Outsourcing Partnerships: Reality or Illusion?

Because "partnership" is an elusive goal, in some cases the arrangement simply isn’t a partnership and won’t ever be one. This is more the case in outtasked or subcontracted services, but even with outsourcing, partnerships don’t develop unless the conditions are right.

Before we worry about whether a working relationship is a partnership or not, we must understand what "partnership" means. In a legal context, a partnership is a formal, contractual arrangement wherein the partners share in the profits or losses of a business activity. Usually, it’s a joint business venture to which both parties are contributing to an outcome, whether it’s a product or service from which they both profit.

Because outsourcing is a buyer/seller relationship, this formal definition doesn’t apply. We have to look at the more general definition of the word, which is the mutual cooperation toward achieving a goal. The two key words are "cooperation" and "goal."

In Facilities Management, service is complex and constantly shifting based on the client’s corporate needs. Partnership means that give and take, and mutual, cooperative agreement and trust, in the service and the relationship allow the service provider and the client to easily adapt without being constrained by rigid key performance indicators (KPIs), strict contract terms, and inflexible financial models. It’s this flexibility that makes the difference between a partnership and a traditional buyer/seller relationship.

If you look closely at outsourcing, you see that it typically includes the overall management of more than one facility services function with a specific responsibility for the outcomes. These are often enshrined in Service Levels or Key Performance Indicators (KPIs). Progressive outsourcing doesn’t constrain the service providers with detailed specifications or procedures; it focuses on the end result and lets a service provider achieve goals by using their expertise and abilities to advantage.

That should cover the "goal" part of the general definition of partnership, but the only way for a partnership to succeed is for goals to be met. Otherwise it will become a traditional buyer/service provider relationship very quickly, because any trust and flexibility will be abandoned for a formal, inflexible contract management approach to bring performance in line and to initiate due diligence to support penalties, withholding payments, or termination. The key to maintaining a partnership is to ensure that goals are realistic, achievable, and aligned.

Are Your Goals Aligned?

Three distinct goals – service performance, budget objectives, and profitability – exist, and misalignment of any of these obstructs a real partnership.

Often, only two goals are considered critical to the outsourcing partnership relationship - the basic goals of the client and of the service provider. For the client, this includes service performance and budget objectives. For the service provider, it’s their profitability.

These goals are more readily aligned when the procurement approach enables it and the goals are achievable. One of the problems in meeting both financial and performance goals for the client is when the service provider over-promises savings and find themselves unable to deliver the savings and maintain service levels. There’s a direct relationship between service levels and resources and resources cost money. Just consider the differences between companies you see in other markets, from the low cost budget services and products to high cost premium services and products. The service you’re outsourcing is no different.

Increasing competition and the large scale of many outsourcing companies reduces costs, but it’s important to realize that the outsourcing company is in business to make a profit, just like yours. The reality is simple, when your service provider is losing money, they can’t give you the service you need.

Your expected goals must be realistic and achievable and the service provider must also promise results that are realistic and achievable. The procurement process must recognize this and make sure these goals are aligned when a deal is done, otherwise after the procurement professionals are gone, you will be left with a very challenging service management issue that impacts your success.

The third goal is usually overlooked yet has a significant impact on the success of the outsourcing initiative and the partnership. This third goal is that of the client’s staff, known as the Stay Back Team, who have remained with the client to manage the outsourced services and who are accountable for the results.

Like any business situation, outsourcing involves people and partnerships are always between people. In an outsourcing partnership, that includes the service lead from the outsourcing company and the client’s stay-back team. Outsourcing isn’t a ‘set it and forget it’ proposition. It requires effort to make it work the way it should.

Managing the outsourcing relationship is usually left to the Stay-back team. This is where the partnership can be built regardless of the other factors involved in the outsourcing relationship. If outsourcing is new, the stay-back team should be be trained on how to manage and what is expected from them.

The Stay-Back team members must support the initiative and the goals without having their own internal or personal goals that conflict with the main ones. Sometimes their goal is to demonstrate their own value by over managing the service provider or competing with the service provider’s team to maintain credit for initiatives or service delivery. The Key Performance Indicators, Service Levels and the penalty/reward systems may be inadvertently designed to create this miss-alignment since cost pressures or how the Stay-Back team’s individual performance is evaluated may encourage them to find reasons for penalizing the supplier rather than rewarding them.

While it may seem counter-intuitive, you need to support your outsourcing service providers to ensure they are successful. After all, when they screw up, you screw up – it’s not possible to simply blame the service provider since you selected them and are managing them. They’ve become an extension of you. Of course if a trustworthy environment isn’t created by the service provider, the efforts of the stay-back team will be wasted.

Is Your Procurement Process Designed For Partnership?

While the goal of many procurement exercises is to reduce costs, the reduction must be reasonable and a flexible contractual arrangement provides more opportunity for a partnership while also meeting overall goals and reducing costs. This includes recognizing that cost, service levels and scope are part of a triangle. If you change one, you usually impact the others.

First, the goal needs to be clear and understood by both parties. For instance, if your procurement process is designed to save money and that’s it, then be honest and expect your ‘partner’ to manage appropriately.

For a partnership approach, start by selecting  the company with the best fit by asking the right questions in your RFP and evaluating them on what matters to you and what ensures successful and efficient delivery of services. Include meetings with each service provider during the process if your organization or governance allows it and build an interview stage into the process. The detail and depth depends on the scope and size of your initiative. Selecting the right company in the first place creates the foundation for your partnership and outsourcing success.

