces this point, “Outsourcing is the handing over to third party management of IT services, assets and/or activities to achieve required outcomes”.
Suppliers may not welcome clients prying into the background of each supplier employee assigned to an account. Suppliers need to manage their employees’ training and careers paths, and some novices—hopefully under the guidance of a supplier expert—are in all probability working on client accounts. Suppliers say, “If the services are meeting SLAs and security processes are sound and in place, do clients really need to know every resource being used to provide that service?” Suppliers want clients to ‘stay on their own side’.
‘Staying on your own side’ requires sharp definition of the responsibilities for client and supplier staff. This must be very explicit in the contractual agreement, with any changes agreed and documented as they (inevitably) happen across the lifetime of the deal. A fundamental sticking point is that outsourcing gives the client the opportunity to focus on outcomes rather than on the process of service delivery. One supplier told us that she found people still crossing the line, “They can’t help themselves sometimes, especially if they did the job before.” Another type of in-house manager is the ‘comfort seeker’ – a person who managed what was most familiar and what they liked to manage, whether or not that had any real relevance to the new work of managing the supplier’s performance. A supplier executive described one case: “She clearly loved delivering the service… encouraged people to ring up like they used to do, gave second opinions, even did tasks that were really not her responsibility. The only solution in the end was to hire her.”
A more formidable problem, from a supplier perspective, comes from what can be called ‘the adversary’. This manager tends to make the assumption that the supplier is solely self-seeking, untrustworthy and to blame for most, if not all, things. The adversary often combines operating unreasonably across the work dividing line with micro-managing supplier staff. One supplier described his early experience in an energy company: “We got regular investigations into performance, questions about why our staff were doing x, in this way rather than that… we used to call it the inquisition…” In this case, the relationship became so bad that both client and supplier account executives were replaced by people who were more relationship-oriented.
Again, the issue is one of balance. Suppliers do not complain about pro-active assertive client staff. They do argue that intervening or aggressive client executives who fail to stay on their own side do not really help the outsourcing enterprise.
In our research we address the question, “Which capabilities need to be kept in house?” While common wisdom tells clients to insource core capabilities and to outsource non-core capabilities, the distinction is not very useful. We have offered a richer distinction. We initially identified nine specific capabilities to keep in-house for IT functions. This work has been cited hundreds of times and adopted by many large organizations. We later extended the capabilities model to nine specific capabilities to keep in house for any back office function. These capabilities include leadership, business systems thinking, internal customer relationship building, architecture design, informed buying, contract facilitation, contract monitoring, and supplier development (See Table 2). We also identified that all back offices need to keep a team of ‘process doers’ to troubleshoot technical issues, to scrutinize supplier activities and proposals, and to understand emerging innovations. Overall, research supports what supplier say: clients need a different set of capabilities after outsourcing. These capabilities shift from doing IT and business process work, to managing ITO and BPO providers.
Relational Governance: Letter or Spirit of The Contract?
Relational governance is about the softer issues of managing client-supplier relationships, including norms, open communication; open sharing of information, mutual dependency, and cooperation. All of these factors form the basis of trust between clients and suppliers. Initially, trustin outsourcingis the confidence that another will conform to one’s expectations and in the goodwill of another. Fair contracts help to build this initial view of trust--the spirit of goodwill among parties. In the long term, however, trust is based on behaviours. Clients trust suppliers that deliver promised services. Trust is also built by resolving conflicts fairly, rather than holding the disadvantaged party to a contractual clause that may have been negotiated based on shaky data or assumptions that no longer hold. Thus, trust is ultimately about performance. Clients for a long time have heard suppliers utter, ‘you have to trust us.’ But suppliers also admit to sometimes operating on another basis:
“If it favours us, we’ll stick to the letter of the contract; otherwise, it’s the spirit that counts.”
I want to warn clients away from creating the situation where this supplier behaviour would develop, or at least make them aware of the likely consequences. It is easy to understand why a supplier would want to stick steadfastly to contract conditions. Suppliers tend to be more expert in contracting. As one IT manager told us, “Users may sign one or two in their career; a vendor may be signing one or two a week.” They may have much more understanding of the deeper import of what they write into a contract. One contract manager told us, “Some of those clauses were put in by the vendor and we didn’t understand the implications.” A supplier CEO told us, “Outsourcing contracts are agreed in concept but delivered in detail. That’s why they can break down – the devil is in the detail.” Suppliers are also, on the whole, careful about defining what is in scope, and what is out of scope, what the price per unit is, and how any change at all to the contract terms will be handled procedurally. This supplier carefulness is particularly prevalent in cost reduction deals where margins may be quite slim. Sticking to a carefully worded contract is one way of safeguarding returns in a fast changing business environment. It is also a way of legitimately and differently charging for work outside contract scope.
