As regular readers of our articles will know, I tend to continually emphasise the importance of a strong Intelligent Client Function (ICF) team. I don’t do so without cause though because the evidence we see day in and day out is that these are the key people responsible for shaping ‘what good looks like’ in a well-managed outsourced relationship.
They serve a vital role including the initial concept of outsourced service delivery, from the business case, through requirements gathering, market engagement, procurement, contract structure and negotiation of the contracted relationship. Post contract, they are the key drivers of on-going re-shaping, vendor performance and innovation.
Having been asked to recover hundreds of poor performing relationships, as obvious as it may be to us that an ICF team is crucial to the sustainability and success of a complex outsourced relationship, not everyone in senior management teams who consider outsourcing their services recognise this.
Therefore as with any investment, it is critical to make sure that your business case for developing an appropriately resourced and skilled ICF team supports a strong return on investment. This case should also make clear where and how your organisation’s major project relationships can benefit from investing in individuals with the right mix of technical competence and emotional intelligence.
Three of the key considerations in making a business case for investing in a highly skilled ICF team, are:
1. A strong client-side team needs investment – in the right personnel, in ongoing training to keep the team sharp, and even in the latest technologies that help your people stay on top of the performance of your strategic partnerships.
2. Many organisations understand little about the importance of effective contract and supplier relationship management, necessitating an explanation of why investment in an ICF team is justified and what quantified financial and non-financial benefits the team will bring.
3. Many client-side senior executives aren’t aware of the opportunities an ICF team is able to identify and the outsourcing risks the team will be able to mitigate.
A number of an ICF team’s benefits can be a challenge to quantify, therefore, if you are new to outsourcing, it can be difficult to understand what to put into the business case to get the right team around you. However, by focusing on opportunities and risks, some of which do provide avenues for quantifiable outcomes, a balanced case can be built for investing in the manpower, the resources and the autonomy a good ICF team will need.
Opportunities
Even the healthiest of complex strategic partnerships will present numerous opportunities for improvement in its life-cycle – the only thing standing in the way of your organisation maximising these is ensuring the team managing the outcomes and benefits have the right level of diligence and insight to find and make something of them.
1. Using evidence based insights for performance management and client compliance
We have often found that when a contract begins to suffer from poor service delivery, a client’s instinct is to turn to their vendor to change their behaviour so that that the vendor can repair the relationship. By instinctively placing the blame at the vendor’s door, usually through a lack of evidence based robust performance analysis, client teams often fail to analyse their own influence on the situation they find themselves in.
Without appropriate internal compliance to an evidenced based governance process, a client may eventually find that they are unintentionally sabotaging the partnership. Internal compliance to capturing the right performance data can be the last thing considered, but an ICF team is tasked both keeping an eye on the vendor and how well the client organisation is holding their own feet to the fire.
More positively, an ICF team with the power to drive internal compliance is able to point out when compliance can provide you with opportunities for service delivery improvement or greater value. For example, you may find aspects of the contract that are not yet fully utilised but would prove beneficial if implemented.
2. Vendor compliance
Although ensuring that your supplier/vendor adheres to all of a written contract’s terms and conditions is daunting enough to be considered a risk – in some cases they are unlikely to follow the contract to the letter – therefore managing their compliance can still generate opportunities:
-
The contract offers price reductions for increased volumes.
-
Trial service offers, free advisory services, or special deals made in the contract.
How often do clients take advantage of these contractual terms? In addition to challenging the vendor to comply with their more critical contractual responsibilities, an experienced client-side team can see to it that when such opportunities are triggered, they are not missed.
3. Making cost improvements
Most contracts offer the opportunity to make significant cost savings. Usually, these are through performance measures where both client and vendor are satisfied with the quality of service delivery. Alternatively, various cost-related clauses may be found in the contract that may be activated on the achievement or lack thereof of certain milestones. Such clauses can be:
-
A specified cost reduction over the project’s lifetime
-
A best value clause allowing the client to seek cost adjustments based on market prices (subject to a like-for-like comparison with existing risk exposure and service levels)
-
Both partners agree to work together to achieve reduced costs for specific and quantified objectives
-
Service credits or penalties when delivery quality slides
Whatever the clause or circumstance, often these opportunities to make a considered cost saving, or service improvements at no additional costs, will be missed or organisations will fail to identify these clauses as soon as they kick in, simply because they are not equipped with the right resources and skills to drive cost improvements or confer with suppliers on their contractual obligations.
Resourceful ICF teams, conversely, are equipped to manage your outsourcing contracts and supplier relationships, ensuring that with an emphasis on joint enterprise, both sides are able to come together to reduce costs.
4. Obtaining better value
Although value can be associated with cost, there are also opportunities to gain value that is not necessarily cost-related, but can have a positive effect on service charges, such as:
-
Improving the logistics of the delivery process
-
Increasing delivery quality, which can have a knock-on effect on your own performance
-
Personnel restructuring and training
-
Using modern technologies such as e-invoicing or dynamic discounting to make the payments process more efficient
-
Working with the vendor to make mutually beneficial changes in specifications
As with finding ways to reduce costs in a manner that benefits both you and your outsourcing partner, an ICF team plays a fundamental role in maximising value. They work with your supplier to identify value-gaining opportunities, and then formulate and execute a plan to act on those opportunities.
