Beyond Outsourcing: Partnering provides provable long-term results

Working side by side with the customer rather than at arm’s length denotes more than a "client-vendor" relationship. This plan of "partnering" brings you a step beyond outsourcing and into a new business model.

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By Magnus Pousette, Vice President, ABB Reliability Services North America

PlantServices.com

Outsourcing: panacea or flash in the pan?

When the outsourcing business model first hit the scene, it was the greatest thing since polyvinylidene chloride. Companies saw outsourcing as an incremental tool to carve out unimportant activities and cut costs in non-core activities. Management books heralded this model as a panacea for manufacturing competitiveness in developed economies like North America.

But, as the saying goes, no one can save their way to prosperity. Outsourcing became a classic case of diminishing returns (allowing those same heralding authors to write more books about outsourcing’s demise). After reaping all the low-hanging fruit in the first year or two, outsourcing “non-core processes” turns the outsourced process into a commodity, with limited lasting value to the end customer. Soon, in conjunction with the Internet, companies with outsourcing business models were introduced to Cost-Only Blind Reverse Auctions (COBRAs), where the lowest bidder wins. This ensured a cycle of ever-decreasing margins and the requisite compromises that go with them, such as sacrificing quality for cost, and high customer “churn” as the other guy wins the business.

So in this environment of diminished value offering, the only way a company with an outsourcing model can grow is to find a way to provide additional value to the customer. One way is to expand the scope of outsourced services provided to that customer. But while this approach might add revenue, it is still predicated upon a cost-only model that ultimately provides little real incremental value to the customer, and then only for limited time, until the diminishing returns rule kicks back in.

Another, more promising way to improve the outsourcing model is to move “up the value chain” beyond simple cost-cutting and into something that provides real, lasting and attractive value to the customer, such as increased production. The idea here is that if costs are under control and reasonably predictable, then increasing production (providing the customer can sell extra production) will contribute additional margin directly to the bottom line.

But moving “up the value chain” into production means the outsourcing company begins to encroach upon the customer’s core business; the same business the customer chose to concentrate on, and why they decided to outsource “non-core” processes in the first place. Yet if the value proposition to the customer is no longer limited to non-core processes, then that business model must be something other than “outsourcing.” A third-party business model directly contributing measurably to the customer’s core business needs another name. Working side by side with the customer rather than at arm’s length denotes more than a “client-vendor” relationship. We propose “partnering” to describe this new kind of business model.

Partnering: outsourcing’s smarter cousin

Partnering thinks in the customer’s long-term interest, working with arms locked, not at arms length. Partners have the same goal as the customer, participating in production meetings, and mutually striving to achieve jointly-created and targeted metrics. The primary differences between a partnering business model and traditional outsourcing are:

The fundamental components of successful partnering are:

• Mutual objectives
• Performance basis

Mutual objectives: “singing from the same songsheet”

Key to partnering is mutual objectives defined by Key Performance Indicators (KPIs).  KPIs are used to measure improvement. Partnering KPIs should be mutual and plant-wide, in which the partner can be seen to have direct (if lesser) impact on overall plant performance. If KPIs are limited to task-driven measures influenced only by the partnering company, then the partnering company is incentivized to manipulate the system (albeit ethically and legally) to achieve these KPIs, regardless of how the rest of the plant performs. If KPIs are “silo-driven” like this, and the partnering agreement is performance-based, the customer may find himself in the position of having to pay a bonus to his partner when the partner meet his metrics, even while the overall plant performs poorly. A scenario like this in which only one partner “wins” is sure to end badly, perhaps in a COBRA. So metrics must be plant-wide, that both the end user and the partner company strive for, and for which both parties agree ahead of time.

But even with mutual metrics, in a dynamic business environment, issues requiring mitigation will still arise. So just as partners in the best marriages have an agreed upon methodology for how to mitigate family disagreements, successful business partnerships also must have a good problem resolution methodology agreed upon before problems arise. This takes the form of agreed upon timeframes during which to discuss strategic ramifications of meeting (or not meeting) mutual KPIs.

And good partner “coaching” should not be overlooked. As many successful couples have a trusted person they can consult during difficult times (such as a parent, pastor or friend), successful partnerships should have a “board of directors” consisting of senior managers from both companies. But rather than only having this “board of directors” available to mitigate issues when they arise, the board should meet on a regular basis (quarterly, semiannually etc) to understand and provide proactive advice and direction to mitigate issues before they arise.

Again, business is dynamic: customers change, markets change, prices change, products change, capital changes etc. If no process for adjusting to these dynamics exist so that the customer and partner can continue to have measurable improvements that positively affect the business, the partnership is sure to sour.