At least one consulting organization, in fact, has begun to offer "relationship management" training as part of its services. Jack Benton, vice president of marketing for Technology Partners International Inc. (TPI), in Houston, says the need is great for several reasons: companies are using more outsourcing providers, the providers themselves now subcontract to others more than before, and often the people who choose the providers "go off and do something else, leaving someone else to manage a relationship they know nothing about." Wiegler of Sourcing Interests Group adds that, "with the rush toward E-commerce, companies often go around the discipline that IT and procurement organizations have put in place. Outsourcing becomes very ad hoc."
Benton estimates that only about 10 percent of large companies have a relationship manager or department in place, but many more are currently establishing the position. Finding the right people can be difficult. "We've put some people in that role who haven't worked out," says Kodak's Chiazza. "It's easy to get into finger-pointing between the client and the vendor. You need people who have a good background in IT, but who may not be experts. They have to be good at negotiation and communication."
Other experts suggest that project-management skills are also essential. Opinions differ, however, on just how a sourcing expert or relationship manager should interact with the service provider. Chiazza believes that "there is always day-to-day traffic that requires a point person who can make sure service is being delivered." Exult's Madden counters that "if the job is just managing the vendor day-to-day, that's not much of a value-add. Once you pick the vendor, the process owner should own the relationship."
It may be that IT outsourcing and BPO are fundamentally different in that regard, but even if companies can work out their own internal politics, there is still the tricky matter of making sure outsourcers can work together. In some cases, such as that of TNPC, it is clear that one company is the top dog — the general contractor that will set the direction for the other service providers. Wyatt wouldn't have it any other way. "If I had to tap five lesser companies for all the things that IBM can do," he says, "I would have to work harder on those relationships, and I'd get less strategic value."
But in many cases, no single partner dominates, and often each one wants to deal directly with the client, not be subordinated in a subcontractor role. "We need direct communication," says Heather Shively, CEO of CapitalThinking Inc., a New Yorkbased ASP that provides E-finance software to the mortgage industry, "because even when you work hard at it, expectations and deliverables may not match."
One Slice per Customer
Often, outsourcers want not only direct contact, but also a bigger slice of the pie. "There is a tendency for third parties to want 'umbrella deals,'" says Kodak's Chiazza. "But I think comprehensive agreements can make it hard to evaluate performance, and to disentangle yourself from unsatisfactory relationships." It's not that Chiazza is averse to using a vendor for more than one service, but he recommends addressing each area of functionality in a separate contract.
As partners multiply, of course, so do contracts, the original form of "relationship management." Chiazza and others believe that companies have become much smarter about how to structure various outsourcing deals, but he cautions against "management by contract." In Kodak's earliest experiences, he says, the company wrote contracts vaguely, which led to disagreements about expected service levels. The company overcompensated by writing very detailed contracts, which created an inflexible bureaucracy. "Now," he says, "we've gone back to more general contracts that provide a framework but that count on a proper attitude by both parties. That's the key to making it work."
A certain amount of proper attitude can be captured in a good contract. "Someone has to take the lead on certain issues," suggests Dave Hudson, head of marketing for Getronics USA, a Boston-based outsourcer, "on matters such as anticipating a client's requirements for storage, network capacity, and so on. So companies that spread their business among many different suppliers should make sure the contracts stipulate which providers will monitor those issues and sound a proper alarm."
Jacobs of TNPC draws an analogy befitting a CFO: "A contract is like a balance sheet — a snapshot of where things are at a given point. The relationship is like an income statement — a broader view of the entire picture." And those relationships will shape the bottom line like never before.
Scott Leibs is technology editor at CFO.
Name Your Price?
As the number of outsourcing providers increases, so too do the pricing models being offered. Traditional terms have included either flat-fee or volume-based pricing (based on transactions, for example). But increasingly, various forms of "value pricing" are becoming more popular. These typically focus on the quality or business impact of a service, and represent a certain risk/reward sharing between client and vendor. At The New Power Co., for example, IBM was guaranteed $1.5 billion over 10 years. That means it can save on selling costs, since TNPC has little incentive to open every new process to competitive bidding, but TNPC has flexibility to tap non-IBM vendors when it sees fit, as long as it reaches the spending threshold within the stated time period. In other models, vendors are paid based on how much they save the client, or how much new business they facilitate. But some remain bearish on the economic benefits of outsourcing, no matter what form the contract takes. "We did an exhaustive study of outsourcing our data center," says Jim Hatch, CIO of $3 billion packaging giant Pactiv Corp., in Lake Forest, Illinois. "In every single case, it would have cost us more to outsource than to do it ourselves. Add to that the loss of control over what should be regarded as a strategic asset, and it doesn't make sense." That is, Hatch adds, if one is comparing an outsourcer to a well-run internal operation. "But two-thirds of the IT organizations out there are badly run, so it's not surprising the outsourcers are finding a fertile market." Pactiv did sign a three-year deal with Exult last year, however, suggesting that even hard-line companies have their soft spots. —S.L
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