Phase Change at an Operational Level

A transformational outsourcing initiative may never face strategic failure. It may never have a stakeholder hiccup. But it will certainly change its operating character at some point. When the new capabilities that executives sought through transformation are in place, they turn their attention to operating, not implementing. The organization takes smaller bites of change—relentless incremental improvements rather than big, radical shifts. Operating managers, rather than change champions, take the lead.

This is all normal. It does not call for a new contract with the outsourcing provider. But it does require the leadership on both sides to agree on a change in emphasis. For example, Thomas Cook measured its cosourcing partner on meeting deadlines and cultural fit during the transition to the shared-service center. They exacted no financial penalties for missing service levels during that time. When the emphasis shifted to operations, the service-level standards, performance penalties, and push for incremental improvements kicked in.

Executives do not stumble over this transition. They see it coming; they plan for it; they carry it out successfully. And executives who are only trying to reposition their organizations can declare victory. The companies that are looking for a better strategic trajectory, however, can fall prey to complacency at this stage. In a global study of national governments’ outsourcing experiences, for example, we found that only 10 percent of the executives were extremely satisfied with the level of innovation their outsourcing providers offered. Less than half ranked their satisfaction above neutral on that score.

Executives in our universe of examples use six different mechanisms to stimulate and refresh their operating relationships with their outsourcing partners in order to stay on the trajectory they worked so hard to achieve. These mechanisms follow in order of disruptiveness, starting with the least:

1. Changing the Faces. Companies and their outsourcing partners rotate their senior operational staff to bring in fresh blood and fresh ideas. For many outsourcing providers this is a deliberate strategy to develop their people by exposing them to a variety of engagements.

2. Strategic Planning. The two partners jointly review their strategic position and aspirations and lay plans to move forward. This is a great opportunity to bring in outside perspectives—with independent consultants, academics, or strategists from the outsourcing provider’s staff.

3. Benchmarking. Companies use mid-course benchmarking to ensure that their performance is keeping up with leaders and to spot practices that make sense for their operation. Benchmarking can be time-consuming, but large outsourcing providers can smooth the way by establishing the process within their own constellation of clients. Benchmarking has the potential to be eye-opening when it is used to stack up an operation against the best in class. I think it is just as valuable when it is used to provide an annual ranking. When formal benchmarking seems too distracting or costly, companies can substitute a more qualitative effort. They can schedule a series of ‘‘field trips’’ to high-performance companies to share perspectives and management lessons.

   Regardless of which approach they use, companies and their outsourcing partners must establish the organizational follow-up to make use of what they learn. That means naming individuals and teams responsible for moving the needle on selected measures and releasing them from other duties so they can make this effort a priority.

4. Renegotiating the Contract. Most often, companies and their outsourcing partners renegotiate their contracts when the financial picture changes substantially. But, as we discussed earlier, the process of renegotiation brings both executive teams into a detailed discussion about goals and objectives, responsibilities, incentives, and the way forward. If the partners have devolved into stale routines, a discussion that impacts their wallets may be just what they need to reengage. Again, the process is costly and disruptive, and both sides must be vigilant to make sure the lawyers don’t take over. However, executives can use it to shake their partnership out of its lethargy.

   Thomas Cook put an explicit break in its seven-year cosourcing contract after the third year to allow for renegotiation. Executives reasoned that their shared-services center would be operating stably by then and that they would want to consider making another step-change. Their options could include consolidating operations across Europe or moving the center to a low-wage rate country, for example.

5. Retendering. Retendering a transformationally outsourced activity means calling it quits on a committed relationship. Whether or not the incumbent wins the bid, a retender implies that the level of mutual commitment has relaxed. Our universe of 20 examples includes only one that involved retendering. More than six years after a major energy company catalyzed change by outsourcing back-office functions extensively across the enterprise, it retendered one of its earliest contracts. Performance had slipped, and the company simply wanted to get cost-cutting back on track. By this time, executives had accomplished their transformational objectives, and the outsourcing relationships had changed to focus on more modest goals.

6. Repatriation. Repatriating a process ends the relationship by bringing the outsourced capability in-house. This can even be part of the original plan when the transformational outsourcing is intended to launch a start-up or clear roadblocks to growth. All of the failures among our examples, and two of the successes, brought their outsourced operations back in-house after these were transformed.

In all of these cases, the transition back to the company was managed quite differently from the transition in the other direction. Instead of an aggressive, big-bang handoff to highly experienced management, operations returned in-house in a slower and more deliberate manner as the company brought in skilled employees who could assume the responsibilities. In at least one case, the outsourcing provider received incentives based on the company’s increasing level of self-sufficiency, as measured by the decreasing number of outsourced workers on the job.

How does a company decide which of these renewal options is right? It depends completely on the partnership’s strategic intent going forward—not the operational performance, but the strategic intent. As we discussed in Chapter 9, if the partners can leverage their joint and collective assets to drive future innovation and growth, they should find a mutually satisfactory way to manage the operational activities. This does not mean operations should continue as is; it just means the partners should agree on how best to manage them. And, if they see no strategic promise in partnership, they can safely sever it over issues of operational effi-ciency.