Let’s Talk About Our Relationships
This article originally appeared in Outsource Magazine Issue #28 Summer 2012
Earlier this year, the Sourcing Interests Group (SIG) held its second London Roundtable bringing together a broad range of experts from across the sourcing space to tackle a number of issues critical to sourcing best practice. As part of this event, Outsource was proud to host a panel debate featuring two luminaries from the supplier relationship community – and plenty of input from the audience to boot. Now, we’re equally proud to present some edited extracts from that debate, looking at some of the biggest topics at play in the space today and bringing some indispensable advice straight from the front line…
Outsource: Let’s begin by taking on a tough question: how can we bridge the gap between two big ongoing trends, namely cash-strapped buyers beating up providers on price, and the increased drive towards a genuine philosophy of partnership within outsourcing relationships?
David Lewis: You tend to hear a lot about this: “more for less”, “driving value in the contract” – and personally, I think that it is a window-dressing for “I want something for free”. The example in the press a few months ago was the M&S approach, to claw back 1.25 per cent of turnover with their suppliers to finance £600-million-worth of store refurbishment. Now either that’s for free, or we’re going to walk into M&S stores and they’re going to be in IBM blue and have “I think therefore IBM” on the walls – so it’s likely to be free.
My problem with this is from the relationship side of things – because I “get” cost-savings, I really do, but my problem is that if this mindset persists and continues in the current climate, we’re going to find that we’re going to start breaking those relationships; there are only so many times you can almost steal from your suppliers. The issue that I’ve got then is it’s too much of the win-lose; that’s the easy way to get money back, there’s no win-win in this scenario. I think everyone in this room will probably understand that eventually the suppliers will claw their money back; you might win in the short term but the next service you procure from them, they’ll put that extra ten per cent back on it again. All that you end up with is that, because you’ve asked for something cheaper, you’ve got the B, C, or even D team and you’ve broken the relationship. Have you really won? No, you probably haven’t.
Srini Krishna: I’d break this into two parts. One of these I would call pure hygiene and this means from a buyer’s perspective my expectations are just what I want; if we’re buying and I want a grey-coloured widget then give me a grey-coloured widget; don’t sell me a black-coloured widget and say it got black because it was out in the sun and eventually it will become grey. Just give me what I want. To David’s point, historically outsourcing has started off from a confrontational position, so there’s always black and grey and we end up somewhere in the middle but I think there’s that basic hygiene of “I want an SLA with a turnaround of two days” – that’s basic stuff.
But there’s another part, which is slightly touchy-feely, and this question is: what are we expecting from a supplier? I think there is a change in mindset that is required where suppliers can also come to the buyer and say “let’s work on that together” rather than saying “okay, this is a change order, ABC clauses, XYZ dollars and so on and so forth”; a mindset where we say “I’m not just a service provider, I am actually part of your team”. I think that’s something that you want suppliers to increasingly start to display, rather than say “I’m a supplier; I’ve just got my job finished when I delegate this service”.
O: Srini, you’ve been recognised internationally for your work on one particular deal between Microsoft and Accenture which had at its heart a philosophy which our friend [and Outsource columnist] Kate Vitasek describes as “what’s in it for we”: how can buyers take the steps to ensure the right balance so the relationship makes sense from both sides – and how can you approach it from a “what’s in it for we?” perspective?
SK: It really is saying “what’s in it for we?” The point is again, if I’m going to start an outsourcing relationship or a sourcing relationship by arguing about whether I get 60 per cent of the cake or 40 per cent of the cake, we could keep fighting with each other forever – but if there is a way in which we can start to work with our suppliers to say “well, this is the starting point; can we then look to expand the pie over the life of the contract so that there is something for you and there’s something for me?”, then there is a possibility of saying that together we can achieve something bigger than what we would have achieved if it was just a question of going for each other’s throat.
I think this is a fundamental shift in mindset; Kate’s research has actually shown several organisations trying to adopt this type of contract, to say “let’s see how we can expand our own horizons and see how we can work so that both of us can gain.” And just giving one example – to the point that David made – if I make money as a buyer and I’m assuming I want to beat the guy and don’t want him to make money, that’s a slightly stupid thing because both of us are commercial organisations; we’re not in this for charity, and I’m just as responsible for my shareholders as he is to deliver financial value.
