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Selecting Outsourcing Vendors
SPICE is the metholodology I have developed alongside some of the leading minds in the industry to strategise, procurement, implement, manage and improve outsourced operations. SPICE is an acronym for "S" - Strategy, "P" - Procurement "I" - Imlementation, "C" - Control & Innovate and "E" - Exit. It is the lifecycle for managing outsourcing contracts. .
I am the founder of call-centres.com with over 23 years of helping organisations to improve the quality of their outsourcing. I was the first person in The UK to gain a Masters Degree specialiaing in outsourcing. I am a published author, a regular speak on contact centres and contributor to publications around the world.
Exiting from call centre contracts often seems like a daunting process. I have assisted many organisations in exiting from contracts. Below is an article I have written on how to approach exits:
There are only 6 reasons why organisations exit from call centre contracts. These are important as they help to determine the different approach that you need to them.
(1) Expiration of contract period. Although if the contract is going well, then it is often the best course of action to at least attempt to negotiate an extension. This might not be possible for Government where the procurement process dictated by OJEU means that a contract should have a definitive end date.
(2) Failure to achieve objectives. In such circumstances, if you are looking to replace the supplier, you need to consider whether it is your actions which have caused this failure.
(3) Reduced demand or consolidation. We are seeing many companies with multiple vendors seek to rationalise their supplier base especially for those where demand is reducing as a result of automation and self-service.
(4) Default by either party
(6) Change in circumstances. This could be a change in ownership of either the client or the supplier. Or it could be that the requirements are very different as a result of a changing business climate and the incumbent provider
I believe that it’s better to amend these 6 reasons into 6 slightly different reasons so that we can consider the different approaches for them.
(1) Standard exit from suppliers: This is where we switch a service to a new supplier
(2) Exit from service: This is where we cease a service and therefore exit from a supplier without replacing them with an alternative supplier.
(3) Bringing In-House: Bringing the work in-house and away from an outsourced supplier shares commonalities with both “Standard Exit” and “Exit From Service”. The exit still has to be aligned with the implementation at the in-house operation but the fact that the work isn’t being moved to another supplier allows the outgoing supplier to save face. Additionally, more staff may choose to TUPE across as the client organisation are likely to offer better terms of employment and career opportunities than an outsourced supplier. In his book “Strategic Outsourcing⁽⁴⁾”, Maurice F. Greaver II states that “In the event that the organisation wants to insource the operation, it will take even longer to rebuild the operation to be successful”. Whilst I believed that Greaver’s book presented an unashamedly pro-outsourcing stance as opposed to a balanced analysis of the captive versus outsource debate, I believe his assertion on this particular aspect is correct. Successful vendors are typically highly nimble organisations designed in such a way as to provide rapid transitions. It contrast, in-house operations may have to build both capability and capacity to deliver the operation and it is important to recognise these potentially extended timescales when considering exit and transition.
(4) Emergency exit: This is where a supplier is no longer able to fulfil the contract due to internal issues such as bankruptcy
(5) Breach of contract: This is where a supplier has breached the contract to such an extent that the contract must be terminated
(6) Consolidation: In Mark Power’s book “The Outsourcing Handbook- How To Implement a Successful Outsourcing Process” , the author lists a number of events which could trigger an exit and this “consolidation” group I have created includes those which are not part of the previous 5 types I have indicated. This theory is similar to the “change of control” reason identified in The Michael F. Corbett & Associates theory but Mark Power’s theory expands on how a change in the various impacts of a change in ownership (control). For example, if one client organisation acquired another, they are likely to review their sourcing strategy based on the newly combined organisation. This is likely to involve a reduction in the total number of vendors. It may be that one or more of the incumbent suppliers does not have the capacity, skill-set or geographical locations in order to serve the new organisation and their work would be given to one of the other vendors. Other changes in organisations such as adding or removing a market, increase or decreases in market share and others may result in an exit. In such situations, many of the operational aspects will be similar to the standard exit from suppliers. However, the relationship may be easier to maintain as they have not lost the work due to their own failings.
Each of these exit types will require a different approach although the differences between some may be quite subtle. The simplest way to look at this is that each of these exit types has 2 major variables; time to exit and maintenance of relationship. The diagram below demonstrates how these 2 variables relate to each exit type. Of course, there are other issues to consider for some of these exit types. For example, there may be additional legal implications involved with emergency exits and exits forced by breach of contract.
