Is Your Outsourcing Contract Paying Off?
By: Michele J. Flynn Printed in: Site Selection
By: Michele J. Flynn
Printed in: Site Selection
Nine out of 10 CFOs based in the U.S. believe that using outside resources to perform non-core functions increases shareholder value. Yet fewer than two out of 10 have empirically measured the return on investment (ROI) of their outsourcing initiatives. Those who have measured ROI report an average of 17 percent savings.
What about those who haven't measured it? Perhaps they haven't done so because they haven't figured out the best way to measure it, or maybe, it's because "savings" wasn't the driver in the first place. Companies outsource for many reasons. Some choose to do so to tap into talent or expertise that is deeper with an outside firm than what they can attract internally. Many turn to the outside so they can focus their energies on their core business with limited distractions. And others do so simply to reduce headcount and related expenses.
Real estate and facilities management is one of the most commonly outsourced functions - second only to information technology. For those organizations that have chosen to outsource these functions, or are considering doing so, the question is: "How can we make sure outsourcing pays?" To answer this question, we turned to organizations that have outsourced, to determine if they felt that the decision had paid off, if so how, and if not, why not. The results are mixed, but, many more rate outsourcing as a success than a failure. One consistent message resonated through all of the responses: "It depends on how you choose to do it."
What Went Wrong
For those organizations indicating their outsourcing initiative did not pay, few actually stopped outsourcing. Most repositioned the initiative or the providers to recover their initial objectives. For one utility company based in the Southwest, a recent reevaluation of their outsourcing initiatives resulted in termination of the contract and re-employment of the individuals as full-time employees of the company. The rationale: the value add received from the provider did not outweigh the cost premium they were charging to manage the staff. However, in that particular instance, the utility actually retained strategic and tactical control of the function, and the outsource provider merely supplied the labor.
Ten years ago, this type of arrangement was common. Today, few would truly describe this as outsourcing. At best, it might be defined as "out-tasking". Logically, the provider has the same expenses in hiring, training and retaining staff that any company does, and they need to add profit as well. If the outsourcer dictates the processes and methods to be used, there is no opportunity for the provider to deliver efficiencies. Therefore, the only way to reduce costs is to provide the labor less expensively. In the very competitive labor markets of recent years, this has proven very difficult to do.
In several circumstances, where organizations couldn't determine if outsourcing paid, the common thread was the lack of a clear baseline prior to undertaking the outsourcing initiative. The drivers behind deciding to outsource, the methodology used in selecting the provider and the contract structures all varied. Yet without exception, and for various reasons, the organizations pursued their initial outsourcing efforts without a clear view of their starting point. As a result, they were unable to assess, other than anecdotally, whether or not the initiative was financially successful.
Some might wonder how this is possible - either your costs went up or they went down, how tough is that? In reality, no organization is stagnant from one year to the next. Without a fair amount of detail about volumes and costs per unit of volume, it is very difficult to determine if there have been any savings.
Given the speed of change in business, most organizations see wide fluctuations in the volume of activity within their portfolio in any given year. Not only can the amount of space within the portfolio differ from year to year, but the level of activity within a portfolio often varies widely, affecting costs on many different levels.
In addition, if savings are identifiable, they may be attributable to a drop in service levels or a decrease in customer satisfaction. Anyone can do less with less, but is this success?
Outsourcing Success Factors
As outsourcing is defined differently by many, so too is success. If one were to address the question "Do you use outsourcing to manage any aspect of your real estate?" to 50 companies, the response would likely be positive from virtually all of them, but it would mean 50 different things.
There are those companies like Bank of America that consider the strategic sourcing of all real estate activity in a given geographic region, including transaction management, project management and facility management to be outsourcing. Others, like IBM or Nortel, consider the award of a single functional responsibility such as facility management to a limited number of vendors as outsourcing.
Some will tell those considering outsourcing that all functions should be assigned to the same provider within a given area to ensure smooth delivery of all services. Others would suggest that awards should be based solely on functional expertise, and an organization should never put all of its proverbial eggs in one basket.
At the far end of the spectrum are those that would promote the use of multiple vendors within the same geographic and functional arenas to ensure a competitive balance. Are these all outsourcing? Yes. Can each of these be made to pay? Yes. Are there any common denominators among the successful outsourcing initiatives that can be shared with others considering the same path? The answer to this most important question is also "yes." Although there are many opportunities to derail the success of an outsourcing initiative, there are also many techniques that can be used to improve the opportunity to make outsourcing pay. Addressing each of the potential pitfalls to avoid, and the steps to take to ensure success, would require far more time than this article would allow, therefore the focus will be on the top three items that most consistently occur in successful initiatives.
Document a Clear Baseline
A common question in this arena is: "Why do I care what happened last year, the future will be different?"
It's an understandable response. At first glance, it even makes sense. If the organization has already acknowledged the need to manage service delivery differently, and it's known that the old way wasn't the most efficient, why spend the time and resources to document the past? The answer is two-fold.
The first and most obvious is simple: if you don't know where you started from, you can't possibly know how far you've come at the end. This reality is applicable to far more than just numbers or cost. Every organization's baseline consists of a tremendous number of variables, including the services that are offered, the functions and activities performed within those services, the volume of each particular task or activity, the service levels within which it is performed, the quality of the materials used, where the services are performed, for whom, the frequency of the activity and when it occurs.
