by Peter Evans-Greenwood
Pressure on margins is driving organizations to increasingly rationalize and externalize supporting functions as they search for more efficient and flexible delivery approaches.
Most common approaches to outsourcing center on establishing target service levels and a unit cost, treating the negotiation of an outsourcing engagement in a similar fashion to the procurement of other materials that the business needs.
Outsourcing, however, is becoming more complicated as we move functions closer to the heart of the business into the hands of partners and suppliers. This represents a shift from an approach based on paying invoices for the raw materials we need to run the business, to one based on delegating core, business-critical functions to suppliers, and then requiring them to deliver the outcomes that we need.
Crafting a successful outsourcing engagement in this environment requires us to align the supplier’s incentives, and therefore their objectives, with the client’s business drivers. It’s not enough to take a piecemeal approach, imposing additional requirements and constraints in the hope that these will shape supplier behaviour.
It’s a truism that what gets measured is what gets done; outsourcing is no different. Existing approaches to crafting outsourcing agreements attempt to shape supplier behavior by imposing large and inconsistent sets of requirements, with the result that both parties search for loopholes in an attempt to optimize their position.
A successful contract will be based on the customer’s business drivers, aligning supplier incentives with them to ensure that the agreement drives the right behaviors