WHY OBJECTIVES ARE IMPORTANT
The importance of setting objectives correctly cannot be overstated. Outsourcing agreements typically run for a number of years and involve two, usually disparate, organizations attempting to work closely together. More particularly, outsourcing agreements can take many different forms and have many different components. You may be confronted with a bewildering range of options which could lead to what will seem like a life sentence if you make the wrong choices.
The nature of the objectives set profoundly influences both the direction and the outturn of the outsourcing agreement. Correctly set objectives will fulfil the following functions:
âGuide the assessment of internal options and suitability for external partnering.
âGuide the design of the external partnering contract or internal improvement programme.
âProvide the basis for measuring progress towards the delivery of benefits.
âFacilitate the ultimate delivery of planned benefits.
âProvide a datum against which proposed courses of action may be tested.
The absence of objectives will frustrate the ability to test the appropriateness of proposed courses of action and deficient objectives may lead to the adoption of inappropriate courses of action.
Setting meaningful and measurable objectives is, therefore, a critical success factor. It is also more difficult than most people believe.
HOW OBJECTIVES INFLUENCE THE OUTCOME
The skill with which objectives are set will affect the outcome of both an investigation into the appropriateness of outsourcing and, if judged to be relevant, the resultant outsourcing agreement itself. The illustration that follows shows how.
Assume that a single objective to reduce costs is set. The resulting service or contract principles will be as follows:
âThere must be an exact definition of service requirement â poor definition that excludes a service component will result in increased charges or lower service
âTight cost constraints will mean total adherence to the supply of those closely defined services â the supplier will have no scope to vary the service since it is tightly constrained by the need to provide a service and make a profit for the price agreed.
âThere will be minimal service flexibility and no value added services.
âConstraints to the rate of business development may be imposed because the supplier is forced to a position where it is unable to agree to changes in the service requirement without the ability to see how existing poor margins will be improved or, as a minimum, not be diminished still further.
âChanges to service requirements will be subject to potentially difficult negotiation because the supplier will either perceive an opportunity to improve weak margins or, more negatively, work to avoid a further weakening of margin.
âIncreased charges for changed requirements will be used to lever up the supplierâs margin. The most basic of business dynamics must make this so.
âBudget constraints may constrain the desire or ability of the service provider to respond to changes in the customerâs market sector, leaving the customer trailing its competitors.
If forced to operate within the principles defined above, the service provider is likely to behave in the following way:
âThe service supplier may be forced to a position of inflexibility by the twin constraints of low costs or margins and a tight work specification. Low costs and low margins may mean reduced investment, research and loss of continuity, remembering that resources are tuned to the precise requirement and unnecessary resources are removed or re-assigned.
âThe service supplierâs priority will be the maintenance of either low margins or tight cost budgets since this is the primary demand of the customerâs objective.
âThe implications of the above inevitably result in a lack of emphasis on helping to deliver the customerâs wider business objectives. The requirement has placed no obligation on the supplier to take a broader view and the commercial constraints make it quite impossible for the supplier to react differently.
âThe supplier may seek to use every change in requirement to improve margins, which, over time, will have a debilitating effect upon both the relationship and value for money.
âThere will be maximum job losses and possibly unforeseen consequences because the pressure to reduce...