Be wary of the Business of Buying your business and treating Outsourcing like a Commodity

There’s been a recent trend in the procurement of Business Process/Office Support Outsourcing Services where to compensate for stagnant growth, Outsourcing vendors are “buying” a client’s business, typically in a competitive displacement. This is achieved by paying a large up front “incentive” or cash disbursement to the client, for a three-four year services contract. This upfront fee, which is some cases, such as was apparently the case re: the ill-fated Mail & Reproduction outsourcing services contract with the now defunct Dewey & LaBoeuf (according to several competitive vendors involved in the RFP process) exceeded $500,000, in RAS’ view, is fool’s gold. This kind of initial balloon “incentive” back to the client is typically difficult for a normal vendor bid structure, e.g., cost + margin, to overcome and is, in effect, analogous to “buying the book of business”, but with a significant value-diminishing upfront penalty.

Why would a vendor agree to such an arrangement (and in some cases it’s not the vendor actually offering the concession, it’s the customer, either independently, or through an unscrupulous RFP consultant demanding the concession and receiving it from a vendor willing to meet the demand) you ask, when it no doubt skews the financials and p&ls on the entire deal? Hasn’t business taught us that a deal with below market profitability is not a good one? This is an old procurement tactic that is consistent with the way some look at Business Process outsourcing–as a commodity instead of a management service, like widgets off a production line. This line of thinking basically asserts, the people/process do not matter; we can work within the narrower margins as the people are just empty place holders for services that are predictable and delivered without passion and strategy.

Some would argue that with most Business Process Outsourcing Services organizations today all espousing the same philosophies–that their people are their difference, that taking the “treat outsourcing as a commodity” is even justified. Have all the outsourcing provider vendors become so homogeneous that they deserve to be treated like a commodity? Not in my book and they will never be as long as there are human beings involved.

Treating outsourcing as a commodity, however, to use the literal adoption of the procurement method means the people, management and uniqueness of the vendor doesn’t matter–price alone should be the driving force in the decision-making for the services, or that price concessions are the end-all. But lowest pricing of course does have consequences–in the end you DO get what you pay for no matter what anyone says–providers all recruit from the same job pool, pay similar compensation rates, have similar training and technology budgets and provisions.

Again, to those that treat outsourcing like a commodity, remember that you or your customers are purchasing Managed Services and Outsourced Services. You’re buying the whole package, the management oversight, the technology integration and innovation, the corporate culture, the systems and procedures expertise, the cost savings initiatives, etc., NOT just the bodies and boxes. And when the consultant is long gone after negotiating that stellar pricing solution, who has to live with the consequences of a vendor, desperate to pickup additional revenue in any way shape or fashion to offset mediocre margins or that provides mediocre service or quality of employees that match the minimal margin earned with an offsetting level of apathy and lack of commitment in providing the services ? At the end of the day, no one likes being marginalized; put yourself in their shoes sometime and you will readily agree.

 

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