Keep Outsourcing Relationships Short Term
Topics: cost, profit, speed, outsourcing, entrepreneur, leader, manager, planning, business model
Consider outsourcing and you’ll find eager companies and suppliers lined up to offer you long-term contracts. Why? Assuming that the outsourcing provider performs as promised, you are locked into using their service . . . even if a better alternative arises. The more profitable the arrangement is for the provider, the more that organization will want you to sign a long-term deal.
All kinds of reasons will be offered to justify a long-term arrangement. A typical explanation goes as follows: The supplier has to make a capital investment to start serving you and needs you to stay with the supplier long enough to allow the company to recoup the costs.
While that’s highly desirable for the supplier, you have to also consider if it’s equally desirable for your organization. Can the capital investment be used by a large number of other customers?
If yes, why should a long-term contract be required? If not, what would be a fair payment be during a shorter contract to compensate the supplier for having made the initial capital investment?
Others will tell you that they lose money during the first year and need several years to recover that cost. What they may not be telling you is that a lot of those costs are selling expenses that the outsourcing provider should be absorbing.
As a consultant, I’ve often seen other consulting firms become established inside companies. They seem to live permanently inside the client.
Under such circumstances it’s not unusual for the consulting firm to have a five-year contract in exchange for a modest discount in hourly rates. Long before the contract term is over, consultants priced at over $300 an hour may be doing work that could have been supplied elsewhere at $10 an hour. No matter how discounted the consulting price is, the client didn’t get a good deal.
This kind of arrangement can be pretty hard on organizational morale, especially during hard times. Staff members often complain bitterly when they see wasteful spending on consultants. Every decision in the company may find its way through the consultants, both slowing down progress and making progress more expensive as the consultants find ways to grab pieces of the workload.
I’ve heard people who haven’t had a raise in two years say that they would be glad to do the same work on their own time for $15 an hour just to get a little extra income. It’s pretty galling to see relatively inexperienced MBAs strolling around charging consulting rates when they typically know less about the issues than the people who work in the organization.
Sometimes, overly expensive long-term relationships sneak in the back door as a way to accomplish some other purpose. Before such relationships were restricted by legislation in the United States, accounting audit firms could sell clients other types of professional services.
If the auditors found a process problem while reviewing internal controls, the auditors would prepare a proposal to solve the problem on an outsourcing basis. Because other outsourcing firms didn’t know about the problem’s background, it often seemed logical to hire the auditing firm to do this work at full price.
Although auditing contracts were usually for a single year, public companies were generally reluctant to change auditors very often. Such changes could create a public presumption that the old auditor turned up some sort of accounting problem that the public company wanted to keep quiet.
As a result, most public companies worked with the same auditors for a decade or longer. The longer those relationships lasted, the bigger the outsourcing bills became.
There was another subtle influence at work in some cases. CFOs who wanted to use questionable accounting methods would be sure to spend plenty on the auditing firm’s latest outsourcing ideas.
The accounting firms would often find accounting methods that deferred, capitalized, or otherwise kept their fees from hurting current profit levels. With so much money at stake for the auditing firms, some accounting partners became more focused on the auditing firm’s profits than on the integrity of the organization’s books they were auditing.
A parallel pattern of excessive influence showed up in many public companies’ relationships with U.S. investment bankers. Journalists have reported that some senior executives in public companies were allotted large numbers of shares in hot initial public offerings (IPOs) by investment banking firms seeking more business from the executives’ firms.
These executives could in some cases flip the IPO shares for a 200 to 300 percent gain in a single day, making as much as several hundred thousand dollars. Some would call such accommodations nothing less than bribery.
These same executives also received a lot of their compensation in the form of stock option grants. Investment banks were in a position to encourage their security analysts to write more favorable reports about public companies that spent more on fees with the investment bank.
In fact, the security analysts were often in the dual role of salespeople for outsourced investment banking services and security analysis for the public investors. A senior executive who wanted to earn more often found it to be beneficial to reward investment banks with higher fees. Like the accounting firms, investment banks found ways to package these fees so that they did not affect current earnings (and lower executive bonuses).
This pattern of using outsourcing to gain other purposes shows up in other parts of organizations. Local plant managers have often used outsourcing contracts to reward relatives of local officials who were in a position to aid or harm company efforts. In other cases, this prerogative was abused by being used instead to gain personal favors for the manager’s family.
What all of these back-door relationships have in common is that they don’t receive much scrutiny, aren’t well understood by any but a handful of people in the organization, and are seldom compared to alternatives. It’s no wonder that long-term outsourcing relationships often become tainted by bad apples.
