With the global economy teetering on the edge and your CFO second-guessing every decision, you don’t want to be leaking anything – especially value. “Value leakage” means not getting the highest quality service and the most innovation at the lowest price from your outsourcing agreements, and was a hot topic in recent conversations I’ve had with outsourcing customers.
Leakage includes not only a provider’s failure to deliver measurable results not only in traditional, easy to measure areas such as customer satisfaction or the percent of invoices processed correctly the right time. It extends – and here’s where it gets tricky – to harder to define and measure areas such as lost opportunities for the provider to deliver innovation, best practices or knowledge transfer.
It’s reassuring for customers, and providers, to talk about value leakage because a) it sounds like it’s not terribly serious (a leaking faucet or roof won’t kill you, though it may be annoying) and b) that it’s relatively easy to fix. Neither is true. When profit margins are squeezed to the single digits, it doesn’t take too much inefficiency, rework or higher costs to push a business into the red. And when customer tastes, levels of demand and currencies can shift overnight, it doesn’t long for a competitor to go from also-ran to running right over you.
Among those weighing in on value leakage is outsourcing advisor Alsbridge Inc., which recently devoted a white paper to explaining the causes of value leakage in detail and how to avoid it over the entire life cycle of a vendor sourcing contract. Among other things, Alsbridge recommends the buy side create contracts that can better adapt to changing conditions, and consistent assessment processes and tools to find and fix where gaps are in alignment that could lead to value leakage.
That’s all well and good, but it doesn’t go far enough. As I learned at the recent SIG leadership conference, fixing outsourcing deals requires an overall change in not only contract management but how the customer relates to their outsourcing provider and approaches problem. It requires looking at how well the customers defined their requirements to the provider, tells the provider about changes, and is willing to admit when a problem is at least partly their fault.
And if they want to stop every bit of value leakage by getting the maximum innovation from their provider, customers need to be honest with their providers about the monetary value of, say, a 20% improvement in first-pass completion of accounts payable, or a 10% improvement in customer satisfaction. Then they have to follow through and be willing to share the benefits with the provider, just as they’d want the provider to give up some margin if they don’t deliver the innovation or improvements they promised.
Here’s what Alsbridge says it takes to stop the annoying (or worse) value drip. Will this do the trick, or do customers need to do more to overhaul their governance processes and attitudes?