For example, if a company spends $300,000 one year to move 2,000 people and $325,000 the next for the same number of people, is that bad? Maybe not. Perhaps the first year there were four moves of 500 people each for an average cost of $150 per person moved with all activity taking place during working hours. And in the second there were 500 separate moves of 4 people each, at an average cost of $162.50 per person moved with all activity taking place after hours. The second year reflects a huge increase in project activity (1,250 percent), but only an 8.3 percent increment in pricing. By establishing a detailed baseline that delineates all of the variables, it is far easier to measure success. Outsourcing of any of the complex services that fall within the real estate arena cannot be measured on an aggregated level effectively.
The second reason is somewhat more subtle. In order to effectively establish a clear baseline, an organization is forced to define exactly what services are provided, for whom, when, how frequently, in what increments, within what turnaround timeframes and to what degree of satisfaction. These answers then form the foundation for a clearly defined scope of service and frame the decision points to be considered for establishing clear service level agreements.
Interestingly, for each of the organizations that said their outsourcing initiative was not as successful as they hoped it would be, lack of a clearly defined scope of work was the number one reason offered for why it was sub-optimal. Equally important, for those who assessed their initiatives as successful, clarity of expectations between the provider and the outsourcer fell within the top five reasons for that success every time.
Map Success Measures to Organizational Objectives
There is nothing worse than completing an assignment and finding out that you just solved the wrong problem. The drivers behind an outsourcing initiative differ widely. Whether a company is trying to reduce costs, reduce headcount, improve service levels, speed up cycle times or provide their staff with greater opportunity, the ways in which they measure success will differ significantly. Yet each will need to define exactly what constitutes success.
Headcount reductions can be achieved by reducing service levels, eliminating services entirely or improving efficiency. Depending upon the ultimate corporate objective, each one of these actions could be perceived as a success or a failure. It is not only important that both the outsourcing organization and the provider know and agree on what success means, but that that definition of success maps directly back to the corporate objectives.
All too often in the early days of outsourcing neither party recognized the need to directly map the success measures of the outsourcing to organizational objectives. Sometimes this stemmed from the reality that the real estate organizations used to providing the services internally didn't really map their own internal measures of success to the overall objectives of the company. More often, it was due to the perception that outsourcing was a tactical methodology for delivering service similar to the procurement of any other commodity, and therefore the measures of success were very one-dimensional and revolved around the delivery of services on time and on budget.
Over the last ten years, awareness of how critical it is for real estate services to not only meet the daily operational needs of the occupant base, but to contribute significantly toward meeting the corporate objectives has been elevated. With the increasing shift to use of outside providers to deliver these services has come an equally elevated awareness that outsourcing is not just a tactical measure, but a very powerful strategic opportunity to enhance a real estate organization's ability to provide that contribution.
Measure Performance and Report on It
At the beginning of any relationship, and certainly during the sales cycle, every organization considering outsourcing and every provider begins the process with the best of intentions. However, human nature is a very funny thing - best intentions often get buried by the pressures and stresses of every day activity, particularly at the current pace of business.
For many corporate insiders there is a desire to heave a huge sigh of relief once the decision is made, the provider selected and the transition is completed. A sense of "great, now we're set" is common. Yet in reality, for the successful outsourcing relationships, the work has only just begun. Just as we paid more attention in class when we knew that the material would be on the test, so too do we perform better when we know that what we are doing is being measured and reported - and that the results contribute significantly to whether we'll retain the business, earn a bonus or even keep our job.
Measuring performance and reporting on it is easy, if you begin with a clearly defined baseline, and well-defined measures of success that map appropriately to the objectives. Both organizations will have clear key performance indicators (KPIs) that will, when accumulated, tell the story of the success or failure of the outsourcing initiative. Each will know in which areas the relationship is performing, and where it is not. They will have sufficient information to investigate the reasons for poor performance and be able to track worrisome trends, or successful remedial actions. Most importantly, what information needs to be tracked to report effectively and the fact that the provider will track and report on it is included in the clearly defined scope of work, so all parties are assured that the methods and tools are in place to do so.
In order to ensure that the measurements are not too tactical or one-dimensional, comprehensive performance-measurement programs consist of a mixture of objective and subjective measures that are weighted to ensure that the provider places the appropriate emphasis on the tasks and activities that matter relative to their ability to meet the initiative's key objectives. Despite the use of some subjective measures, the measurement needs to be empirical and should be directly linked to the provider's compensation structure. Because as we all know, the report card has far more meaning when it drives something as critical as personal compensation.
There is no single answer to the question "Does outsourcing pay?" Perhaps the real question is, "Can outsourcing be made to pay?" The answer is yes, definitively. Although there are many things that an organization needs to do to ensure the success and a positive ROI from their outsourcing initiative, the three most basic are (1) begin with a clearly defined baseline; (2) map the success measurements of the initiative - and the provider - to the organization's underlying objectives; (3) and measure performance and report on it continually. Other contributing factors will include how the deal is structured, which is the right cultural match and which services should go out and to whom. If you get every one of these right and miss the top three, your chances of success will likely be limited.
Michele J. Flynn is the founding principal of Expense Management Solutions, Inc. Expense Management Solutions,Inc.