In This Issue:

The focus of this month's article will be valuable to those of you responsible for any, or all, aspects of outsourcing services such as Request for Proposal (RFP) distribution, supplier negotiations, vendor selection, and supply chain management.

Effective supply chain management needs to start before you sign agreement with a service provider. In fact, it should begin before the RFP is created. There are six important issues to consider in order to successfully outsource services. Negotiating these issues up front will not only save time and effort for you and the vendors, but will also help to ensure that your suppliers deliver value throughout the term of the agreement.

Ultimately, the goal of any supply-chain agreement should be to create a win-win situation that allows you and your vendor to develop a mutually satisfying, financially rewarding, and collaborative relationship over the long term. In today's economic environment many vendors are being asked to deliver more services at less cost. In some instances this could result in driving qualified suppliers away, or forcing them out of business when their operating margins become too slim to survive. This means it's more critical than ever to structure your RFPs and service agreements properly.

Six key outsourcing issues are:

1. Determining Your Service Expectations
2. Using Service Quality As A Deliverable
3. Defining Service Level Agreement Requirements
4. Quantifying In-House Versus Outsourcing Costs
5. Determining the Importance of Supplier Innovation
6. Balancing Name Vendors and Small, Community Suppliers

Tip #1: Determining Your Service Expectations

Whatever the reasons you're looking to outsource a service, you'll want to be clear about the results you expect to achieve. Often when relationship managers become frustrated with their suppliers' performance it's because they have failed to communicate their expectations up front. The importance of investing quality time defining your business objectives and documenting supplier expectations for delivering measurable results can't be emphasized enough. Some questions to ask yourself include:

• How will we track, measure and report the supplier's performance?
• How will we ensure the integrity of the reported data?
• How will we communicate special requirements and changing needs to our suppliers?
• How will we measure our supplier's performance against the company's objectives?

For example, if you're setting up international call center as outsourced service you'd want to include service requirements, such as all customer calls will be answered in three rings or less. Another requirement might be that the 24/7 operations center will have representatives available on every shift who can speak x,y, and z languages as defined by your customer environment. Whatever the requirements be certain that you communicate them to your suppliers.


Tip #2: Using Service Quality As A Deliverable

Building quality as a deliverable into your supplier program requires that you know what quality looks like for your company and how it's being measured today. Break down into components those areas specific to your organization's objectives and then translate these goals into supplier requirements. Use these requirements to develop performance metrics for your suppliers that clearly define how you will track, audit, and measure quality. You should not set your standards too high initially, else you risk driving away good suppliers who could deliver quality results for you over the long haul.

Using the example in Tip #1, you decide that in order to meet minimum service standards for your internal customers call center representatives must complete a 10-point checklist for all inbound and outbound calls. You determine that initially this information will be tracked and reported weekly by the supplier, as it will represent one of their quality metrics. You decide to perform monthly spot audits with your supplier to:

1. Ensure process compliance.
2. Determine effectiveness of the online tool.
3. Identify process improvements.

Quality can be a nebulous goal, therefore it's important to clearly state your supplier expectations up front. Life is too short, time is tight, and the costs of doing business are way too high to do otherwise.


Tip #3: Defining Service Level Agreement Requirements

You need to ensure that you know the minimum service levels your internal customers expect, and the types of services your company requires to meet its business objectives. Communicating this information to your suppliers at the start via a documented Service Level Agreement (SLA) will ensure that all parties understand service deliverables and expectations.

Including SLA metrics as part of your formal supplier agreement allows you to track and measure vendor compliance against documented expectations. You should also include process steps for when your suppliers need to escalate issues that require internal response. In addition, you'll want to include reporting mechanisms that you'll use in supporting their success, i.e., weekly reports and periodic reviews. (Incorporating your SLA expectations into your RFP can help you identify and select a vendor better positioned to deliver your required service levels.)

Continuing with the example in Tip #1, suppose your current internal customer satisfaction ratings have not risen above 75 percent for the last three quarters. Your outsourcing expectations are to increase these ratings to 85 percent while reducing service operations costs by 20 percent. You'll want to communicate these expectations to your supplier and include them in the SLA as a "living document" which can be used during your regular supplier performance review meetings.


Tip #4: Quantifying In-House Versus Outsourcing Costs

A primary reason why companies decide to outsource services is to either reduce the costs of existing operations or to introduce a new low-cost service. Therefore much of your success in deciding to outsource existing services will be determined by the associated costs of operating this service in-house versus outsourcing it.

Using the example above, given that your goals are to: 1) increase customer satisfaction by 10 percent and 2) reduce service operations costs by 20 percent, you'll want to remember to capture and report any direct or indirect cost savings by your vendor. This becomes particularly important if your supplier boosts service ratings through cost savings typically overlooked such as increased productivity and/or technology enhancements, which allow them to reduce the number of service representatives initially contracted to manage your account.

Outsourcing a brand new service where in-house comparisons don't exist will require market research in order to determine competitive pricing structures by industry and type of service. You might consider researching your industry's best practices and the suppliers who service these companies in order to begin developing your own comparisons.

Note: For explanation of direct (hard) savings and indirect (soft) savings, please see August's issue of Rt Times on "Low Hanging Fruit: Cost Savings At Your Fingertips."


#5: Determining the Importance of Supplier Innovation

While defining quality for your suppliers is tough enough, how do you quantify expectations and deliverables when it comes to innovation? Model your program on your company's culture.

The first question is whether your company has a culture of innovation. If it does, how does your company define and measure innovation today? What does the spectrum leading up to innovative breakthroughs--creativity, risktaking, and failed attempts--look like at your company? These are the types of questions to ask yourself in designing your supplier programs and future RFPs.

If your company doesn't value innovation, it may not make sense to have your suppliers delivering aggressive results that require innovative, forward-looking actions. internal change agent hoping to introduce innovation through their company's "backdoor" might consider selecting two or three innovative goals for the supplier, which can then be broken down into less aggressive deliverable dates. Incremental steps will allow you and your supplier the opportunity to deliver small, credible wins over a longer period of time.

Your supplier performance goals need to clearly define what innovation would look like and how it will be measured in your environment.


Tip #6: Balancing Name Vendors and Small, Community Suppliers


Outsourcing your company's services can provide you with opportunities to both reduce your operational costs and increase your community standing.

There may be times when only a large-scale supplier will suffice in delivering the high-end solutions your business requires. However, there might also be ways for you to split a larger proposal to include both a name vendor and a smaller vendor. This can create a win-win opportunity that meets your business objectives and builds goodwill in your community.

Consider your company's policies in selecting suppliers. What factors are most critical, e.g., well-known and respected suppliers, past and present verifiable performance in the marketplace, size or name recognition? If you choose a different path than recommended by your company, you might first consider talking to your Purchasing department to understand the historical perspective on the company's supply chain strategy.

Often companies have unpublished guidelines as to informal selection factors, e.g., minority owned and/or locally-based entrepreneurs. Even if they don't, it can be to the supply chain manager's benefit to grow smaller, local suppliers from the ground up when building a top notch partner program. Many times you'll find that smaller suppliers are more eager to accept your challenges, more flexible in taking responsible risks, and more willing to present outside-the-box solutions for your business.

Conclusion

Innovation plus measurable cost-saving means credible wins for you as the supply chain manager, your business unit, your company, and your supplier. It doesn't get much better than that.

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