Q & A: Debra Maxwell, Arvato Finance Services Ltd.
Debra Maxwell, Global Operations Director of Arvato Finance Services Ltd. chaired the outsourcing track at the recent Shared Services and Outsourcing Week in Budapest 2009.
SSON: Debra what are the bear traps in an outsourcing contract?
Debra Maxwell: Well I think one of the first things that you have to look out for and this is where cost verse value comes into the equation, is if you have an outsourcing deal and you get your response back and it looks too good to be true, then it most likely is. So, for outsourcers, the main aim can be to try to lock clients into long-term deals –so usually based on contract terms, pricing and the need to re-negotiate at every turn - so all the time something changes, I need to re-negotiate. This can lead to frustration, irritation, a lack of understanding and a breakdown in the relationship. So if you are planning on doing an outsourcing deal – I think it is pretty important to make sure that sales doesn’t drive it, but actually the outcomes that you want.
I think the other thing that is predominantly spoken about is death by change order. So, quite often when an outsourcing deal is done, then every single change order has to be done as part of the contract. And quite often service providers might under-quote, sometimes on purpose just to get the deal done. Or alternatively the RFP or RFI stage that you go to is so unspecific that it doesn’t allow service providers to actually cite the requirements that are in the document.
Alternatively customers often cause the problem, to be fair, by not really understanding what it is they want and wanting the outsourcer to flex the contract to their will, so it is really important to have a scope of services, it is really very important to be clear on what you expect the outsourcer to do and it is best to negotiate the change order process upfront and put some parameters in that will allow the outsourcer to be flexible when they are working with you.
I also think that there is a massive view around outsourcing deals that somebody has got to win and somebody has got to lose. And when you end up in that situation, you end up with two losers and inevitably you end up with a very angry loser. So it is really important that you approach the contract negotiation with a win-win in mind. You have got to understand that the outsourcer has to make a reasonable profit and not be stretched by such a situation that service delivery is impacted, which will make you think that the outsourcer isn’t delivering the service they provide.
So if you are looking for good value for money, make sure you are getting good value for money and not just the base line service delivery at a cost that pinches the supplier to such a point that they are forced to make decisions in the contract that don’t add value in the end.
I think the next big critical thing is really on a client’s organization. Effectively it is a case of what you don’t know will eventually come back and get you. So unless you properly understand exactly what it is that you want and we go back to the scope of services -there are many factors that service providers can’t see, don’t see – critical works around the developed in the client organization that are really important. You know –for example, you don’t understand that somebody goes and checks with Bob next door and then only puts a tick in the box. And if built into the technology to show that decision process to be built in – the process breaks down. And often, because they are so difficult to identify, it is assumed that the outsourcer will know that this will go into the knowledge. And without allowing the outsourcer to get into your business and really dig deep down to find what it is that actually drives the process, and quite often it is forcing the outsourcer to actually do that, you now force them to go in and have a look and then come up with a more practical approach to how you deliver it. And it links right back into the change order thing. If an outsourcer doesn’t know that it means someone might have to speak to Bob and then all of sudden you require that someone has to pick up the phone and speak to Bob ten times a day, for the outsourcer it might mean another head, extra hours of work and it is really important that you nail those things down really early, so those things don’t become a problem.
Some outsourcers and some customers might build in a lack of transparency. So it is sort of a black box cost and margin – so you can just imagine outsourcers sitting in the office saying ok we will take a hit on the volume and we will drop the price per transaction or keep the volume cost down really low, because we know we are going to get consultancy services, system development, project management -all of those things particularly the very complex contracts. Therefore, customers might say that it feels like they are being constantly being sold at and no-one is actually delivering the service. So if you are not planning on adding anything into that contract – you should make it very, very clear when you are actually contracted with a client.
Often people start off, every single RFP -and I discussed this in my session this morning. I asked for a show of hands, I asked who was planning in setting up a consultancy deal in fact any sort of procurement this year and I asked them how many of then would start the first sentence with ‘we are looking for a strategic partner to ….’ And everybody gave very wry smiles and only half of the room put their hands up. And to be fair quite often on these deals you are not looking for a strategic partner - you are looking for somebody that will outsource and do very low level transactions on their behalf and if you don’t make that very clear, then people might cost something really low with the expectation that more will come along and it can often lead to frustration if that doesn’t happen. So be very clear about what you want.
I think that clients need to be very realistic about what an outsourcer can do in the time. It is really easy to underestimate the full effect of outsourcing. There was a gentleman in our session today who gave a very interesting insight about having created a captive Shared Services center, gone through a lot of the effort to get every process running smoothly and then making a very dangerous and to them not disastrous, but difficult assumption that therefore handing it over to an outsourcer would be very easy. It’s not. There are loads of things to do – really difficult things; you have got to move people, you gotta retain people, you have to recruit people and you have to consolidate computer applications – it has to come together all in one go and it has to be just right to hit the target. If one thing goes wrong it just cascades and causes a big impact across the board. So give your outsourcing supplier enough time to do things and give yourself enough time to think it through. Put your very best people on it. You know, make sure you are focused on the outcomes rather than what needs to be done in the short period of time, give people training on how to deal with outsourcing partners, because it is a very different relationship internally than it is externally and there might need to be a big change control program on the back of it.
SSON: Debra, what about this value, innovation and transformation – when actually that contract is all about cost?
DM: Again, what it is you want out of the contract needs to be very clear. If you are just looking to get a labor arbitrage benefit out of your contract, which is fine - hand it over as it is. If your expectation is that your outsourcer delivers a range of innovation that they have already picked up as best practice from somewhere else applies that to your processes and there is gain share benefit or a benefit to that organization or a cutting cost, that’s fine, but make that very clear. I think very often defining what innovation actually is and how far a step you are willing to take is often very unclear so you need to have a) a good governance model that allows the outsourcer that brings opportunities and there has to be something in it for them. They are not going to want to gain efficiencies if there is nothing in it for them. For example, why make a process more efficient if all the benefit is their transaction cost reduces - so I think gain share models work particularly well with that.
SSON: Have you seen a lot of example of good gain share models?
DM: I think there are some. One or two that I have seen that are good. There is one or two that I have seen in previous lives that are pretty disastrous…
SSON: Is it pretty standard now?
DM: I think the gain share is less standard, but certainly the realization of benefits is pretty standard. So certainly you need to realize your benefits during the course of your contract. I think one of the good drivers that drives perhaps interesting behaviours is linking over-performance, so don’t only penalise your supplier if they under deliver, but perhaps reward them if they over-deliver. So build your gain share into something that you want to get out of the contract. So if you think of an SLA - let’s suggest that an SLA – I will take AR as an example - so let’s say you know that more than 5% of your ledger in the 60+ bucket and that might be perfectly acceptable to clients. If you go to 2% - that actually doesn’t gain them a huge amount so why build in a reward around that? But if you build in reducing the DSO from 54 days to 50 days, actually increases your cash flow and gives you an x-net effect - then why not offer to share that with the outsourcer? Because they are not focused on the DSO and they might keep the SLA for the AR hovering at around 5% which is also ok to you. So it s almost like an negotiation around which SLAs or KPIs even critically drive the behaviours that actually bring real benefit to you as an organization