Today's blog comes from Peter Allen, Partner and Managing Director, TPI.
Across professions and industries, those of us who provide services to paying customers strive to obtain a position of recognition best evidenced by the difference made to those who hire us for our expertise. It's human nature.
Unless we're truly in the business of providing non-differentiated (aka commodity) services to our customers, we want to be recognized and compensated for being better at what we do than others in our field of work. We also want to recover our investments and the risks we take in building an offering to serve a market need.
In the field of outsourced services, many outsourcing buyers and their service providers are asking whether there's an opportunity to achieve partnership-oriented relationships. Conversely, has the industry moved to a position analogous to that of gasoline stations where providers on virtually every corner compete on the basis of unit prices?
I've seen all flavors of sourcing relationships between companies in all industries and providers of all orientations. Some relationships are clearly cost-driven and non-differentiating in nature. Those aren't necessarily less-valued contracts. Many companies simply want solid services delivered at the prices promised - keep the lights on.
Other relationships achieve a higher-order of partnership in terms of cooperative capability enhancement and problem solving. These alignments are usually built upon a foundation of solid service delivery for the basic services. In essence, the provider earns the right to take on the more complex tasks by delivering on the basics.
But here's the paradox: Many foundational relationships are conceived with sole consideration of the commodity orientation and little weight given to the difference-making possibilities that come through a degree of shared risks and shared rewards. TPI utilizes a decision structure called the 3C Framework to guide decision-making with an eye towards future business needs.
Recently, some progressive strategic sourcing organizations are asking us for help with defining a service provider categorization structure. This includes:
a) Defining and deciding upon the number of tiers in the framework
b) The assessment criteria for determining which tier a provider belongs in
c) The definitions and measures associated with the framework
d) Guidelines on how to communicate the new framework, and how to deal with arguments from stakeholders about tier ratings and dissenting views
While it's unfair to generalize, here's one structure that we have seen emerge:
- Commodity Providers - Do not need management at the relationship level and are purely selected on price.
- Operational Providers - The company has a relationship for defined services where service-level and overall risk is managed. However, other providers offer services that are near perfect substitutes, so there is no strategic interdependency or material cross-business risk.
- Strategic Providers - Major cross-business or strategic services (e.g. mortgage processing) providers with whom the outsourcing company has a shared interest in developing a long-term relationship. These involve senior executives up to Board level and require a high level of relationship, shared service and risk management.
It's important for outsourcing buyers to know what sort of relationship they need, and equally important for service providers to know how they will be slotted into the hierarchy within the service portfolio.
If you want a strategic partner, don't select a provider that has built a business on being a leader in a commodity category. Similarly, don't hire a transformational expert if all you really want from the relationship is cost-benchmarked services delivered just like many other providers.
