10 Top tips for getting the most from strategic partnering

Against a background of continuing uncertainty in the global economy, and major budget cuts, the challenge to both public and private sector organisations continues to be reduce costs to ensure success, but also, for some, to position themselves for the many growth opportunities in the switch from public to private service provision. 

Many of the cost-saving actions undertaken have taken a ruthless approach to supplier contracts and relationships.  Existing contractors were pressured to reduce their prices and/or accept extended payment cycles. New contracts were subject to aggressive competitive tenders and negotiations. Suppliers, faced with their own battles to survive, have been forced to accept punitive contract terms, acceptable only on a marginally costed basis, that barely allow them to continue trading. This has inevitably impacted the quality of service for many. Most recognise the danger that such approaches are not sustainable. 

We believe that a prerequisite for transforming operations lies in working with suppliers in a creative and flexible way.   Our experience in delivering such programmes has shown that delivering cost savings and transformation, through any outsourcing/consolidation programme requires a very focused delivery, and focus on outcomes, relationships and method.

Strategic Partnerships may be the best option, providing both short term savings and paving the way to well-founded growth. However, the journey requires companies to give as well as take.

10 tips for success

Outsourcing relationships are not a new phenomenon. Over the past 20 years, companies have been outsourcing using a variety of relationship constructs, but with mixed success. Through the application of PPM principles and rigour, organisations can better manage the outsourcing process and realise the desired outcomes, helping to define the approach, select a supplier, and deliver an integrated and working operating model, that reduces costs whilst maintaining or improving services.

Tip 1 - Awareness

Prior to commencing a relationship with any supplier for any part of their business, a company must put in the ground work to establish the basis on which to proceed. Three core elements of this are:

1.  Understanding the current position

Complete an internal review to protect the core elements of the business, identify supporting (non-core) functions and review the largest cost bases. Alongside the identification of functions into core and non-core, an assessment of the extractability will further help to identify which function(s) should be considered for outsourcing.

2.  Understanding the market offerings

Once the appropriate functions have been defined, the company must assess the market to establish what options are available. These could be large and small suppliers, technical or people-driven solutions, local or international partners delivering service ranging from basic to gold-plated. One of the key pointers for assessing the market is to find a supplier who harbours the company's non-core functions as core to their business. Using this principle, Moorhouse were able to assist BT with a major outsourcing programme, selecting suppliers which were able to develop capability in BT's non-core functions.

3.  Understanding the environment

Reviewing the economic situation internally and in the chosen market. What is cash flow likely to look like over the coming years?  Which companies are merging or acquiring? Which companies are growing rather than shrinking?

Awareness is focused on understanding your own strategy, understanding the market and the strategy of potential suppliers.

Tip 2 – Outcomes

With a clear idea of what can be done, the company needs to start to review what the desired outcomes from engaging a supplier are. For example, this could be a reduction of operational cost, or could relate to new product speed-to-market. Defining the key drivers and benefits will not only help to define the nature of the relationship (Tip 6) with a potential supplier, but also create the content required by the business case. This review should be completed on an iterative business to ensure that the goals of the programme always reflect the current strategy of the company.
The key questions are:

1.  What benefit are you expecting to get by when?

2.  How will you measure it? 

This is vital information for creation of a business case and will be picked up and managed through formal benefits tracking. Moorhouse believes that a strong business case with clearly defined benefits and timescales can create a definite focus to delivery, helping ensure all involved are driving for the same goal.

Tip 3 – Target Operating Models

Alongside definition of the outcomes, we believe the structure of the target operating model can shape the strategy for change. Having a clear vision for the organisational blueprint and being able to communicate this to prospective suppliers will enhance the likelihood of a successful outsource.

A common mistake is to start to look at the destination of the organisation only once the supplier has been selected and the contract agreed. Begin with the end in mind and you will increase the chances of getting there. 

