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Redefining value

Phil McClennon, CEO of Leadec, explains why the outsourcing market must become a race to the top if the industry is to thrive and grow in difficult times

With several high-profile outsourcing businesses hitting the headlines for all the wrong reasons, the death knell has supposedly sounded for outsourcing. But while recent events have triggered an outpouring of theories about the shortcomings of this business model, we’re actually seeing the market putting more emphasis on value over price.

The traditional outsourcing market has seen customers auction contracts where the lowest bidder wins, with providers simply doing what has been asked of them rather than thinking outside the box. This creates an inevitable race to the bottom where suppliers can dump price to win at all costs, with customers receiving very little added value above and beyond the terms of their tender.

In many ways, this process has been a consequence of previous misconceptions surrounding the role of outsourcing. In many industries, it has often been viewed as a means to an end, with customers outsourcing tasks they either don’t want to do themselves, or which they do not have the capacity to carry out. As such, it has become a commodity purchase to some, with few customers viewing it as an opportunity to unlock added value.

However, the market is changing. Customers are becoming more sophisticated and it is no longer enough for outsourcing businesses to simply deliver what they are paid to do. Customers are increasingly recognising the value that can be added by specialist organisations that truly understand and complement their own efforts – and appreciate that this is not always achievable when buying purely on price. Outsourcing businesses have an opportunity to identify their own key areas of added value and develop a clearly defined service proposition on that foundation.

CREATING DIFFERENTIATION
Today’s customer wants to experience value during every transaction in an outsourcing partnership. They want effective and flexible processes, good communication, and the knowledge that they can lean on experts to deliver additional value in their specialist areas.

As a result, the procurement process for outsourcing is undergoing a major overhaul and becoming more collaborative. Instead of looking for a provider with an offer that suits a specified budget, customers are locking added incentives into contracts and bundling projects to find dedicated, onsite partners. Track record and specialisation are key to winning work, with suppliers that attempt to be all things to all people losing out when it comes to more focused briefs.

This market change led Leadec to think about its own specialist offering to the market. Our experience working with automotive OEMs around the world, carrying out niche tasks such as paint shop cleaning, prompted us to shift from providing diverse outsourced services to specialising in manufacturing outsourcing. By focusing on facilities services, installation and maintenance within customer sites, we ensure we are delivering maximum value in these specific areas, rather than trying to spread our value more thinly across several areas.

The days where outsourcing is seen and not heard, and only contracted to cover areas of low interest, are numbered. Customers increasingly seek ideas and partnership from their outsourcing suppliers, rather than just the services they pay for.

For example, we have built a system that dynamically evaluates both customer service fulfilment and customer satisfaction. Customers have access to a secure dashboard through which they can see exactly what they are getting for their money, and how we are going beyond their initial expectations. Satisfaction data can be grouped at every level from individual customer employee to the wider business.

THE RACE TO THE TOP
Many customers have learnt valuable lessons from past outsourcing deals that were procured and agreed on a simple lowest-price basis. They have come to appreciate the benefits of working with an external partner who can provide additional value in key areas. Specialist providers are able to do this by virtue of their context-specific know-how and thorough understanding of the customer’s operations within their area of expertise.

Manufacturing is a good example of an industry that understands the need for added value. Companies must be fiercely competitive to retain their position in the market, which means they’ve become accustomed to buying-in value. This might be through capital equipment purchases, new technology integration, or seeking ways to fill the skills gap.

Manufacturers must continually focus on their own core value added in order to pull ahead of their competition. For outsourcing partners this means continually seeking new, often minor scope additions to contracts in areas which might cross the border between what’s considered core and non-core business. This might take the scope beyond building and infrastructure to include auxiliary production equipment and other assets, requiring an understanding of their impact on the customer’s core operations.

It’s important for outsourcing partners to address the issue of value early in the relationship to understand how the customer defines value. This can lead to a change in the initial brief and opens the customer’s eyes to what is possible when working with a specialist. Such a mutual ‘fair play’ approach also encourages a shift in the structure of contracts towards higher levels of transparency and multi-level joint governance arrangements. In these contracts, the guaranteed maximum price and vested models are still prevalent, but gain share mechanisms might differ from what we have seen in the past.

The stereotypical image of outsourcing is changing. Those who think they have a win-lose deal are discovering the situation is actually one of lose-lose. The days when projects failed because of a breakdown in relations between customer and supplier are passing, as all parties see the benefits in a win-win-based collaboration. A cultural shift is taking place as customers begin to recognise the added value that can be provided by outsourcing partners, largely led by mature markets.

As a result, the typical cost model the industry has always followed is evolving into something more sophisticated, but there is still work to do. Before the entire market moves towards this more balanced model, suppliers need to provide transparency to customers to demonstrate the value they are providing. We have a responsibility to help customers understand more effective routes to collaboration and more productive ways to reward excellence and innovation.

We should view these turbulent times not as a harbinger of doom, but the beginning of an outsourcing market transformation which will completely change the way businesses procure and purchase services. It’s a time of positive change, and specialist providers are well positioned to thrive in this new age.

About Sarah OBeirne

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