How Much More Can Some Consultants Squeeze out of Outsourcing Services Contracts

With the advent of more and more consultants in the Office Support Services Outsourcing Providers space and their approach treating traditional outsourcing services like a commodity, it’s resulting in retreating margins for outsourcing providers and potentially harmful effects on the quality of the services that come out of these new contracts.

It’s a well-know fact that in its hey day of the late 90′s and earlier part of this decade, it was not uncommon for Office Support Services outsourcing providers like Merrill Corporation, Williams Lea, Pitney Bowes Management Services, OCE, IKON, DTI and others to enjoy profile margins that exceeded 20%.  But since the economic collapse in 2008, resulting in mega downsizing and cut back in services, headcount and equipment, those margins have shrank.

In practicality, it was unrealistic for law firm clients to expect outsourcing providers to reduce their costs in earnest for their on site operations, as that would result in lower revenues, hence lower margins.  Many of those firms turned to consultants like RAS Consulting back in the late 1990s and 2000′s to execute competitive bidding processes via RFPs to secure savings.

Then in the past three years or so a new crop of industry consultants have come along, like Profit Recovery Partners as well as a new approach by existing industry consultants like Mattern & Associates who treat these services entirely as a commodity, like office supplies. For these consultants, price alone is the driving force, pressuring participating vendors in an RFP to reduce their pricing on levels so extreme by pitting one against the other, it has resulted in single digit profit margins on these projects.

While the consultant no doubt met their “savings” targets to justify their considerable fees,  they often leave the vendor and the client with a residual arrangement that is unsustainable.  As someone who has worked both on the corporate side and for outsourcing companies, unlike most of my competitors, there’s an old saying that a bad business deal is no good for either side. In RAS Consulting’s view, a vendor/client relationship has to be a win/win for both, meaning sustainable, healthy profit margins but cost effective services and a true partnership that continuously strives to be cost effective.

The vendor, in order to meet the miniscule profit margins left on the contracts, was forced to cut wages, use temporary personnel, reduce training, benefit packages to employees, a myriad of cost cutting moves that hurt not only the employees, their morale, but the services themselves. These less qualified, less compensated, less motivated personnel often result in more mistakes, errors and less dedication that in the legal business can be catastrophic. This is where one lost package, misplaced document original can result in loss of a client or case costing tens of thousands of dollars or more.

How does it work? The traditional competitive bidding process, the nexus of these processes even before consultant’s involvement, was to bid out and throw out the highest bid and the lowest bid. Now the lowest bid, often unattainable, is now becoming the benchmark for all the other participating vendors are being forced to reconcile to in these processes.

Vendors interviewed by RAS Consulting acknowledge that the industry is changing in terms of its revenue source from the traditional “bodies and boxes” now to more of a consultative, strategic resource offering as law firms look to outsource more and more functions to save money, especially in legal areas like eDiscovery, document production, document review, etc.

But as the current feeding frenzy and trend of consultants who continue to apply extreme pressure on pricing for outsourcing services–essentially taking money out of the pockets of these entry level employees–outsourcing will no doubt take its share of blows as service issues mushroom in frequency due to this dehumanizing process.

As one senior management person at Pitney Bowes Management Services (now Novitex) told RAS Consulting,  these consultants want to ruin the business by forcing vendors to accept ridiculous low margins and providing low quality services.  Senior members of other major outsourcing providers have echoed this statement.

RAS Consulting believes there are more creative and strategic ways vendors and clients can partner to reduce costs, re-engineer services, increase recovery revenue that doesn’t necessarily have to result in severe reductions in wages, benefits and quality of the outsourced workforce, to say nothing of the impact on their morale.

Above all, in outsourcing, you do get what you pay for and to expect to hold an outsourcing provider to unrealistic SLAs–while you’ve cut their margins and employee compensation levels might look good on paper, but it will likely back fire.

There’s certainly a place for good traditional procurement methods in running an RFP process, but let’s not forget, these are operations, they employ people, systems and procedures. Price pressure only dilutes the effectiveness of all of these. and when you diminish the compensation of human resources you rob their dignity, effectiveness and dedication.

Please also visit our website at www.ras-consulting.com   To sign up for our blog, please click here.

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