Tip 4 – Sourcing Approach

There are several decisions which need to be made regarding the approach to selecting a supplier; this can form an industry in itself. Decisions to consider are:

1.  Will there be a formal ITT and will it be managed internally or externally?

2.  Who will create the supplier shortlist and who will create the supplier brief?

3.  Who internally will make the final decision and what criteria will they use? 

Many organisations have a standard procurement process, it is important to assess if this is fit for purpose for outsourcing. Moorhouse have a significant amount of experience helping companies with this decision point and have led strategic partnering initiatives at NDA, NHS, TfL and BT.

Remember, the quality and accuracy of this process will ultimately determine which supplier is selected – a decision which is likely to last for 3-5 years and have a dramatic impact on future success.

Tip 5 – Delivery Approach

Although it may be more natural for a procurement function to lead and outsourcing programme, applying a rigorous PPM approach to supplier interactions will help focus to the programme team on achieving the outcomes defined in Tip 2.  Either through internal or external PPM resources and methodology, Moorhouse believes that using a recognised programme management approach can help by:

•  Creating focus on benefits delivery

•  Controlling  costs throughout the process

•  Minimising scope creep

•  Managing governance, reporting and schedules in a consistent manner

•  Independently managing stakeholders and therefore ensuring tension between parties is minimised.

In the same way as agreeing which functions are suitable for outsourcing, a company should look at its capabilities in both sourcing and programme management and determine whether in-house resources are suitable to deliver the outcomes, or whether finding external experts in either sourcing, PPM or both will be more cost-effective over the lifetime of the outsource.

Tip 6 - Relationship

Having defined the functions to outsource, the desired outcome and the structure with which to implement, it is important to consider the nature of the relationship with the suppliers.  The simple scale below can be used to define the relationship between customer and supplier, focused on the complexity of the activities/functions, and will help navigate this decision.

The transactional relationship is usually typified by a strongly defined legal contract with carefully defined, and enforced, service levels and inflexible charges. It is best used for the purchase of commoditised products and services that are not business critical to the customer. It assumes a large, competitive supplier base so that the customer can easily turn to another supplier if they receive unsatisfactory or uncompetitive service. This can lead to an adversarial relationship with the focus on agreed/missed targets and discussions centred on negative performance. It leaves little, or no, flexibility to respond to sudden changes in the business environment and often results in protracted and expensive legal actions. Once the cost base has been reduced it is also hard for a company to extract further value from that function.

With a transformational relationship, the company selects a supplier who can deliver the necessary cost savings but who will also complement the core ethos of the company and contribute to delivery of company strategy. Focusing on transformation rather than just cost cutting helps to create a platform on which future growth can be built, where both company and supplier feel the benefit. This is the basis for a strategic partnership.

A strategic partnership, by contrast to a transactional relationship, operates on a basis of collaboration and trust between customer and supplier. It works best when it is obvious to both parties that their success is mutually dependent, i.e. if one fails, both fail.

Any legal framework documents the agreed benefit aspirations, and the desired approach to the commercial and operational relationship – in its ideal format it represents a mutually agreed business plan to deliver measurable, quantified outcomes for each party. Relationship management is the key to success as there has to be a significant degree of operational flexibility to allow effective responses to changes in the business environment. This degree of flexibility cannot be legislated for in legal contracts. 

Moorhouse believes that any company embarking on the path to strategic partnering must be very clear on what they want to achieve and why. They also need to be clear about the implications for their business if the move is not successful.

Tip 7 - Execution

As a company steps through the process, the scope is defined, the suppliers are shortlisted and the relationship type has been agreed. The execution phase sees implementation of the approaches determined in Tips 4 & 5 and should follow a typical lifecycle through business case development, supplier selection, contracting and into transition.

Having benchmarked 19 FTSE 100 and large central government departments, Moorhouse have developed a best-practice relationship/partnering framework that helps companies maximise the benefits from entering into strategic partnerships.

Each of the five layers in the model will need to be delivered to ensure defined benefits are realised.  

•  Agreed strategy – this needs to be clearly understood by both customer and supplier and all activities related back to delivery of the strategy.  Before transition activities can be planned, the end point needs to be understood by both organisations.

•  Clear governance – as with any relationship, the governance process needs to be established early and understood by all.  Reporting and escalation processes should be in place from the first day with the senior responsible owner identified and empowered to direct the transition.