FIGURE 1: THE LENGTH OF TIME TO EXIT AND RELATIONSHIP MANAGEMENT PROBABILITY IN DIFFERENT TYPES OF EXIT
There are 2 assumption which every consultant I’ve ever met agree upon.
(1) That the exit planning process starts from the award of the contract.
(2) That there is a positive correlation between the length of the exit period and the success of the process.
On the first issue, I am in complete agreement and this is part of the standard process across every organisation I have worked with. The NOA Exit Management best Practice Guide states the following: “The contract should specify a date by which the detailed exit management plan must be delivered (for customer review and approval) and, to guard against the possibility of delivery of the plan drifting, the customer should consider making part of the transition payments conditional on delivery and agreement of the detailed exit management plan”. In simple terms, this means that the exit management plan should either be done as part of the contract or to set a clear date in the very early stages of the contract that it is completed. The only part of this I would question is that the theorists on this topic believe that an exit plan should be in place before the project starts as part of the implementation process. In practice, the implementation process is typically a labour intensive exercise and often the exit plan would be low down on the list of priorities. It is my opinion that an exit plan should form part of the proposal process. This is likely to be little more than a template process at this stage but there should be a process to determine when the detailed and specific exit plan would be ready.
On the issue of the length of the exit period, I question whether an extended exit period is always beneficial. According to a leading expert on this topic (Graham Smith PHD) ⁽⁸⁾, a rule of thumb is that the exit period should be 1 month for every year of the contract and that 6 months to a year is not reasonable. However, the assumption within the various theories on exit time is that this period covers the timeframe from when the supplier is told that an exit is to happen until when the contract ends. My suggestion is that the supplier does not always have to be involved in the exit management process and the time for internal exit management can start as early as possible but that the timeframe from when the supplier is told could be as little as the time it takes to implement the new supplier.
Based on my research, I have created this top-level process. This breaks the process down into a number of stages:
(1) The procurement phase of SPICE (otherwise known as relationship engagement): where initial drafts of exit plans are set out. This helps to ensure that all aspects are considered.
(2) The Implementation (otherwise known as the transition phase): where the exit plans are adapted to meet world-class standards which are specific to the work being outsourced
(3) The Control and Innovation phase (otherwise known as the relationship management phase): where the plans are constantly reviewed during the lifetime of the contract
(4) Pre-announcement: where the internal preparation work at the client is done to limit the amount of time from announcement to the incumbent supplier to transition date to the new supplier
(5) Post-announcement: where the client and supplier work together to execute the exit plan
(6) Post-contract: where the legal obligations between the client and supplier are conducted
The overall process therefore looks as pictured below:
FIGURE 2: THE OVERALL PROCESS FOR EXIT MANAGEMENT (DEVELOPED BY ROB O’MALLEY)
There are a number of important things to remember when considering the process:
(1) When transitioning the service, the implementation plan and the exit plan should go together. In many cases the exit cannot be completed until the new supplier is ready to take over the service. Delays in the implementation process therefore have an inevitable impact on the outgoing supplier. It is likely that the same resources are deployed on the implementation and exit projects. In relatively small-scale work, this appears to be the best practice but in larger projects where different resources are applied, it is essential that there is shared knowledge on the state of each of the projects.
(2) Each stage in this process should have an associated checklist of activities which need to be completed. The NOA have a guide to the types of things which should be considered on this checklist. This checklist form part of the project plan.
The same rules apply to exit
management as with any other “project”.
A detailed plan is required,
accountabilities need to be assigned
appropriately, risks needs to be considered and
governance needs to be in place.
The only additional thing to consider in
exit management projects is that one of the
parties with responsibilities has lost the work
and so their motivation and/or incentive to
assist may be diminished.
Relationship management during exits is bound to be challenging during the exit period especially when an alternative supplier has won the business. The management and staff at the outgoing supplier are likely to feel demoralised by the decision and extra attention needs to be given to the management of the relationship.
The diagram below shows the areas of the exit process where relationship management is most important. The areas in green highlight the most important areas and those in green where relationships are also important.