The second stage is to establish a realistic cost based on your organization’s financial goals and performance priorities. Ask specifically how cost reductions will be achieved and what impact they will have on service levels, including what modifications the Service Provider would make to specifications, service levels and KPI targets to balance your financial and performance goals. In most outsourcing contracts, the delivery methods, staffing and other factors are left up to the service provider as part of their bid and significantly impact costs, yet most service providers are bidding based solely on what you tell them in an RFP document, so it’s impossible to be perfectly accurate. Include a flexible process that enables you to discuss and negotiate these factors with the selected service provider to balance goals and costs cooperatively from the start.

Does your Contract Model support it?

It’s nice to believe that a good partnership doesn’t depend on the contract, but the contractual and financial arrangement will have an impact on the relationship. Without a fair, balanced and flexible contract, you may not get the cooperative relationship that a partnership relies on.

The contract includes clauses designed to manage risk between the parties as well as clauses designed to make decisions and disputes easier – in other words, to manage the grey areas that always surface. Include clauses that identify what will happen when scope changes, the portfolio changes, specifications change, legislative requirements change or other unknown pressures arise. A partnership is built with clarity and fairness about how these issues are dealt with. By eliminating uncertainty, you also enable the bidders to provide a more accurate price.

While there are many contract types, a complex outsourcing arrangement with many subcontracted services is better managed with a management fee and a flow-thru arrangement for most of the costs. This enables flexibility, visibility and control over the resources, costs and the specifications of the subcontracted service while eliminating some of the issues involved with a fully included fixed price. You can build in a sharing arrangement for savings but continuous savings simply won’t be sustainable if you want to maintain the same service levels, so this shouldn’t be the way the service provider expects to make their profits.

The contract model can also stifle innovation, continuous improvement, introduction of new techniques and technologies. These are areas where your service provider can provide some of the best value as a partner. The financial model around costs and savings should foster innovation and new ideas, not limit them. Build a flexible approach to implementing your service provider’s ideas so there is incentive for both parties. For instance, if the service provider can implement innovations that improve your results or save you money, yet the financial model means related costs must be absorbed by the service provider, they are not likely to implement these innovations. Include a cost/benefit sharing mechanism or a way to fund these types of incremental costs in your contract to enable flexibility.

The length of the contract also impacts the partnership. A contract that’s re-bid every 2 years isn’t designed to build and sustain a partnership. A longer contract with extended renewal options is more likely to foster a partnership, all else being equal, simply because of the longer time horizon. By building in some renewal periods, you can extend the contract easily if things are going well and renegotiate pricing instead of being required to re-bid the service.

Are You Investing In The Partnership?

Managing the outsourcing partnership requires flexibility since not everything can or will be reflected in the contract. The relationship between the service provider and stay-back-team has to be flexible enough to enable changes as the relationship progresses and your needs change. A narrow adherence to the contract will be detrimental to the relationship. With flexibility, be sure to document agreements and changes so when you move on, your replacement understands why things are the way they are.

There will always be problems and sometimes the service provider will make mistakes. In a partnership, the service provider is given a chance to fix the mistake and make sure it doesn’t happen again. How they recover is almost more important than being perfect in the first place. Blaming and punishing the service provider won’t foster a strong working relationship and may cause them to hide things or stop communicating about important issues.

Of course, for this to happen there must be trust between the service provider and stay-back-team. Establish this early through regular and open communication. Both sides must be open and honest to build a relationship since even a hint of mistrust will destroy it with little chance to rebuild. If possible, co-locate their key staff with yours to foster a better more integrated working relationship and ensure you communicate your issues, goals, and problems. Include them in meetings so they hear information directly and can contribute their experience to help you with issues.

Don’t rely on SLA’s and KPI’s

Tools developed to manage outsourcing relationships, including Service Levels and Key Performance Indicators, were meant to ensure the service provider outcomes are aligned with the goals of the client organization.

However, it’s too easy to simply depending on Service Levels and Key Performance Indicators, with their dashboards and red, green and yellow stoplights, as a tool to communicate with and manage the service provider. A rigid measurement and reward/penalty system that tracks intermediate results, reports on them after the fact and delivers a financial penalty or reward focuses both parties on those specific issues with less regard for the bigger picture. A dependency on measures and a reward/penalty system can also drive bad behaviour even in people with the best intentions.

A true partnership goes beyond KPI’s and uses a progressive, ongoing performance communication process, including less formal performance and service assessment tools, regular meetings and cooperative discussions about problems and solutions. Be flexible, adjust targets, add new measures and drop the ones that don’t provide any value as well as letting some slide when other issues become more important. A better partnership moves towards managing and improving results while delivering the required services.

To get the full value of outsourcing, which is more than simply shifting the risk and responsibility to someone else at the lowest possible cost, you have to actively manage the relationship to get the best out of your partner. While outsourcing is often a way to reduce headcount, you should continue to use progressive performance management approaches similar to the ones you use with valuable employees.

What would you have done?

A partnership, just like a marriage, includes compromise and the realization that your partner isn’t perfect and you aren’t either. When you deal with issues, consider what you would have done when you were managing the service yourself, probably with fewer constraints, and manage them accordingly. Flexibility is probably what enabled you to manage successfully. It’s the same flexibility your service provider needs to deliver service to you and help you and your organization be successful with a working partnership.

This article originally appeared in the May 2010 edition of Building Operating Management magazine.  Michel is an independent consultant providing strategic and management solutions for Facility Managers. He has many years of experience in all areas of FM, including operations, performance management, change management, customer service, service level definitions, outsourcing and RFP’s. He welcomes your comments and feedback at michel@strategicadvisor.ca or www.strategicadvisor.ca