By Jake Rheude
Outsourcing. It used to be a bad word. The kind of cost-cutting move that could dilute a brand if done wrong. But times have changed.
Today, the outsourcing game is more ambitious than ever. Thanks to developments in software, cloud computing, and automation, the savviest businesses use outsourcing not only to keep costs down but to improve some of their most fundamental business processes.
What kind of innovation can a vendor provide? The market is still testing the possibilities, but a survey by Deloitte found that business leaders across sectors have hired outside vendors to do things like improve the quality of their product or service, lower the cost of delivery, boost user experience, and grow client revenue. But while Deloitte predicts that the market for outsourced services will continue to demand innovation, it also found that few companies know how to define and contract for it.
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I’m in the order and fulfillment world, so permit me an example involving warehouses. A few years back a friend of ours thought they had a pretty smart way to figure out which warehouse they wanted to house and deliver their product. They chose two contenders and said they would try out both of them for six months, and then go with the one that completed the most orders. One emerged the victor, our buddy moved all of his inventory to that warehouse, and then happily ever after it went, right? Nope.
Turns out there was more to the vendor that the numbers didn’t tell. Our friend took a tour and didn’t like what he saw. The warehouse was filthy and dreary—not the kind of place you’d want to work in. This made for lots of glum faces and low morale.
What’s more, the incentive for the pickers and packers was all about speed and not about accuracy, so lots of mistakes were getting packaged and sent out to customers. Sure, they were fast, but it turned out that was about all they were. This vendor didn’t offer our friend any ability to innovate beyond speed, no way to make the product better for the customer, or help our friend improve his reach, market strategy, or fulfillment processes.
In the end, our friend realized that those innovations were what he really wanted. “Fast” was something he could find anywhere. But to find a real partner that makes a company the best it can be takes some digging.
Ask second-level questions
When you consider a vendor partnership, don’t just think about saving money and time. Think about how that vendor could improve the fundamentals of your business—and ask deeper questions about how they operate their business.
Just the other day I had a call from someone who sells address verification software. This is an important topic in our world: If you ship something via FedEx Home Delivery and it arrives at a business address, you’re going to be fined—and those fines can add up to major costs. I asked him what they do when the address is brand-new and is not yet in the USPS’s database. He answered that USPS has a comprehensive database with 99% accuracy and they update it once a month.
I know enough to know this isn’t true—and the existing processes we have in place actually go much deeper than this. We use the USPS database, but have procedures in place for that 1% of the time: Our system defaults to a second database and as a third resort, Google Maps is pulled up on the packer’s computer screen, with the end result being near-absolute accuracy. It took some questioning to discover that the outsourcing partnership wouldn’t work.
As you ask questions of your business and the outsourcing partner, consider the following:
- Define the innovations you need from them in your service-level agreement (SLA).
- Engage a vendor management organization to develop and enforce your SLA.
- Make sure the vendor’s employee incentives align with your priorities.
- Look for vendors with efficient, smart technology that can keep up with the rapidly changing market.
- Hire vendors for “modules” of related business services that can be integrated, used, and then removed when no longer needed.
- Seek vendors that bundle process, technology, and cloud-based support.
- Outsource for expertise, like with a vendor who can facilitate M&A and other business changes.
- Ownership: Public? Private? If private, looking to flip and sell in the next three to five years? That could be a major concern if this is a critical partnership.
Outsourcing innovation isn’t easy—it’s a new strategy that requires creativity for both the client and vendor. But if you can pull it off, you’ll be at the forefront of what Deloitte calls the latest “pervasive ambition” of business executives—to make outsourcing benefit much more than the bottom line.
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