The unfortunately all too frequent seven-year itch – “the spice is gone…should we stay together?” – doesn’t happen just in personal relationships, it also happens in outsourcing relationships. Past the mid-point of a 10-year outsourcing relationship (or whatever the length of the agreement) buyers and service providers often struggle to identify how to maintain the health and happiness of their contractual relationship. Buyers are interested in increasing the level of commitment from the provider, in the form of increased productivity or continuous improvement initiatives. However, the provider is often challenged with supplying service improvements and decreasing the cost of service delivery at narrowing profit margins. With the remaining years in the outsourcing relationship, what relationship modifications are required to ensure mutual benefits for both parties?

Organizations should review their changing landscape, organization, and business requirements to identify their long-term strategic objectives so they can decide on the model that is most appropriate for delivering their services and the supporting sourcing option(s) to help achieve their goals. For example, the fact that an organization is currently in an outsourced relationship does not require that it stay in one. If the organization has the internal capabilities, access to the necessary resources, and time to implement the strategic initiatives, engaging in a sourcing relationship may not be strategically (nor potentially financially) beneficial. However, an organization that is potentially looking for greater flexibility and scalability, access to new skills and resources that are not locally available, or to capitalize on new technological trends may consider partnering with one or more suppliers who have the ability to support the organization’s objectives due to lack of in-house capabilities.  

An organization that chooses to engage in a relationship with a third-party service provider should ensure alignment for the long-term: strategic objectives (i.e., business and organizational objectives), cultural fit (i.e., mission and values), and solution requirements (i.e., feasibility and adaptability of the service delivery model to meet the organization’s needs.) An understanding of all three factors is imperative in determining the future strategy of the functional organization and shaping the future direction of the current outsourcing relationship.  

What is the right change for your relationship? 

There are several options you can consider: 

1. Don’t rock the boat (i.e., Renew): 

  • After an honest look at your relationship, you realize that the ”same old, same old” is actually working for you
  • This is akin to renewing the sourcing relationship where you and your incumbent provider agree to continue with the existing contract with minimal changes  

2. Face lift (i.e., Renegotiate): 

  • Following discussions on trade-offs and compromises, you and your partner decide that some tweaking to your old routine is required in order for your relationship to continue 
  • Similarly, you and your incumbent provider agree to modify one or a number of limited elements of the outsourcing contract, e.g., price and service levels

3. Overhaul (i.e., Restructure):

  • Small changes are not going to cut it. In order to make this relationship work going forward there must be some fundamental changes
  • In a strategic sourcing relationship, you may realize that while you’ve had a provider that has offered value over time and will continue to do so, it must be under a new set of circumstances. In this case, you and your provider can undergo a strategy exercise to restructure the services being you’re receiving to ensure that they align with your long-term objectives

4. Out with the old and in with the new (i.e., Re-compete):

  • You’ve talked it through with your partner and realize the relationship is not going anywhere. You need someone more supportive and responsive to your needs, and decide it’s time to see other people
  • The decision to re-compete your delivered services is driven not only by cost, but also by your organization’s long-term strategy. If you assess that your current provider is not capable of supporting your cost and strategic goals, it’s time to start seeing other service providers

5. It’s not you, it’s me (i.e., Repatriate):

  • You’ve assessed your relationship, and discovered that you are happiest being on your own.
  • Over time, as your organization evolves, you may find yourself in a position where your long-term goals are best met by bringing services back in-house. This can be the result of M&A activities, a fundamental shift in business strategies, etc.

All kidding aside, buyers must go through a complex exercise when approaching the end of their strategic sourcing relationship. The initial step is to understand their organization’s 10-year strategies and objectives, then begin assessing the current relationship for fit. We typically find there is no single correct answer and, instead, the resulting engagement strategy is a hybrid of the above options. As the marketplace embraces new technologies, the multi-vendor answer is becoming increasingly common. Unlike in personal relationships, it may be beneficial for an organization to have more than one sourcing partner to maintain competitive tension and to optimize the fit with the buyer’s strategies. Organizations can choose their flavor of service providers, a Tier 1, niche, or offshore provider, depending on their objectives and requirements. However, they need to balance the complexity of managing a multi-vendor environment against the benefits provided by each vendor. We strongly encourage full disclosure and consistent communication in a multi-partner model to ensure smooth day-to-day operations and successful service delivery from both/all providers. After all, a little competition never hurt anyone.

3 Responses to “Are You Ready to Renew Your Vows With Your Provider? | Sherpas in Blue Shirts”

  1. Alicia Quinn says:

    It seems that there is another parallel we could draw from real-life relationship to sourcing relationship – the role of a counselor, whether that be pre-marriage, marriage or divorce. Before making major decisions about a sourcing relationship, it is important to do one’s due diligence and make sure the decisions are counseled and educated and not rush into things (think Las Vegas wedding). Wouldn’t you agree?

  2. Betty Breukelman says:

    I agree, rushing into or out of any major relationship isn’t wise. Ensuring that they have the right counsel beforehand is critical for buyers and suppliers to achieve their objectives. In the past this counsel was almost exclusively the purview of sourcing advisors, but the market has changed; organizations have developed in-house strategic sourcing expertise. The expertise that their ‘counsellor’ brings is related to market knowledge, global services expertise and experience, and experience in optimizing a portfolio of services, etc. as opposed to purely sourcing expertise.

  3. Lilian Liao says:

    You are absolutely correct Alicia. Due diligence is definitely important and essential as it allows you to investigate the key elements of the relationship before you engage in a long-term relationship with the provider. However, in addition to due diligence, it is also important to assess the cultural fit of the organization. For example, your assessment of a potential suitor does not stop at seeing how good the individual looks on paper; you also need to ensure that the individual’s personality is compatible with yours. Similarly, a supplier organization may have the skills, relevant credentials, and experience to facilitate your organization’s goals; however, you should also get to know individuals from the supplier’s organization (particularly the delivery organization) to ensure cultural and strategic fit of the two companies.

    Everest Group has a Joint Design methodology that reinforces the importance of this ‘getting to know you’ phase between the buyer and its potential suitors of suppliers. The Joint Design process engages the buyer with each potential supplier in a series of interactive workshops to collaboratively identify solutions that would best fit the buyer’s future state needs and requirements. This process is important as it will allow both parties a preliminary view on what it is like to work with each other and assess the fit of the relationship. For example, the interactive workshops will advise the buyer of the perceived cultural fit, supplier’s responsiveness to change, supplier’s ability to meet buyer’s solutions requirements, etc. It is like going on your first trip as a new couple where you both identify and test the little quirks of the new relationship. After the first of day or so of pleasantries, the real personalities come shining through as you get more comfortable in your journey forward.

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