•  Embedded Structure – Both the target operating model and the journey to get there need to be defined up front and integrated into the delivery work streams.  This will ensure that organisational change is managed alongside transition.  See Tip 8 for more details.

•  Joint understanding/ownership of tools & processes – To create a partnership, there has to be overlap in the way the organisations work. This will enhance the impact of the capabilities sourced. The company may need to surrender control of parts of the service to achieve greater transformational benefit. A single PPM method used by both parties will also help to drive consistency across the organisations.

•  Effective Relationships – To maximise the 'upside' from entering into a strategic partnership, the relationship needs to be viewed as collaborative from all parts of each organisation. Recognising the benefits to the relationship and trusting the governance arrangements put in place will help resolve conflict swiftly and lead to greater synergies and mutual successes.

Tip 8 – Change Management

All organisations will recognise that change management is required to successfully integrate project and programme deliveries into an operational environment, but in our experience, there are a few key stumbling blocks which can be avoided as a new partner is added to an organisation.

1.  Start change management activities early – as mentioned in Tip 3, having a good view of the target operating model from the start of the programme will increase the chances of delivery. From our experience, involving the impacted functions in development of the target operating model will help not only to make the model more likely to work, but will build strong relationships with people who are going to be involved with the outsourcing partner further down the line.

2.  Don't underestimate the effort required to change – One of the key principles behind a successful strategic partnership is that the two organisations will work closely together in an open and collaborative way. This may be a step change from previous customer/supplier relationships and will take a significant amount of work from both organisations to succeed.

There are many different methodologies which can be applied to support change management activities within an outsourcing programme. Whatever approach is selected, addition of a work stream dedicated to change as part of the programme management approach will help ensure it is planned and managed in line with the programme delivery.

Tip 9 – Benefits

The key differentiator between transitioning to an outsource arrangement as an internal project and applying a rigorous programme method is in the focus on benefits realisation. As mentioned in Tip 5, clarity of scope and ensuring all activities delivery the desired output and outcome will increase the success of the programme. Best-practise benefits realisation techniques can be applied from the initial business case development through to in-life management forums. This will enable the delivery teams and business owners to focus on the elements critical to success and also to correct the overall direction of the programme/transition if the benefits become at risk.  Moorhouse have recently completed development of a benefits realisation methodology for BT and is currently integrating this into a series of major delivery programmes.

Tip 10 – Governance

The in-life management of a contract varies dramatically between the transactional and the transformational. As alluded to above, the transactional contract is often driven by SLAs, governance structures are operational and procurement driven with focus on delivery of a service. Frameworks such as ITIL exist to provide a standardised model for service management which can be implemented as part of transition.

Transformational relationships can be most successful when the touch points are strategy-focussed. At the extreme, each company may even 'trade' a board member to ensure that the strategies are aligned. The day-to-day operational relationships need to be equally trusting with each party working towards a commonly agreed goal.  Even through transition, a common plan will ensure that issues are resolved at source and major decisions are made jointly. 

There will always be points throughout any transition where problems arise, successful governance arrangements will help to ensure not only that these points are minimised, but that problems are resolved as efficiently as possible.

Conclusion

Each company needs to identify the appropriate functions and the supplier options available prior to commencing an outsourcing venture. If the only objective is to cut cost, then a transactional approach to supplier relationships may suffice. However, if there are strategic similarities between the company and supplier, then entrance into a strategic partnership may provide the base required to deliver both organisation transformation and market growth. This will be maximised through encouraging a transparent and honest relationship where success is shared and problems dealt with quickly and efficiently. 

To achieve this will require several critical success factors to be in place:

1.  Ensuring the desired outcomes are linked to the correct type of customer/supplier relationship

2.  Use of a best practice partnership and delivery approach, similar to the mature relationship/strategic partnering framework developed by Moorhouse 

3.  Ensuring a clear vision of the operating model is defined and communicated to all involved early in the process and managed as part of the outsourcing programme delivery.

© 2011 Moorhouse.