FIGURE 3: THE STAGES OF THE EXIT PROCESS WHICH ARE IMPORTANT FOR RELATIONSHIP MANAGEMENT
As you will see, the maintenance of relationships is important throughout the entire period from once the decision is announced. However, the single most important area is the “situation analysis” procedure which is conducted pre-announcement and is then reviewed on an ongoing basis. Situation analysis is something which is instinctively done during an exit but I believe there is real value to making this more formal to maximise what it can help to deliver. A situation analysis is basically a review of what bargaining power the client has over the supplier which can help to maintain performance during the exit process. This can include areas such as the following:
(1) Would the supplier want to use the client as a reference in their future sales pitches?
(2) Are there opportunities for the supplier to win business from the client or its associated organisations in the future?
(3) Are there any financial incentives or penalties associated with performing well or not performing well during the exit process?
(4) Are any of the supplier’s staff likely to transfer to the incoming supplier or to the client itself?
This is by no means an
exhaustive list and there are undoubtedly areas
where the client has bargaining power over the
supplier both as an organisation and the
individuals working on the account.
The “situation analysis” needs to be
constantly reviewed. Once the
decision is made to the supplier, there are
likely to be things which become apparent from
them which may not have been obvious when
conducting the analysis internally.
A Google search on topics related to exit management reveal a disproportionately high percentage of results relating to the legal implications. Of course, legal obligations are important but I believe the volume of results reflects that law firms are one of a few business types who can generate revenue from contract exits. I read through a number of these documents produced by law firms of which the most comprehensive and informative one I found was produced by Kemp Little ⁽¹⁰⁾. Many of the aspects they refer to such as intellectual property and ownership of equipment are very important legal considerations but are not relevant to the type of work we are exiting from. It’s highly likely that the legal considerations are considerably more important for organisations where intellectual property is a major consideration. This theory was vindicated by our legal department who gave me a relatively short list of legal requirements which I have grouped into the 3 areas as detailed below:
(2) Data destruction and certification of data destruction
(3) Contractual obligations
The contractual obligations section can be split into 2 further sub-sections (1) What does the outgoing supplier contractually have to do during the exit process? (2) What post-contractual obligations does the supplier have e.g. non disclosure of information, retention of data or dealing with any complaints which arise post contract which deride from work conducted during the contractual period.
The important stages for the legal issues are during the early stages of the relationship. The exit from the contract must be an important consideration during the contract preparation phase. As we have seen in our exit, some of the references in the contract as a whole relate to areas which have now either changes or are now obsolete.
The chart on the following page indicates the areas of the process where legal considerations are high:
FIGURE 4: IMPORTANT LEGAL AREAS IN EXIT MANAGEMENT
TUPE is the responsibility of the incoming supplier to liaise with the outgoing supplier. From the client’s perspective, TUPE’s main significance is if and how it impacts on the implementation with the incoming supplier. The cost of TUPE can also be quite high and should be factored into the implementation costs of the new supplier.
According to our legal department, data destruction post-contract is the single most important legal consideration during the exit. In our case, this applies to customer data but the same principle should be applied to anything belonging to the client which should not be used by others. This may include intellectual property, physical assets or competitive information. Like most clients, the physical data resides on our systems which are accessed on-line via by the suppliers but the supplier still holds some paper data and 2 years’ worth of call recordings. Under our contract, the supplier is obliged to maintain the call recordings for 2 years post-contract. However, it should be best practice for a client to not enforce any such obligations as it is not feasible to assess the protection of this data post-contract.
Any strong contract should contain a number of obligations during the exit. This should include co-operation with the incoming supplier and continuity of service. The important conclusion is that legal representation should be received from someone with expertise in outsourcing contracts who can ensure that the correct provisions are included in the contract from the beginning.
In certain types of outsourcing, service continuity may not be an issue. For example, when a service is coming to an end and not being replaced either in-house or with another supplier, then the project can be wound down and does not require a definitive end date. This is the case for our face-to-face service. The same could also be true if you outsource telemarketing activity. It would be highly feasible to end a relationship with a supplier and then start with a new supplier weeks later. Of course, sales would be impacted but the issue is far more pressing where the calls are incoming. To put is simply, customers will not stop calling simply because we are switching provider and this is very true for our contact centre. We are very aware that the incumbent supplier was likely to lose staff during the exit period. We were also aware that the supplier’s management team were likely to be demotivated. These 2 things combined meant that there was potentially a serious issue. Of course, we also have to ensure the quality of the service delivered during the exit period. As part of this process, I have asked both internally and externally for potential ideas to mitigate this risk and have come up with the following potential solutions to ensure we maintain enough staff:
(1) Ensure that the contract has the provision for service credits if the supplier is unable to deliver the service to the sufficient quality and quantity
(2) Have a staged implementation at the incoming supplier if practical to deal with reduced volumes
(3) Exit from the supplier during seasonally quiet periods of the year.
