This is the second part of a short guide on outsourcing. If you have landed on this article via a Google/Bing search then I encourage you to take a look at this article first and then follow the links to read the entire guide.
This article describes some of the best practices I have observed being used by firms that excel in project management. Although the list is by no means comprehensive, it reflects strategies used by organizations with extensive outsourcing experience.
Outsourcing Overview
These practices reveal an underlying theme in how firms approach outsourcing and contracted work on projects. Instead of the traditional master—slave relationship between owner and provider or buyer and seller, all parties work together as partners sharing the ultimate goal of a successful project.
Differences between the traditional approach and the partnering approach to managing contracted relationships are summarized in the table below.
Partnering/outsourcing requires more than a simple hand-shake. It typically entails a significant commitment of time and energy to forge and sustain collaborative relations among all parties. This commitment is reflected in the seven best practices which will be discussed next:
- Well-defined requirements and procedures.
- Extensive training and team-building activities.
- Well-established conflict management processes in place.
- Frequent review and status updates.
- Co-location when needed.
- Fair and incentive-laden contracts.
- Long-term outsourcing relationships.
Well-Defined Requirements and Procedures
Convincing people from different professions, organizations, and cultures to work together is difficult. If expectations and requirements are fuzzy or open to debate, this is even harder. Successful firms are very careful in selecting the work to be outsourced. They often choose to contract/outsource only work with clearly defined deliverables with measurable outcomes.
For example, contractors hire electric firms to install heating and air-conditioning systems, electronic firms use design firms to fabricate enclosures for their products, and software development teams outsource the testing of versions of their programs.
In all of these cases, the technical requirements are spelled out in detail. Even so, communicating requirements can be troublesome, especially with foreign providers , and extra care has to be taken to ensure that expectations are understood.
Not only do requirements have to be spelled out, but the different firms’ project management systems need to be integrated. Common procedures and terminology need to be established so that different parties can work together. This can be problematic when you have firms with more advanced project management systems working with less developed organizations.
Surprisingly, this often is the case when U.S. firms outsource software work to India. We have heard reports that Indian providers are shocked at how unsystematic their U.S. counterparts are in their approach to managing software projects.
The best companies address this issue up front instead of waiting for problems to emerge.
- First they assess “fit” between providers, project management methods and their own project management system. This is a prime consideration in choosing vendors.
- Work requirements and deliverables are spelled out in detail in the procurement process.
- They invest significant time and energy to establishing project communication systems to support effective collaboration.
- Finally, whenever you work with other organizations on projects, security is an important issue. Security extends beyond competitive secrets and technology to include access to information systems. Firms have to establish robust safeguards to prevent information access and the introduction of viruses due to less secure provider systems. Information technology security is an additional cost and risk that needs to be addressed up front before outsourcing project work.
Extensive Training and Team-Building Activities
Too often managers become preoccupied with the plans and technical challenges of the project and assume that people issues will work themselves out over time. Smart firms recognize that people issues are as important, if not more important than technical issues. They train their personnel to work effectively with people from other organizations and countries.
This training is pervasive. It is not limited to management but involves all the people, at all levels, who interact with, and are dependent upon outsourcers. Whether in a general class on negotiation or a specific one on working with Chinese programmers, team members are provided with a theoretical understanding of the barriers to collaboration as well as the skills and procedures to be successful.
The training is augmented by inter-organizational team-building sessions designed to forge healthy relationships before the project begins. Team-building workshops involve the key players from the different firms, for example, engineers, architects, lawyers, specialists, and other staff. In many cases, firms find it useful to hire an outside consultant to design and facilitate the sessions. Such a consultant is typically well-versed in inter-organizational team building and can provide an impartial perspective to the workshop.
The length and design of the team-building sessions will depend on the experience, commitment, and skill level of the participants.
Team building workshop example
For example, one project, in which the owner and the contractors were relatively inexperienced at working together, utilized a two-day workshop.
The first day was devoted to ice-breaking activities and establishing the rationale behind partnering. The conceptual foundation was supported by exercises and mini-lectures on teamwork, synergy, win/win, and constructive feedback.
The second day began by examining the problems and barriers that prevented collaboration in the past. Representatives from the different organizations were separated and each asked the following:
- What actions do the other groups engage in that create problems for us?
- What actions do we engage in that we think create problems for them?
- What recommendations would we make to improve the situation?
The groups shared their responses and asked questions on points needing clarification. Agreements and disparities in the lists were noted and specific problems were identified. Once problem areas were noted, each group was assigned the task of identifying its specific interests and goals for the project. Goals were shared across groups, and special attention was devoted to establishing what goals they had in common. Recognition of shared goals is critical for transforming the different groups into a cohesive team.
The team-building sessions often culminate with the creation of a partnering charter signed by all of the participants. This charter states their common goals for the project as well as the procedures that will be used to achieve these goals.
Well-Established Conflict Management Processes in Place
Conflict is inevitable on a project and, as pointed out in the previous chapter, disagreements handled effectively can elevate performance. Dysfunctional conflict, however, can catch fire and severely undermine project success.
Outsourced projects are susceptible to conflicts since people are unaccustomed to working together and have different values and perspectives. Successful firms invest significant time and energy up front in establishing the “rules of engagement” so that disagreements are handled constructively.