5. Maintaining clarity and communication within the partnership
Communication is the lynchpin of a long-term outsourced relationship, and where a strong ICF team can shine from pre-procurement to the end of the contract. Working in conjunction with senior management and the supplier, the ICF team is the link between client and vendor, ensuring that communication is clear and transparent, and that expected business outcomes are clearly understood and agreed upon. While it can be difficult to quantify the opportunities provided by communication on its own, the results certainly make sense in a business case – firm partnerships last longer and ailing ones can be resuscitated, innovation in service delivery can be developed, and value and performance can be maximised.
Risks
The flip-side of opportunities – won or lost as a result of effective ICF team activities – are the risks, which inevitably show themselves through a failure to achieve what was specified or when external factors hamper delivery efforts or results.
1. Commercial Risk
Commercial risk – when a contract’s costs begin to escalate or become uncompetitive – can be caused by:
-
Failure to identify or implement contractual terms (for example those relating to service credits, penalty payments, or benchmarking clauses)
-
Failure to manage internal demand for a product or service, leading to charges that are higher than expected
-
Failure to adequately monitor invoices to ensure that what you are paying for has been delivered in accordance with expectations
-
Failure to notice or challenge increases in pricing, particularly in the case of long-term contracts
Effective ICF teams are those which, given the appropriate tools to monitor risks and the training to squeeze value and drive innovation in complex strategic partnerships, are able to combat these commercial risks, using techniques from analytics and verifications of fees and charges to benchmarking and monitoring.
2. Performance Risk
Perhaps the most commonly recognised type of risk is performance risk, which as you’ll know is when declining service quality begins to have a negative client-side effect. Performance risk can cover a wide array of situations, some of which are:
-
Productivity fluctuations or the supplier failing to meet delivery goals, causing your own productivity to fall
-
The supplier taking poor business advice, which negatively impacts you when the consequences of this poor advice trickle down
-
A high staff turnover rate within the vendor, which takes the vendor’s focus away from delivery and onto knowledge transfer and training of new staff
-
Poor performance in peripheral areas subcontracted out to third parties which lead to further, unexpected costs
Just as with commercial risk, skilled ICF teams are tasked with consistently tracking and relaying vendor performance, while maintaining constant communication with their counterparts on the supplier’s side in order to ensure that their performance is kept in line with expectations.
3. Strategic Risk
Strategic risk can be seen as the weakening of your position as a client through contract activities. Examples can include:
-
Loss of knowledge, by clients who hand over full control of products or services previously handled exclusively in-house
-
The supplier gaining technical knowledge or intellectual property that can enable them to compete with a client in their own market
-
The supplier gaining knowledge of your customer base
-
Poaching of key personnel
-
Opportunistic behaviour, such as aggressive changes in pricing in response to realignment, taking advantage of the client’s desire to avoid an early termination
Because successfully achieving mutually beneficial project outcomes means working closely with your strategic partner, you could expose your organisation to these risks, with vendors ultimately obtaining a strategic advantage in terms of new products, services, or activities.
However, with an experienced ICF team, strategic risk can be minimised through the trust your team builds with the supplier, their greater understanding of your supply base, the segmentation of the criticality of contracts and providers, and the creation of regular detailed strategic risk assessments.
4. Reputational risk
Reputation is becoming increasingly important in the modern age. Nowadays, social media can make or break a company, or inexorably alter someone’s public perception. In fact, it has been assessed that up to 75% of a company’s value can be tied to its reputation. Consider the impact to your public perception if a partner is found doing one of the following:
-
Getting its labour from embargoed countries
-
Destroying the environment, such as by reducing biodiversity or leaving harmful waste
-
Disregarding ethical guidelines
-
Ignoring regulations
Considering how essential a positive reputation is to ensuring that a complex outsourcing project is accepted by the public, a strong ICF team should have the natural skills and training to adequately assess the reputational risk factor of working with a particular partner, along with determining when and how to act on a potential problem.
In Conclusion
Every new outsourcing partnership comes with its own set of opportunities and risks. As those laid out here provide a more general perspective, you are likely to encounter many more possibilities. Because of the wide variability of variables here, an ICF team with the ability to adapt to the specific needs of every relationship can quickly show its importance. And through the skilful management of your outsourced partnership, they will quickly prove their worth by taking advantage of the opportunities they find and mitigating or removing all risks as they crop up or preferably before they do.
Consequently, the business case for an ICF team is tied up in the intricacies of balancing a strategic relationship’s opportunities with its risks, giving you the foresight to handle any eventuality and maximise every chance to enhance outcomes. An ICF team can build a foundation of trust with your service provider, or enable you to mine real value from the relationship – or both.