But suppliers also know that contracts are eminently re-interpretable. This malleability can come from such factors as ambiguities in language, omissions, loose wording of objectives, and even, we have seen, from punctuation. A supplier who is having a particularly poor service experience may well see one recourse as going back to the contract to find if its terms can be leveraged in its favour. One manager told us of her experience of being recruited to a supplier’s ‘get well’ team. After two years of making no returns, the supplier decided to pour over every line of a very weighty contract, to see how it could cut down its obligations, invoice for more, and pass on costs to other suppliers. In the event, when the client complained of indifferent service, the supplier confessed to not making a profit, and asked for, and got, an improved margin on certain work types where they were charging less than the market.
The other route that suppliers have been known to take is to sweat the relationship and ‘higher objective’ part of the deal. This is when partnering rhetoric comes into play, sometimes in muted form, as when participants refer to the ‘meaning’, ‘spirit’, or ‘heart’ of the contract, or beyond that, of the relationship. One client manager in a utilities company managed a supplier who had taken over legacy systems for three years. The deal seemed straightforward enough. The client understood the activities and wrote a detailed service contract and SLAs based on previous performance. However, the supplier was determined to follow the contract to the letter because it was making little profit. The client manager commented, “It was slim margins I know, but they argued about every word in the contract, and interpreted it in their favour, and when that didn’t work they talked about the spirit of the agreement. It used to wake me up at night that phrase – ‘spirit of the agreement’”.
This self-interestedness portrays suppliers in a less than favourable light. If so, this is by no means always their behaviour, and should not detract from the strong point they make on reciprocity and good faith:
“We have to trust you too.”
While the main thrust in outsourcing seems to be clients building trust in the service, suppliers want clients to know that they have to learn to trust their clients also, i.e., trust is a two-way street. From the supplier perspective, trust building begins in the contract negotiation phase. Are clients honest about their outsourcing intentions? Do clients provide accurate estimates of their baseline processes? Do clients let suppliers meet and deal with client senior managers and business process owners? Are client’s fair negotiators? Are clients informed about outsourcing practices? After the contract is signed, trust becomes even more vital. Supplier account managers need to be able to trust their counterparts in the client organization. They will need the client’s help for many things, such as change management, problem diagnosis and resolution, proper and timely invoice payments, and fair conflict resolution. Suppliers cannot trust client managers who quickly blame the supplier for faulty performance. Instead, suppliers trust client managers who feel jointly responsible for service issues.
Our own work supports what suppliers tell us. Initial trust is based on beliefs. Trustin outsourcingis the confidence that another will conform to one’s expectations and in the goodwill of another. Fair contracts help to build this initial view of trust--the spirit of goodwill among parties. Long-term trust is based on behaviour: Clients trust suppliers that deliver promised services. Suppliers trust client relationship managers who facilitate the supplier’s success within the client organization. Trust is also built by resolving conflicts fairly. Trust is about open communications and knowledge sharing. Thus, trust is ultimately about performance and fairness.Some typical quotes from outsourcing arrangements where these conditions do not prevail are the following:
“We know where they have problems, but damned if I am going to tell them” (supplier)
“They always wait for us (the client) to react to something. They play dead until we kick them.”
“It’s tougher dealing with the supplier people than our helpful in-house staff.”
Contrast these statements with some typical ones we found in more trust-based outsourcing ventures:
“We really handed them over a mess, so we’re going to give them time to clean up...we couldn’t do it ourselves.”
“Our contract wouldn’t let them hire any of our people for two years, but we had to cut them some slack on that one.”
“We (the client) had to clean up our act – we weren’t as professional as they were.”
Trust is a very perishable commodity in outsourcing arrangements. Interestingly in researching outsourcing arrangements we have never come across a case where trust and the relationship were not talked of as critical to the success, or in their absence, the failing, of the venture. And when we look at high performing outsourcing arrangements, we see four types of trust in place:
(1) Calculus-based trust that is rooted in rewards and punishments associated with a particular project,
(2) Knowledge-based trust that depends on the two parties knowing each other well,
(3) Identification-based trust that follows from the two parties identifying with each other’s goals, and
(4) Performance-based trust that depends on early project successes.
Be clear. Relational governance (through spirit and trust) and contractual governance (through ‘letter’ and structure) must both be in place to ensure success. In high performing outsourcing deals, relationships and contracts are managed dynamically as complements rather than substitutes to create high performance. Success fuels further trust among clients and suppliers. In contrast, projects that suffer from delays or poor performance lead to decreased trust. Suppliers tell us there is no such thing as instant trust. Trust, for clients and suppliers alike, builds over time as a result of performance. As part of this, maybe we will see more clients inviting suppliers to speak up, and suppliers more willing to contribute their brains and insight as well as their technical abilities. After all, wasn’t that why you hired them in the first place?
Estimates from the study by Mary Lacity and Leslie Willcocks on High Performance BPO sponsored by Accenture in 2012. Also based on two reviews of all ITO and BPO studies. See Lacity, M. Solomon, S. Yan, A. and Willcocks, L. (2011) Business Process Outsourcing Studies: A Critical Review and Research Directions. Journal of Information Technology, 26, 4. Also Willcocks, L. and Lacity, M. (2012) The New IT Outsourcijng Landscape (Palgrave, London) chapter 1.
Professor Mary Lacity, my close colleague in LSE’s Outsourcing Unit, was a prime contributor to the research and findings on which this article is based.