(4) Consider retention bonuses or other financial incentives if the contract does not force the supplier to do this.
In order to ensure the quality of service, the following ideas were presented:
(1) I spoke with another ex-client of our contact centre and they advised that we should maintain or increase the volume of quality checks during the exit period. Many clients reduce the volume of quality assessments during the exit period but this poses risks and sends out the wrong messages to the supplier and its staff that quality no longer matters.
(2) Consider financial and non-financial incentives to the staff at the supplier focussed around quality.
Continuity of service is something which should be considered at the majority of stages in the exit process. It is something which needs to start during the planning & contract stages and constantly be measured. One key stage to look at this is during the situation analysis. This needs to consider all options for delivering both volume and quality. It is also heavily reliant on both the quality of the relationship with the supplier and the ideas which come from the supplier to address these. Having considered input from many people on this issue, I have confirmed my belief that the length of time from the decision being announced to the supplier and the new supplier starting.
FIGURE 5: IMPORTANT AREAS IN SERVICE CONTINUITY IN EXIT MANAGEMENT
Risks of Exit
Risks are inter-dependent on the issues already discussed. For example, a contract can mitigate against many of the risks as does strong relationship management. Continuity of service (or lack of) is the biggest single risk associated with the exit. Many of the risks that we consider to be part of exit could equally be considered to risks associated with the implementation with the incoming supplier.
The NOA best practice guide for exiting suggests the following as mitigation against the risks
- Could any financial incentives be put in place to help the exit proceed efficiently?
- Agree a fixed price for the exit assistance
- Offering to be a reference site
In terms of our specific work, the risks can be grouped as follows:
(1) Inability to deliver volumes
(2) Inability to deliver quality standards
(3) Lack of understanding of what the supplier does and/or knows
(4) Legal confusion over the exit
The lack of volumes and quality standards can both be addressed through a combination of a robust contract and strong relationship management as previously discussed. The issue of not fully understanding what the suppliers does or knows is common and one which does not often manifest itself until the service is transitioned. The mitigation against this should be two-fold; firstly, there needs to be clearly defined and documented processes to as a granular level as possible. A comprehensive contract management process throughout the contract lifetime should have dealt with this. If this is not the case as with our contracts, this will need to be done as soon as possible and ideally before the announcement is made to the supplier.
Costs Associated With Exits
In many cases, the costs associated with exits will have been pre-agreed in the contract. However, it is advisable to have a buffer budget which can be deployed to the exit which can be used to either mitigate against risk or to expedite timeframes. It may also be that resources within the outgoing supplier are the best placed people to assist with the transition to the new supplier. Whilst a contract may allow for the use of some resources during the transition, it is likely that additional “out-of-scope” resources may also be beneficial. There may also be disputes over the ownership of intellectual property.
(1) Pre-agreed costs detailed in contract
(2) Out-of-scope costs associated with transition
(3) Legal costs
(4) The cost of internal resources responsible for managing the exit
(5) Miscellaneous costs. These are costs which could have been avoided with a more robust contract.
I have been able to draw the following conclusions from this exercise
1. Exiting a contract at any point has many risks.
2. Exiting a contract takes more time and resources than one might consider. It is best practice to consider exits as projects as opposed to business as usual.
3. The planning for the exit of a contract should begin in the implementation phase. Extensive planning helps to alleviate risks.
4. At least one of the exit team should have experience in exit management. The experience from experienced personnel was invaluable during this process.
5. There are clear differences between the different types of exits particularly based on timescales, risks and relationship management.
6. A robust contract can mitigate against some risk but is not a silver bullet to solve all issues relating to exit management.
7. The management of the relationship is often the single most important factor in a successful exit.
8. The length of time planning exits should be long as feasible but the length of time from announcement to supplier to exit should be as short as possible especially when switching to an alternative vendor.
9. In many types of exit for many types of service, the exit and transition to the incoming supplier, the timescales and the process for both aspects need to be aligned to ensure continuity of service.