Managing Risks in Outsourcing: Part 3 – Relationship Management

In Part 1, addressed managing and mitigating risks during the supplier selection process and in Part 2, I addressed the risks associated with contract negotiations. In this Part 3, I will discuss relationship management as a key component of successful outsourcings.

Successful outsourcing requires effective contract management. While you can mitigate the risks associated with outsourcing through having a robust outsourcing contract, it is the day-to-day management of the relationship with your supplier which is critical to the overall success of the deal. Problems will always arise in long term services arrangements: an inadequate agreement on requirements or specifications, delays, cost overruns and poor performance are not uncommon. Underlying most of these issues is a single recurrent theme – poor management and communication between the parties. If an effective management framework is established early and applied consistently throughout the deal, then the risk of an outsourcing deal failing is significantly reduced.

To assist in the creation of a culture of trust and partnership, you should foster the development of key individual relationships with your supplier so as to facilitate a constructive relationship. Strong relationships will benefit you just as much as your supplier and play a very significant role in ensuring the overall success of the deal and facilitating the development of institutional trust.

While trust between key individuals from either party can often be best achieved in an informal way, trust between organizations requires more formal processes which fit well with the overall contracting structure by defining and developing the parties’ mutual obligations and requirements.

Contract management and governance structures should be given sufficient consideration during the negotiation of the outsourcing contract. There should be multiple layers of interaction between you and the supplier with different reporting and governance structures to address operational, financial and strategic requirements. These processes should run in parallel and strategic relationship meetings should be distinguished from the escalation of operational issues.

Workable change control procedures should be included in the outsourcing contract and used. Change control procedures are often detailed in the outsourcing contract but not applied in practice. When disputes arise it is usually very difficult to find a comprehensive audit trail of change control documentation and as a result there can be considerable uncertainty around the supplier’s obligations and the scope of services.

The need for openness and trust in the relationship should be underpinned by a mutual readiness to communicate when issues arise rather than simply revert to the terms of the outsourcing contract. You should communicate your desired strategic and deal outcomes to your supplier during the course of the outsourcing deal and communicate regularly about your changing business requirements and outcomes to ensure that the outsourcing relationship meets your current needs. This is particularly important in multi-supplier deals that span countries and geographically remote sites.

You should ensure there is rapid escalation of problems as part of a dispute resolution procedure. There may be a concern that the use of dispute resolution is an admission of failure by the delivery management team. This may be correct in certain circumstances but as outsourcing deals increasingly involve key business activities, problems do require senior management engagement for resolution and the greater danger is the reluctance to escalate urgent problems to an appropriate level. It is important to ensure that any resolution to problems and issues during the course of the deal are documented properly. Where disputes arise this is often reflected in a poorly documented series of change control notices and resulting lack of clarity as to the scope of the deal and deliverables.

There are often significant cross-dependencies between your activities and your supplier’s. This is especially the case in a multi-supplier outsourcing environment. You should ensure that cross-dependencies are identified early before the outsourcing contract is executed and that responsibility for delivering on those dependencies is clearly assigned.