Why Price-Focused Outsourcing Doesn’t Work

The most successful outsourcing relationships we have seen between customer and provider are those that focus on business value.  Business value is achieved when you can optimize the supplier’s solutions and capabilities to your advantage, at a cost-effective price.

When evaluating future state solutions, consider that certain technical approaches offer value beyond the current targeted service requirement. Look for the net impact to the overall proposal against long term strategy versus tactical short term solutions.

Certainly, deal pricing should be within the top three considerations to evaluate.  But it should not be the primary or only consideration.  From our experience, the supplier’s day-to-day behavior is based on both their profitability and opportunities for future growth.  A low bidder deal may have been the result of the supplier establishing an initial presence or designed as a loss-leader at your company.  If there is no balance between that profit on the existing deal and future contract growth potential, the supplier behavior negatively changes over time.             

How do you avoid this supplier pricing and profit pitfall?  We recommend a few simple things to remember when formulating your sourcing strategy and plans. 

1. Understanding your own requirements and current state costs are key.  Develop your sourcing strategy with a focus on value, where the requirements and outcomes should be inclusive of your intended future state.  Be sure to include transformational initiatives that can funded by some of the intended savings. Sometimes providing the supplier with a cost range target will help fight against an over-engineered, gold-plated solution.         
2. Choose suppliers for the bidders list with the necessary skills and capabilities to meet and exceed your future state requirements.  During the sourcing process, you should learn as much about the supplier and their “sweet spot” capabilities as possible.  Talk to their best, most satisfied reference customers, and on balance, their customers who aren’t that satisfied. You will gain insight into whether or not the supplier will be an appropriate match both from a solution and relationship standpoint. 
3. Every supplier is different – and they need the opportunity to respond according to their proven solution and delivery approaches.  Allow them to blend their best-of-breed, new and innovative solutions into your future-state solution, utilizing alternative technology platforms, frameworks and service delivery models.  Creativity should be encouraged when developing solutions. You paid for a breadth of experience. Let the supplier propose out-of-the-box solutions and temper them with internal review. But scrutinize the solution so that your current and future state requirements can both be met, and at a cost-effective price.  Keep in mind that this is a long-term, strategic supplier relationship you are building, not just executing a commodity transaction.  Unbolting from a sourcing deal is difficult and often painful; instead, establish a supplier relationship based on short and long-term business value.                                   

If you choose to ignore these points and require a supplier to provide you with a cost-centric “your mess for less” approach you will drive the supplier to lower margins and scaled-back solutions just to hit your cost target.  You will likely not realize transformation, develop innovation, nor drive continuous improvement for the longer term. Consider this to ensure you get the most value from your outsourcing relationship.