A new paper from researchers at Portsmouth University has identified 18 components of a successful outsourcing agreement.
The 18 factors are based on a series of interviews with the UK division of pharmaceuticals giant Eli Lilly, which outsourced its facilities management to a company called Interserve in 2002.
The outsourcing contract was deemed a success on two grounds. Firstly, the like-for-like cost of service provision shrank by 30% for the first three years and then 5% subsequently; and secondlt, Eli Lilly grew the number of services it outsourced to Interserve from 5 in 2002 to 17 in 2007.
The 18 factors, which were presented in a paper in Industrial Marketing Management, are divided into buyer-side attributes, supplier-side attributes and qualities of the relationship between the two. They are as follows:
Commitment from top management
"Top management set the overall tone and philosophy of the company," write authors Dr. Alessio Ishizaka and Rebecca Blakiston of Portsmouth Business School. "They must be involved from the beginning and should regularly information of the service provider's performance."
In Eli Lilly's case, top managers receive monthly updates on the performance of the outsourcing contract, and meet with the service provider's management team three to four times a year
Clear aims and objectives
"It is important to have a good understanding of the outsourced area in order to aim for the best service," Ishizaka and Blakiston write. "It is recommnded that client and service provider jointly develop written goal statements for their relationship."
Project managers at Eli Lilly told the authors that an important principle was not to 'outsource a problem'. "If it is broken internally, if we outsource it would probably be twice, three times, ten times as bad," said one.
Confidence in the supplier
"There needs to be confidence that the client organisation could not provide a better service for a lower cost in house," the authors write. That confidence allows the buying organisation to treat the service provider as a "partner rather than just a supplier," one team leader told the researchers.
The organisation must treat outsourced staff with the same respect and camaraderie as internal employees. "If you've got real partnership approach you wouldn't push a contractor any harder than you would push you own staff," said a general manager at Eli Lilly.
Control of the contract
Management of the outsourcing arrangement must be "conducted in an order and disciplined way", according to one facilities manager. Eli Lilly appointed dedicated staff to manage the outsourcing contract.
Calibre of the company
A high calibre company, Ishizaka and Blakiston write, "can attract high quality staff as they can provide more career opportunities" and offer staff training and qualifications.
"Consistency in people delivering the role … is fundamental to build trust," they claim.
Clearly defined roles
"It is important that roles and responsibilities are well defined", the authors write. They reference a 1996 study which found that "unclear roles are the most frequent cause for the collapse of outsourcing relationships".
Eli Lilly demands that Interserve constantly "improve what they are brining us to demonstrate they are doing better than last year"
Continuity and succession planning
The importance of continuity plans on the side of the supplier was made apparent in 2007, when Interserve was acquired. "The senior managers were focused on integrating with the new company, so our ability to get their attention and deal with the bigger issues was significantly impaired," an engineering manager told the researchers.
If there is a dispute over the performance between buyer and supplier, Eli Lilly says that it has the final say.
The supplier must have an understanding not only of the work and the location, Eli Lilly staff said, but also its core values and beliefs. Ishizaka and Blakiston wrote that critical to success were key performance indicators (KPIs) that reflect these values.
Quite simply, the supplier must be an expert in doing the work. "We benefit from an ability to have a facilities management provider – that's what they specialise in, that's their core business," said one manager.
Communication between buyer and supplier was identified as a critical success factor. Indeed, "all issues are down to poor communication," one team leader said. This includes the buyer communicating its objectives to the supplier, and the supplier being transparent with operational issues.
Interestingly, though, one manager noted the danger of too much communication. "Over communication is as bad as no communication," they said, and leads to an "awful lot of data floating around the business".
The contract must commercially significant to the supplier if the buyer is to receive an appropriate level of service, Eli Lilly staff said. "A large contract gives leverage," said one manager.
However, the contract must no be too big, they added. "While it would seem to be to the buyer's advantage to lock-in its supplier partner, the benefits are likely to be short lived, with the temptation of the powerful client to abuse their situation, so a healthy buyer-supplier relationship is impossible," Ishizaka and Blakiston said.
Connection to the top
This means that not only are the managers from the buyer engaged in the contract, but the supplier's leadership too.
"A businesses evolve, demands are likely to change," the authors write. Eli Lilly staff said that the provider was open to changes in circumstance. "It is not a fixed price contract so we have a lot of control," said one team leader.
Many of the Eli Lilly staff mentioned 'cultural fit' as success factor for outsourcing success.
It is difficult to define precisely what this means, but clearly it is a concept that has salience for those involved. One manager suggested that a supplier's culture can be assessed through "visits to the supplier, asking lots of questions, meeting their management, hearing their spout on visions and values, and assessing their track record".
In conclusion, Ishizaka and Blakiston write that "every company needs to gives serious and continous attention to their outsourcing arrangements". The 18C model allows buyers to assess the health of an outsourcing engagement, they write, although they concede that the management mechanism that allow Eli Lilly to achieve the 18 factors did no come easily.
"Some companies see outsourcing as a cost cutter and do no invest, or only superficially invest, in setting a well managed relationship with their service provider," they write. "This negligence may explain the high failure rate that still exists in outsourcing."