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Financial Accounting Outsourcing (FAO) Annual Report - January 2007

IT Outsourcing in the Small and Medium Businesses

Ah, the honeymoon stage of a business relationship, that early stage when everyone is enthusiastic, when you envision benefits that will continue to multiply, when you celebrate each small increment of success. You're focused on the objectives of the agreement. You talk frequently. You nip and tuck and shape exactly the relationship you know you need.

Then, too often, time erodes the enthusiasm, and the excitement turns to exasperation. An outsourcing relationship, like every other business relationship, runs that same risk of deterioration. Communication breaks down. Turnover eliminates key individuals from both the outsourcer and the client, and the original mission is lost. Amnesia sets in on both sides of the equation, and the frustration level grows dramatically.

The problem can be avoided. Outsourcing relationships can flourish long past the honeymoon stage, if the dangers are anticipated and dealt with in the planning process. Communication and incentives for success are key to growing those long-term relationships.

"The company's outsourcing account team should focus daily on the mission at hand," said Randy Johnson, a partner in the Denver office of Coopers & Lybrand. "Your company communicated clearly with the outsourcers throughout the evaluation and selection process, but that's only the beginning. Each month, both groups should convene to discuss last month's performance and what changes are anticipated for the next month."

Those discussions, said Johnson, provide a short-term measurement to monitor on-going behavior. Benefits expected to be achieved over the length of the contract are reaffirmed, and progress toward delivering those benefits is measured.

"Just as each employee knows the price of your stock, everyone should know the status of the performance criteria," said Johnson.

Candid discussions are based on trust, and trust is essential in an outsourcing relationship. Your outsourcer must be instrumental to your success, so give their team the information they need. Drive home what your business is all about.  Be frank with issues facing your industry both short and long term. Give them the tools they need to achieve or maintain your position as an industry leader.

Be clear about your respective roles in the relationship. You determine 'what' you want to achieve. The outsourcer's primary focus is on 'how' to achieve those goals. Johnson recommends that you encourage out-of-the-box thinking for creative solutions.

That creative approach also should apply to the financial arrangements, according to Johnson. "It is a critical success factor that the outsourcer share in the benefits," he said. "The win-win relationship allows the outsourcer to increase their revenues when you increase yours. Isn't that what business is all about?"

One recent trend, he said, is offering the outsourcer stock or stock options, "so they are truly rewarded and motivated to improve your bottom line."

He also gave another example of how the revenue sharing could work. If your primary goal is lowering the cost of data center operations, review your budget versus actual costs at the end of the fiscal year. Establish a stair-step formula that allows the supplier to increase their share of revenue based on the overall savings.

"Your service level objectives are another critical parameter to this gain-sharing equation. If the annual surveys indicate that performance is satisfactory, then the cost reduction efforts did not hamper service and the supplier performed in an optimum fashion," Johnson said.

With awareness of the pitfalls and careful long-term planning to avoid them, you can keep the spark in your outsourcing relationship. Moreover, you can bring the outsourcer on board as an integral member of your team.

"The message is clear," said Johnson. "To turn your outsourcer into an asset, put them in the boat with you. Constantly provide them with the proper insight and concise company objectives of why you selected them in the first place. And if you cannot turn your outsourcer into an asset, you should not have outsourced in the first place."

Lessons from the Outsourcing Primer:

• Avoid relationship deterioration by planning for the pitfalls.
• Schedule monthly meetings to reaffirm objectives and measure performance.
• Give your outsourcer financial incentives to succeed.

Publish Date: July 1997

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Copyright © 1997 - Everest Partners, L.P.

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