Donald Mitchell is an author of seven books including Adventures of an Optimist and The 2,000 Percent Squared Solution. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at
Previous Articles Highlighter:
Are You Sure You Want To Start A Home Based Business? (1)
When people decide to make the leap into self-employment they set a variety of goals for themselves. These goals will differ for each individual based on their expectations, desires, and background.
A Dining Experience In The Maldives (2)
Generally, traditional cuisine in the Maldives is a balance of sweet, citrus-y and mildly spicy flavours. Fresh tropical fruit like mangoes, bananas and papayas are usually available for dessert.
Are Job Applicants Destroying Your Brand? (3)
He clicks the browser to go back to the prior page. In doing so, all of the information he already entered is wiped out. Darn it! He begins completing the application again.
Cheap Holidays To Cyprus To See Ayia Napa Attractions (4)
The smell of fish fills the air and you see people with there daily take, selling them to everyone who wants some fish. It would probably be easier to go one of the local restaurants and have them make the fish instead of you buying it yourself.
Great Business Is Great Marketing (5)
The marketing process as it imbues a successful business is pretty much a communication method all of its own. The image the business project is more than just informing customers about products and services.
Culture And History Are Part Of Your Holidays To Luxor (6)
There is so much to see and some of the creations are spectacular. The museum is right down the road from the Temple of Luxor. That could be your next attraction to see.
Foreign Buyers Can't Get Enough Of New York City (7)
Foreign demand will only increase if the dollar falls further. Furthermore, as the roughly million homes that are estimated to foreclose in 2008 due to subprime-related reasons start foreclosing, much of New York City Manhattan especially will look comparatively even safer.
6 Tips On How To Provide Better Customer Service (8)
How to and what should you do in order to provide better service to your customer becomes one of the hot topics especially in the highly competitive Internet marketing business.
Get The Best Registry Cleaning Software (9)
Over time, this residue grows in size and the number of unused information in your registry can become massive in a short amount of time. This incredible amount of what amounts to "trash," can do everything from slow your computer down to send it crashing.
The Golden Sands Of Tanjung Benoa Beach, Bali (10)
In addition, some of the most sophisticated hotels offer a variety of dining options such as daily theme buffet dinner, beach restaurants, and relaxing bars. The Accor Group - www.accorhotels-asia.com - manages Hotels with the Sofitel, Novotel, Mercure, All Seasons, Ibis, Formule 1, Grand Mercure brands in nearly 40 countries.
Newer Articles Highlighter:
Technology Gives A Cutting Edge In Cutting Sheet And Plate Metals (1)
In the case of steel, output from the device, the laser beam, targets an area of the sheet or plate. This laser stream receives its direction from a computer, which pinpoints the area requiring the cut.
Why Pay Late Fees On DVDs When You Have Online Rental Companies? (2)
Then you would have to copy every movie like a lot so if a lot of people wanted one of the same movies they could be able to rent it.
The Advantages Of Having A Forum (3)
Topics: free phpbb forum hosting Internet forums which are basically discussion boards can be a valuable asset to any company. This is because they are a great way of enabling people to interact with each other online.
7 Ways To Kickstart Writing Your Book This Year (4)
Start today; complete and release your significant message to the world. Then jump around, get excited for it won't be long before we see your name in print! Earma Brown, 13 year author and book coach Get a Free Book Writers Kit when you take the Write a Book Challenge.
Why Bungee Jumping Has Spread Into The Mainstream (5)
They used some kind of vine to do there bungee jumps with but I would figure that would hurt their feet as they fell and then were snapped back up that would sound like it would rip there ankles away from there legs.
Why Everyone Is Talking About Sales Training (6)
One of the most common mistakes that sales teams make is making a deal that does not make as much money as it could. Turning that deal into money and negotiating the best deal is vitally important.
Fun At SeaWorld San Diego: What You Don't Want To Miss (7)
Check the SeaWorld website before you go to see if you can get a good deal. We got a discount through our AAA card that saved us a significant percentage of the ticket price for single day admission.
Watch Repair - Be Smart When Your Watch Needs To Be Fixed (8)
Perhaps you accidentally dropped your watch and the case came undone, and the first thought that came to mind is to get it to a watch repair outlet to get it functional again.
Mompreneurs Are On The Move (9)
It happens to us all. While you need these ideas to help you generate a more successful business, try not to put too much pressure on yourself to achieve too much at once.
Don't Start With A Blank Page, Use Content Blocks (10)
One of the easiest ways to add the best information to your content blocks document is to review a proposal and see what types of information they are requesting. Fortunately, over 50% of the information they request will be on the next proposal, therefore you have a competitive edge in getting proposals done quicker using this menthod.