Does driving
the absolute best deal possible always make your firm
the winner? When it comes to sourcing, maybe not.
The hype around outsourcing
has led to a feeding frenzy in which clients drive deals
forward solely on expected cost savings, and suppliers
desperately make concessions to land deals in a crowded
market. That’s not healthy for either side in
the long run, says Ben Trowbridge of the Trowbridge
Group, a Dallas, Texas-based outsourcing advisory firm.
In many cases, outsourcing
consultants—and he candidly includes his own company
in that group—can make the situation worse by
helping clients squeeze every possible concession from
the supplier. The problem? That creates suppliers who
are working for next to nothing—making them a
weak long-term partner at best.
Dynamics in the market
“are driving established players like EDS [Electronic
Data Systems Inc.] and CSC [Computer Sciences Corp.]
into low-margin deals time after time,” Mr. Trowbridge
says. That’s because small fringe competitors
are bidding those same jobs with tiny margins and low
overhead, often because they’re using offshore
labor or cutting their margins razor-thin. As you shop
for an outsourcer, Mr. Trowbridge counsels, remember
that it’s a buyer’s market right now. Many
of the companies competing for your business may have
very little actual experience as outsourcers yet. “All
sorts of companies are claiming they’re outsourcing
providers,” he says, “while actually, very
few of them even understand how to write a good outsourcing
contract.”
One way the Trowbridge
Group helps companies align their relationships with
service vendors is by sorting through the service level
agreement (SLA) and simplifying it. In doing so, they
help the client create a shorter list of indicators
that really matter—ones that can be effectively
monitored for compliance.
Rather than joining the
race to the bottom line, Mr. Trowbridge suggests “aligning
the relationship” by negotiating a truly fair
price. It may seem counterintuitive, but if you’re
doing a large outsourcing deal, you need to focus on
the overall balance of the deal—not just the price
and what you’re getting for that price. Looking
at the contract with a broader view helps make sure
your provider is going to stay in business and provide
you with good service.
For example, as you negotiate,
“make sure you know that the real cost to provide
your services from that new location,” Mr.. Trowbridge
says. Once you know that, don’t push the contract
price down to the range of a zero-margin deal.
If the contract really
is saving you more than 50 percent, he says, consider
the costs to the service provider. Where’s their
margin? And without a profit, what’s their incentive
to stay in business? Do you really want to be redoing
this deal in 18 months after your vendor goes under?
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