November 01, 2011 | Supplier Management Strategy
True Success Depends on Defining and Contracting for What Is Really Important
Has your organization claimed “success” when it got a large deal signed? This large deal could be a BPO agreement, an IT contract, or another somewhat complex negotiation. Perhaps you got the vendor to agree to your requirements, timing, reports, pricing, etc. – and therefore you consider the deal a success.
Now look back at what happened over the one to five years following such contract signings. Have most of these “successful” deals delivered the strategic value and transformation that was expected? Does the business seem better? Probably not. In many cases the deal probably cost more, took longer, missed on some metrics and didn’t include everything that you thought was within the scope. These are indicators that you were probably not asalignedwith the vendor as you thought you were. This is not to say that the deal was a failure, but more that it didn’t align with the strategic expectations of the business. How could this happen with a corporate sourcing team leading the transaction?
Lack of large deal experience – a major challenge
One of the key challenges most procurement organizations face is that sourcing and managing large complex deals is only an occasional activity. Many companies therefore only have limited experience negotiating these transactions. However they may still pursue them as if they were just like any other sourcing and contracting event, with a focus on cost and transaction metrics. This lack of experience in outsourcing negotiations is usually reflected in the contract details. Some of the common gaps include definition of scope, performance, responsibility, accountability, timing, strategic value and transformation. Limited experience also tends to show in the financial calculations proposed for service provider penalties and incentives – often focused on protecting the company vs. mutual benefit.
Service providers do have the deep expertise in deal structure and negotiation because they engage in these activities regularly. While most providers are willing to impart their wisdom and experience with a customer, there is a natural tendency for companies to focus on transaction SLAs and costs. In part this is because these metrics are familiar and relatively easy to measure and articulate.
It is also easier to compare providers to each other on these metrics during sourcing. The company will usually have conversations with the provider onstrategic alignmentbut the transactional metrics focus during sourcing and in the contract frequently pushes both parties towards performance agreement. The transactional contract itself is frequently complicated and detailed, and in turn drives anxiety to complete the contracting process. This focus to complete the contract in turn increases the opportunity for gaps in definition and transformation that will need to be worked out later.
Two categories of sourcing programs: scope expectations and performance misalignment
Most companies lacking large-deal experience may have their sourcing programs fall into two categories: one regarding scope expectations and one on performance misalignment. Many times a company can fall into both categories, which are described below.
1) Scope of services not as inclusive as anticipated.
Companies in this category often believe that picking the solution provider and completing the contract are the main objectives to achieve the business case. Usually there is a heavy focus on contract details that protect them against provider under performance while achieving a low per-transaction cost. The perception of success is usually tied to how much of a discount or how many concessions were achieved from the service provider as well as cost improvement in future years compared to the current baseline.
While these measures are not incorrect, alone they do not drive strategic transformation or alignment. A typical symptom of this situation is that customers ask for activities (assessments, process or operations improvements, new reports, etc.) to be performed within the fees of the contract and find the service provider requesting additional fees for these activities. This situation is often a result of a contractagreementthat is much cost and transaction constricting for the service provider – thus the provider is perceived to not be hitting the mark on the customer’s strategic alignment expectations.
2) Good transaction performance – but not feeling the value.
Companies in this category talk about strategy during the sourcing process but drive many detailed performance/transactional metrics in the contract. Once these engagements begin, the service provider may report many “green” indicators but the client company perceives many “red” issues that are business centric. An example is the transactions are being performed well but the client is busier and getting more complaints from the business units. This situation often reflects a misalignment of metrics, with the provider reporting on tactical transactions per the contract and the client is looking at a larger picture of performance (alignment) that was not well defined or enabled in the contract. This is frequently a result of process and transaction focus at too low a level.
Causes of vendor misalignment
Most sourcing organizations are measured on the savings they achieve. Thus the sourcing organization is excited to define and complete a business case and transaction that promises to deliver savings. These procurement groups are motivated to have a strong contract in place to make sure the service provider delivers to the metrics.
The business units are also looking for savings, but more importantly they are looking for “value,” which is harder to align to and calculate. Thus misalignment occurs because companies are talking to service providers about the “big picture” but are creating contracts and measures that miss it by focusing too much on cost and transactions. As a result, the service provider agrees to detailed terms (and performs to them) but does not have sufficient latitude to invest or focus on the big picture. Service providers many times will incrementally improve transactional operations (to get YOY cost improvement), but may not be aligned with the customer’s expectations on transformation.
This alignment gap frequently becomes a larger issue over time, which leads to many meetings about performance and eventually revisiting the contract.
Moving from agreement to alignment
There are plenty of examples of companies and providers having to do a mid-contract recalibration or restructuring to move from agreement to alignment. The challenge is: What can customers (sourcing groups) do differently from the start of the sourcing process and throughout the contracting process to drive more upfront alignment with the service provider that generates real savings and value vs. just getting agreement?
How can the sourcing group manage the expectations internally regarding the discussion, time and the level of detail needed to achieve real alignment? Doing it “right” the first time generally takes more time, costs a bit more, and uses a different (sometimes unfamiliar) set of sourcing criteria to select a provider. These alignment efforts are worthwhile, because plenty of sourcing projects have proven the old axiom: “There’s never time to do it right, but there’s always time to do it over.”
Vendor alignment that drives better value and business benefits begins with at the contracting stage. GEP’s contract management services help you not only get the best possible terms, but also manage improve contract compliance and reporting. Learn more about GEP’s contract management services.