DL: On finding the right balance and actually having a relationship: personally I promote a relationship that works from the beginning to the end, and one topic that seems to be prevalent today is about buying the service – but no one has actually talked about exiting the service. One of the key areas about making sure you’ve got the right relationships right the way through the end-to-end cycle for that particular agreement is that you can exit on equal terms. One of the things that I’ve experienced with my work for the NOA, for instance, is that exit management seems to be one the first things to be forgotten when you’re buying the services: nobody thinks about the exit because you’re just getting into the relationship, so why should you worry about it?
One thing that we’ve found from our experience at Carphone is that if you ignore the exit management side of things, your relationship will break the instant that you decide to exit. This might just be through natural progression or a strategic decision – it doesn’t have to be because you’ve broken your SLAs or whatever – but if you actually invoke that exit you need to have a relationship that’s strong enough to get through it and allow you to continue with the services that you’ve got, so that you can end with your current supplier and transition to the new supplier and still know that you can go back to that original supplier at the end: it isn’t a case of burning bridges. So again, I’d like to impress on people that the relationship is not just for the contract negotiation and the delivery of the service; it’s also to the end, to the exit.
Delegate: I’ve done a lot of outsourcing from both sides of the table and I was thinking back to what we were talking about earlier, how there was a skill of deal-shaping and that skill was about making deals work so that financial incentives were aligned on both sides: that was all about “let’s find the pie together”. Around the early 2000s as the BPO industry – which I work in particularly – took on a lot of IT outsourcing (usually through sourcing providers and advisors) they got this almost lazy deal-making with apples-to-apples comparisons as the only thing that mattered. So as both the seller and the buyer of the BPO, I’ve seen the innovation and the value sucked out of deals – and I am so with you on the exit, David. I’ve actually had a client say “I don’t care, I won’t be here; let’s just get this thing done…”.
SK: As a buyer, I personally believe that buyers are at fault here. Because when we go and come up with a sourcing request, everything is required: lowest cost, a Rolls Royce, platinum customer service; innovation; transformation – and by the way get me the Easter bunny too. For heaven’s sake, you can’t have everything.
Quite often there are contradictions between some of these things and that’s where prioritisation comes in. Now, to achieve some of this, the buyer has to put in some investment and money, otherwise you can’t expect the seller or the service provider to put in all of the money to deliver all those things. So I think there is this whole clarity of outcome – and again when you talk about clarity of outcome, it’s not about “I want accounts payable done”, it’s “what do I want to achieve at the end of five years? What do I want my accounts payable function to look like?” That’s what’s got to be driving the buyer going after the sourcing provider and saying “this is what I want”.
Delegate: Having been on the buy side and the sell side both, I think there’s blissful ignorance written into SLAs – and I blame both sides for that. The buy side always look up to the nineties – we love high nineties, we love one hundred – and yet if we go back to the sell side and say “what if I only ask you for eighty per cent; what will that cost me?” it’s the same price. They don’t know how to cost it at 80 per cent – and a lot of the time I don’t need things at 98 per cent, but that number makes me look good. To me, when we write SLAs in blissful ignorance, I blame both sides – because now we’re creating unrealistic expectations at prices that can’t be moved because we’re not appreciating what it takes to deliver.
SK: I agree, but if I went to the CFO and said “I’ve got a 75 per cent SLA” I should start looking up websites for jobs because I won’t survive. The other part is that SLAs are just part of the whole process; there’s still stuff that’s lying on our side. You can outsource 95, 98, 99 per cent but there’s still got to be someone in the buyer organisation that’s got to complete that process. You could have wonderfully green SLAs but the situation is still screwed up because the rest of the process is not working.
Delegate: We had a member who said that they had a two-day turnaround on an outsourced IT agreement: a two-day turnaround for a desktop delivery, a fully utilised desktop computer – and they got it and, my God, they paid for it. Those computers were stocked all over the world – imagine, to get them there in two days on the desktop fully installed. And then their internal IT department took six weeks on average to issue the passwords and connect the desktops to the internet…
SK: And then the IT department will send you a customer satisfaction survey saying “are you satisfied with x,y and z?” and you’re not – and then you’ve got the vendor looking down the barrel of a sub-standard satisfaction score.