Escalation is the primary control mechanism for dealing with and resolving problems. The basic principle is that problems should be resolved at the lowest level within a set time limit (say, 24 hours), or they are “escalated” to the next level of management. If so, the principals have the same time limit to resolve the problem, or it gets passed on to the next higher level.
No action is not an option.
Nor can one participant force concessions from the other by simply delaying the decision. There is no shame in pushing significant problems up the hierarchy; at the same time, managers should be quick to point out to subordinates those problems or questions that they should have been able to resolve on their own.
If possible, key personnel from the respective organizations are brought together to discuss potential problems and responses. This is usually part of a coordinated series of team-building activities discussed earlier. Particular attention is devoted to establishing the change management control system where problems often erupt.
People who are dependent on each other try to identify potential problems that may occur and agree in advance how they should be resolved.
Finally, principled negotiation is the norm for resolving problems and reaching agreements. This approach, which emphasizes collaborative problem solving, is discussed in detail here.
Frequent Review and Status Updates
Project managers and other key personnel from all involved organizations meet on a regular basis to review and assess project performance. Collaborating as partners is considered a legitimate project priority which is assessed along with time, cost, and performance.
Teamwork, communication, and timely problem resolution are evaluated.
This provides a forum for identifying problems not only with the project but also with working relationships so that they can be resolved quickly and appropriately.
More and more companies are using online surveys to collect data from all project participants about the quality of working relations. With this data one can gauge the “pulse” of the project and identify issues that need to be addressed.
Comparison of survey responses period by period permits tracking areas of improvement and potential problems. In some cases, follow-up team-building sessions are used to focus on specific problems and recharge collaboration.
Finally, when the time to celebrate a significant milestone arrives, no matter who is responsible, all parties gather if possible to celebrate the success. This reinforces a common purpose and project identity. It also establishes positive momentum going into the next phase of the project.
Co-Location When Needed
One of the best ways to overcome inter organizational friction is to have people from each organization working side by side on the project. Smart companies rent or make available the necessary accommodations so that all key project personnel can work collectively together. This allows the high degree of face-to-face interaction needed to coordinate activities, solve difficult problems, and form a common bond.
This is especially relevant for complex projects in which close collaboration from different parties is required to be successful.
For example, the U.S government provides housing and common office space for all key contractors responsible for developing disaster response plans.
My personal experience tells me that co-location is critical and well worth the added expense and inconvenience. When creating this is not practically possible, the travel budget for the project should contain ample funds to support timely travel to different organizations.
Co-location is less relevant for independent work that does not require ongoing coordination between professionals from different organizations. This would be the case if you are outsourcing discrete, independent deliverables like beta testing or a marketing campaign. Here normal channels of communication can handle the coordination issues.
Fair and Incentive-Laden Contracts
When negotiating contracts the goal is to reach a fair deal for all involved. Managers recognize that cohesion and cooperation is undermined if one party feels he or she is being unfairly treated by others. They also realize that negotiating the best deal in terms of price can come back to haunt them with shady work and change order gouging.
Performance-based contracts, in which significant incentives are established based on priorities of the project, are becoming increasingly popular when outsourcing.
For example, if time is critical, then contractors accrue payoffs for beating deadlines; if scope is critical, then bonuses are issued for exceeding performance expectations.
At the same time contractors are held accountable with penalty clauses for failure to perform up to standard, meet deadlines, and/or control costs.
Companies recognize that contracts can discourage continuous improvement and innovation. Instead of trying some new, promising technique that may reduce costs contractors will avoid the risks and apply tried and true methods to meet contracted requirements.
Companies that treat contractors as partners consider continuous improvement as a joint effort to eliminate waste and pursue opportunities for cost savings. Risks as well as benefits are typically shared 50/50 between the principals, with the owner adhering to a fast-track review of proposed changes.
Many companies recognize that major benefits can be enjoyed when outsourcing.
For example, arrangements extend across multiple projects and are long term. Corning and Toyota are among the many firms that have forged a network of long-term strategic partnerships with their suppliers.
A recent study indicates that the average large corporation is involved in around 30 alliances today versus fewer than 3 in the early 1990s.
Among the many advantages for establishing a long-term partnership are the following:
1.Reduced administrative costs—The costs associated with bidding and selecting a contractor are eliminated. Contract administration costs are reduced as partners become knowledgeable or their counterpart’s legal concerns.
2.More efficient utilization of resources—Contractors have a known forecast of work while owners are able to concentrate their workforce on core businesses and avoid the demanding swings of project support.
3.Improved communication—As partners gain experience with each other, they develop a common language and perspective, which reduces misunderstanding and enhances collaboration.
4.Improved innovation—The partners are able to discuss innovation and associated risks in a more open manner and share risks and rewards fairly.
5.Improved performance—Over time partners become more familiar with each others standards and expectations and are able to apply lessons learned from previous projects to current projects.
Conclusion
Working as partners is a conscious effort on the part of management to form collaborative relationships with personnel from different organizations to complete a project.
For it to work, the individuals involved need to be effective negotiators capable of merging interests and discovering solutions to problems that contribute to the project.
The next article addresses some of the key skills and techniques associated with effective negotiation.
