RELATIONSHIP MANAGEMENT GETS ITS DUE

by Dr. Wendell Jones, Senior Consultant, Cutter Consortium

The results of a recent Cutter Consortium survey suggest that companies are developing better tools and techniques for relationship management. For those of us who have tracked outsourcing for a number of years, widespread recognition of relationship management as an important organizational skill seems long overdue.

Relationship managers have the ultimate responsibility for collaborating with each major vendor or service provider regarding value-chain performance. Outsourcing relationships present opportunities for building stronger organizational capabilities, but their true value comes when the relationship grows, blossoms, and provides sustained value. Without constructive working relationships, the value of outsourcing usually falls short of its potential.

In years past, many companies maintained an arm's-length, almost adversarial relationship with suppliers by awarding them short-term contracts to supply items that matched precise specifications. And although a company might repeatedly engage the same supplier, there was no assurance that it would continue to do so. Price usually determined whether a supplier won a contract, and companies maneuvered with suppliers to squeeze out the lowest possible price. The threat of switching to a different supplier was a company's primary weapon; short-term contracts with multiple suppliers were preferred to promote lively competition among suppliers. Today, most companies are abandoning such approaches in favor of outsourcing relationships with fewer, highly capable suppliers. Cooperative agreements with professional relationship builders are replacing purely price-oriented contracts.

The relationship builder's role is to facilitate a wider dialogue between the business and IT communities, to develop user understanding of the potential of IT, to help IT and user specialists work together, and to promote user ownership of and satisfaction with outsourced IT services.

The following quote from Outsourcing Information Technology Systems and Services, which I cowrote with Robert Klepper, illustrates the inherent potential for differences and conflict as well as the importance of paying diligent attention to building a cooperative, trust-based foundation:

Managing the relationship is typically a mixture of discipline and compassion, or discipline and cooperation. Its parallel is "tough love" in personal relationships. On the one hand, the client wants absolute adherence to the contractual obligations the vendor has made, or a tough, disciplined relationship. On the other hand, in most instances of outsourcing, the contract isn't complete and doesn't specify all the aspects of service the client needs from the vendor as the contracting period progresses and the environment changes. Because the client will likely need service not specified in the contract, the client wants a cooperative, understanding relationship with the vendor -- one in which the vendor will respond favorably to requests for changes and "extras," perhaps in return for favors to the vendor granted by the client. Furthermore, differences will inevitably arise in an outsourcing relationship. Cooperation is a firmer foundation on which to resolve disputes than antagonism and retaliation. (Robert Klepper and Wendell Jones, Outsourcing Information Technology Systems and Services).

Even the best possible written and negotiated outsourcing contract cannot guarantee that the inherent gap between parties will be bridged. Effective relationship management, along with a sound contract, can create mutual confidence, encourage harmony of purpose, and promote better communications.

As the Cutter survey indicates, 65% of respondents report that their companies use the Internet for better management of outsourcing relationships by way of basic communication. Other interesting survey results suggest that relationship management is maturing:

• 40% use the Internet for problem tracking.
  
  
• 27% use the Internet as an online project repository.
  
  
• 23% use the Internet to track performance against service-level agreements (SLAs).
  
  
• 12% use the Internet for desktop videoconferencing.
  
  

When asked whether outsourcing makes it easier or more difficult to remain aligned with changing business needs/strategies, almost 70% responded that outsourcing does not make it more difficult to keep IT aligned with changing business needs and strategies. This also suggests that relationship management is improving as organizations gain more experience with outsourcing, alliances, and other cooperative relationships.

More companies today recognize that any value-chain activity is a prime candidate for outsourcing, so long as it is not crucial to a firm's ability to achieve sustainable competitive advantage and would not hollow out the company's core competencies.

Companies also recognize that outsourcing can reduce risk exposure to changing technology or customer preferences, streamline operations in ways that improve organizational flexibility, cut cycle time, and reduce coordination costs.

Dell Computer's partnerships with PC component suppliers is a good example of successful outsourcing arrangements. These supplier relationships have allowed Dell to operate with less than seven days' worth of inventory, reducing inventory costs substantially and allowing PCs to become equipped with next-generation components within just days of the components being shipped.

Why can't a company develop internal capabilities that are as good as or better than the outsourcing suppliers? A number of factors make it burdensome or costly for a company to maintain capabilities internally. Creating or sustaining a capability usually involves a long learning process that cannot be short-circuited at an acceptable cost. Sometimes it's unclear which actions a company must take to create or sustain a needed capability. (There may be multiple conflicting management opinions about the best course to follow.) Oftentimes, companies lack the right culture, or they have divisional rivalries, uncommitted managers and workers, a shortage of necessary skills, or other barriers impossible to overcome in the short run. While acquiring a company with the needed capabilities is an option, the acquisition may come with unwanted baggage, be difficult to reverse, or pose legal, integration, or other problems. In this uncertain and fast-changing global market, acquiring a firm to gain access to new capabilities is often less flexible a strategy than terminating an agreement when conditions change unexpectedly.

The biggest outsourcing pitfall is the risk of farming out too many or the wrong types of activities, thereby hollowing out a company's core capabilities. By excessive or misguided outsourcing, a company may lose touch with the activities and expertise that -- over the long run -- determine its success. Cisco is an excellent example of how to avoid this pitfall. The networking equipment manufacturer guards against loss of control and protects its manufacturing expertise by designing and owning the production methods used by its contract manufacturers at more than 30 production facilities located worldwide and by using the Internet to monitor factory operations around the clock.

-- Dr. Wendell Jones, Senior Consultant, Cutter Consortium