Frank Casale is CEO and chairman of the Outsourcing Institute (www.outsourcing.com), a 7-year-old Jericho, N.Y., executive forum that bills itself as an independent source for outsourcing data for both client executives and outsourcing vendors. Casale believes that businesses have begun outsourcing core activities, which demands new management approaches. Among these: “holistic outsourcing,” a chief relationship officer and treating vendors like your own employees. The institute employs eight people full time and counts some 26,000 members worldwide. And yes, it outsources.
CIO: Let’s start with your take on the state of corporate outsourcing right now.
Casale: We just went to print with our Year 2000 Outsourcing Index, which puts the outsourcing industry at $345 billion by year’s end. The individual deals are getting a lot bigger; we’re seeing deals valued at $1 billion apiece. And there’s a lot more holistic outsourcing being done.
By holistic outsourcing you mean….
Five to seven years ago, companies started to consider outsourcing for the first time by saying, “Let’s outsource some of these noncore activities.” Now, in some companies, there’s been a shift from noncore to core. They’re saying, “What functions and processes are most important and need world-class attention?” Look at CRM [customer relationship management], call centers and sales force automation…five years ago you’d never see anything outsourced that touched the customer. That’s changing.
With all of these new kinds of outsourcing deals being struck, how are managers keeping their vendors in line?
First off, if you’re talking about vendors and keeping them in line, you’re going to have problems. The biggest change that needs to take place in the outsourcing arena is that [companies] need to allow their
definition of a vendor to evolve. Outsourcing isn’t like buying a product drop-shipped. You’re not selecting equipment; you’re selecting a roommate you’re going to live with for a couple of years. So you really want to architect a successful win-win relationship between you and the supplier. And to do that, companies need to revisit how they procure and manage these relationships.
Let’s take procurement. What needs to change there?
The traditional approach to procurement is that cheaper is better, and that’s that. But if your methodology is lowest price wins, you’ll fail. There are many bottlenecks in procurement—outsourcing is always a complex RFP, and most of the people in sourcing or procurement don’t know all the players in a given field. Price is important, of course, but you need to look at the corporate culture, the level of expertise, customer support and global reach if you’re a global company yourself.
I know a lot of companies who nailed the vendor to the wall on price and wound up getting all junior people on a project. So you want to design [a relationship] that gets you where you want to go faster and cheaper, but you need to make sure it works for the vendor too.
The client is supposed to make sure the vendor is happy? A lot of managers might find that advice counterintuitive.
Listen, experienced vendors are walking away from deals more than ever before. Four years ago, a lot of these guys would see the big numbers at the beginning, and they’d sign on just to get the business and get the press release out. Now the more experienced service providers know when to walk. They look at a four-year deal that’s not going to generate enough revenue, and they won’t take it.
So how should these deals be fashioned?
The challenge is to make your agreement definitive and flexible at the same time. You need to make your expectations crystal clear—the deliverables, the responsibility matrixes and so on—but you need room for the contract to evolve into a real relationship.
Most often, we see that the nature of a sourcing deal changes after three months, with the client typically wanting more or different services, usually more. They want to take the services global or want to expand to different types of services, or there’s been a merger or acquisition that changes their requirements.
But even when your contract is just 30 days old, you don’t want your supplier holding you to the letter of the contract the first time you need help. If it’s Friday at 7 o’clock and the contract covers you till only 5, you want to be able to say, “Let’s fix this now, and we’ll work out the pricing difference later.”
That’s the difference between relationship management and vendor management. The more enlightened organizations call their sourcers “partners,” but a lot of companies still have a problem with that. Come up with a new word if you need to, but the point is you’re looking for a relationship that’s going to work for both sides. So the bottom line on outsourcing is that we’ve got more deals covering a wider range of services, and they’re more complex. There’s a heck of a lot more deals, and the nature of these deals and the skill sets they require are very different now. So there’s a quantitative challenge, and there’s a qualitative challenge.
Sounds like a lot of work for somebody, which leads us to a concept that’s near and dear to your heart: the chief relationship officer (CRO). Should we assume you’re speaking metaphorically when you talk about the need for an executive-level person to manage relationships? Or are there people who actually hold that title?
There are a small handful who actually have that title. When I first coined the term CRO, I don’t believe anybody thought it would take off. But of [the Outsourcing Institute’s] 26,000 members, we have hundreds of people with sourcing titles or procurement titles who do the same types of things [as a CRO].