DL: You need to try to integrate people that actually understand the services that are needed on the ground – so when the business says “well, no, I want 98 per cent” actually the IT delivery department realises that you can deliver it in five weeks and that will be fine, and that’ll match with the other IT services that we’ve procured and their capability of getting the password sorted out.
O: Obviously all this has a lot to do with governance: do either of you have any key must-dos for getting governance right?
DL: I think I’ve just touched on one. One of the key things that we’re certainly trying to do with strategic sourcing at the moment is to ensure that we’ve got the SRM or the relationship support to those going through the procurement process; so at the moment we have a seven-step process and by step four we’ve already got the relationship in there.
On my side, where I’m actually doing more of the performance governance, it might sound simple but people need to go back to basics. Even to the level of making sure you take minutes at meetings: “Where are your minutes? Where are the terms of reference to decide what you’re going to discuss in this meeting? Where are your inputs? What is actually going to output?” If you don’t get your basics, you’re just going to sit there and argue. We’re going through a process whereby we’re going back to basics – some people call it a hygiene exercise – to make sure that we’re doing the things that we’re supposed to be doing. While it sounds simple, do you know what? It’s the sort of thing that people in any organisation forget and say “well I’m having my review meetings”; they’re holding their conference calls but do they really know what they’re supposed to be talking about? No, no one’s actually agreed it!
SK: We’re looking at governance and there are a few changes that we are making in many of our BPO contracts in Microsoft. One is going back to the law of requisite variety. Your governance organisation needs to be able to manage the complexity of your outsourcing contract; if you have a global contract like ours that spans all of the regions, spans all the time zones, has about forty-odd languages – three towers if you may – then your governance organisation has to have the capability to manage the complexity. You’re talking about 95 financial controllers; 60-plus procurement managers; every one of the 90,000 employees is your customer.
What I’ve often seen is a governance organisation that was intended to be lean and mean because you wanted to reduce cost, and you had one business owner sitting somewhere up in the stratosphere and then you had a person that was in my role called the vendor manager – and that’s it, your governance finished there! So the role of the vendor manager was periodically to beat the vendor up, and the beating would usually start around January because that’s when you start your budgeting exercise.
DL: Unfortunately this just sounds too familiar…
SK: A second piece is, governance needs to be going from oversight to more insight. What we have historically done is to outsource work, we’ve gone through a huge vendor selection exercise and said “we have got the experts” – and then what we do is sign a wonderful contract and go and stand over shoulders and say “are you pressing the Q and then the W, or are you pressing the W key before the Q?”. You’ve given it to them; let them do their work. And I think that whole of feeling of a loss of control drives this oversight. Governance really needs to change into getting more insight into what’s happening and how to drive the whole outcome forward; change the outcome. What other outcome do I want? That’s really where the governance needs to change.
DL: Just to touch back on the issue of beating your vendors up, Srini: in the original outsource for my department I played both performance and relationship manager . So I was trying to get both win-win deals, trying to put partnerships in place, trying to get value but I’m also doing the performance management; so one minute I’m going in there with my big stick and saying “you didn’t meet SLAs!” and then the next minute I’m saying “and I want to be your friend now” and you can’t do both; you really can’t.
Earlier we were talking about good cop and bad cop, and you sometimes have to deploy that sort of philosophy; you’ve got to have the team to go in there and scrutinise the data and ensure that it is actually genuine and accurate. And then you’ve got to have the team that is looking to build that relationship. The need to manage our organisation on a holistic basis will increase and effective management of knowledge is an integral element of this.
About the Participants
Srinivas Krishna is Director, Finance Operations – Global Supplier Management at Microsoft. He was the inaugural winner of SSON’s Personal Contribution to the Industry Award at the 2011 SSON Excellence Awards – India.
David Lewis is Vendor Relationship Manager, Group Operations for Carphone Warehouse. He has over 25 years’ experience in IT environments across a number of different disciplines.