What exactly are the duties of a CRO?
CROs need to be high-level, strategic managers who are part diplomat and are politically savvy, both internally and externally. Relationship management is a fuzzy area. You need somebody who can juggle many deals and get the job done, but also someone who can leverage a kind of tough-love approach—someone who can put his arm around the vendor every once in a while and say, “What do we need to do to make this work?” Most traditional managers aren’t used to that.
Is the CRO actually negotiating the details of the contracts?
Most companies have attorneys and law firms to do that, so the CRO is involved in a high-level way only. The CRO is the person—often the only person—who understands the intangibles of these deals and how important they are to making them work. Intangibles meaning corporate culture, shared goals and so on. So when an inside person says, “Gee, let’s outsource application development,” the CRO is the person who understands the very best way to procure those resources and determines who the players are in that particular space.
That last point is important. A good portion of our clients are sourcing executives or procurement managers contacting us to find out who the players are in all these various categories. Just within IT alone, you have a couple dozen different subcategories—communications, training, e-business and so on—and the average manager just doesn’t have a clue as to who the best outsourcers are in every category.
And where does this theoretical CRO belong in the company? At the table with the CEO, the CFO, the COO? CIOs have had a hard enough time getting their own seat up there; they might not be in the mood to make room for anyone new.
The best scenario is when the position reports to the CFO or is assigned by functional area. In some companies, there is a CRO in a central position. Other companies could have 10 [people with those responsibilities], broken down by function.
The concept is still in the formative stages, so executives are saying, “Who is this person, and how do we best leverage this position?” It depends on the center of gravity in the company. Some relationship managers are coming out of sourcing groups and have titles like outsourcing manager or director of external enterprise. Others are morphing out of the CIO area or procurement or, again, by function; one of our member companies right now has a CRO-type person for call centers and another for IT.
Does it make sense for the CIO to assume the functional role of the CRO?
There have been instances where we’ve seen that work. The CIO could be ideally suited to that position as sourcing becomes a bigger and bigger role and IT becomes more ubiquitous. This could very well be a wonderful opportunity for CIOs to truly move in to a broader business role. The CRO could be a natural step up and over to the business side.
Alternately, we’ve seen CRO-type roles formed specifically for IT. In that case, the challenge for the CIO is to determine if you want to take on this new role yourself or if you want to have a key right-hand person take it on. You may be heavily focused on strategy and hiring or globalization or whatever, and you need to have a right-hand, go-to person for your vendor relations. We’ve seen that work wonderfully. On the other hand, if you do take the role yourself, it could be a natural segue to a more generic role as CRO for the company.
Putting aside the CRO title for a moment, what ideas can CIOs take away from the concept to use when handling their own vendor relations?
They need to develop their hard skills—an understanding of sales and deliverables, and the technical and financial aspects of the deal—as well as the softer skills like relationship management. They need to be good politicians. In the past, post-contract, their role would have been one of purely policing the vendor. Now they’re striving to keep two companies happy. Granted, the primary role here will always be to get what your company needs, but you do that by managing the relationship so that both partners are getting the most out of it.
How do you do that on a day-to-day basis?
Say you’ve decided to outsource your global network management. Now the question becomes, How do we manage and monitor all these people and deliverables? The conclusion is that you must still manage them as if they were in-house. Include your partners in key meetings, meet with the vendor’s managers just as frequently as you meet with your own. Treat the project’s point person like a division head. The message is you have to put a lot of work in to make it work, but it’s still a net positive.
And once you’ve achieved that platonic ideal for one project, or two or several, how do you take it to the next level? You’ve talked of affecting change throughout the company. How does that come about?
Smart companies encourage their CROs or their sourcing managers to identify new areas for outsourcing so that they’re not just reacting to the market; they’re being proactive. They’re always keeping their eye out there and monitoring the market, saying, “What’s the best way to maximize other people’s resources for our own good?”
When companies started outsourcing for the first time, there was a lot of anxiety. Then they realized the benefits of connecting with companies that are world-class providers in a particular area that the client considers to be noncore to their own business. Once they get comfortable with that idea, they move on to tactical and strategic improvements. They start looking to increase competitive edge, up shareholder value, globalize and grow more efficiently. It’s no longer a question of what to outsource, but how.