Building a Custom Home

I regularly teach executive education courses helping leaders better understand outsourcing dynamics. At the beginning of each course, I have attendees complete a class exercise that role plays a custom home building scenario. Attendees are each given a unique persona representing a theoretical custom home buyer. Each persona has a different level of experience building a custom home and unique personality quirks (such as agreeing to everything the home builder suggests or constantly threatening to sue over every mistake). Further, each person has a different price point for their potential custom home.

The greater class will act as a custom home building company with limited bandwidth for additional projects. One at a time, each student will make a brief pitch to the greater class asking for consideration in choosing them for a custom home building project.

After the last student has asked the greater class to choose their home building project, I have the class answer a series of questions:

1.       Specific to each potential home building project, what are the unique risks? What would need to be done to ensure a successful project?

2.       What project are you most likely to choose if you can only choose one project? What project are you least likely to take? Why?

Consistently, classes choose to work with and provide their best talent to highly prepared customers who are the most reasonable.

I think all understand this basic point- the level of your preparation and how reasonable you are to work with will affect how your outsourcing vendor handles your work. However, experience has shown that few understand to what extent this is true. The most powerful tool you have in determining the overall success of your outsourcing engagements is to thoroughly prepare for and be reasonable in your interactions with any prospective or existing outsourcing firm.

Rating and Ranking Clientele

Outsourcing engagements are unique in many ways. Of special note, they present unique and material risks to the vendor. Outsourcing engagements (like most service engagements) have lower margins than product sales, and contracts typically last for many years. It is quite common for outsourcing contracts to span 3-4 years using a single master service agreement and a common rate card.

While the outsourcing engagement may be profitable for the vendor initially, there is a high risk that increased delivery costs (increase in salaries) throughout the contract will push the engagement into the red. Further, outsourcing engagements that require a high level of management involvement also run a high risk of financial loss.

The second dynamic that needs to be understood is that top outsourcing firms do not need your business. They need better business. Just as end technology users (outsourcing buyers) struggle to find top talent, outsourcing firms struggle to find the workers they need. There are no material pockets of elite technology talent that speak English anywhere. Although there are year-over-year variations, outsourcing is generally capacity constrained and not demand constrained.

Top outsourcing firms have hedged the skilled talent shortage (to an extent) by implementing scalable training programs. For example, Infosys created a massive training program in Mysore, India, capable of training 10,000 workers at a time. Even with these training programs, there is still a shortage of qualified talent needed by customers, and outsourcing firms must make difficult customer prioritization decisions.

In the early days of offshore outsourcing over twenty years ago, outsourcing vendors did little to understand and hedge these risks. Outsourcing companies have learned lessons over the years and are now very good at understanding each potential customer and tailoring their service strategy specific to each customer. Each prospective customer is rated and ranked well before any contract is signed. Like the custom home builder exercise noted earlier, each customer will have a unique delivery strategy defined when any proposal is offered. To get the most out of any outsourcing engagement, each customer must impress the vendor before developing a proposal.

What Your Rank Means

Your customer rank is critically important for your overall outsourcing success. In a scenario that plays out every day, an outsourcing firm needs to hire a senior java developer for two different clients. The outsourcing firm has identified two developers that stand out and are asking for the same salary. One developer is noticeably better than the other. Of the two customers, who will receive the better developer? The decision is not random.

Running an outsourcing firm is often about making constant and difficult customer decisions. What customer do we staff first? Where do we place our best talent? What customer gains access to SMEs that multiple clients need? And who will we work with the most to resolve delivery issues?

Well-run outsourcing firms have a systematic framework for making such decisions. They prioritize staffing, offer the best talent, etc., to clients ranked higher than others.

It is not politically correct to admit, but every company (regardless of whether they are a product or services firm) has some form of client prioritization, with highly regarded customers receiving additional support from the company. Even the most ethical companies will rank their customers.

Rather than complaining about being ranked by outsourcing vendors, I recommend you understand how outsourcing firms rank their customers and take critical steps to become a higher priority.

How Outsourcing Firms Rank Clients

Outsourcing vendors will begin rating and ranking each potential customer starting with their first contact. Customers need to be ready before they ever reach out to an outsourcing firm or risk not getting the best from any outsourcing vendor.

There are set factors that customers cannot change. Of special note, the customer’s global brand is important. Like it or not, potential customers with a large and globally recognized brand are given priority. The issue is not about the prestige of the potential customer within the vendor’s portfolio.

Years ago, I attended an offsite management retreat for one of the largest investment banks in the world. The bank’s leaders noted a new outsourcing contract they recently signed with a Tier 1 Indian outsourcing firm and openly noted how excited this outsourcing firm was to add such a brand to their clientele list. I laughed a little, and it caught the top executive off-guard. He pressed me why I did not think it made much difference to the Indian outsourcing firm regarding sales. I pulled up the outsourcing firm’s website and showed that the outsourcing firm already listed all the bank’s competitors as existing customers. I asked the executive what other major bank would need to see his bank listed as a client to persuade them to buy services from the outsourcing firm. Point made.

While adding another major brand to the outsourcing firm’s clientele list may not help sales, it does help with staffing projects. When outsourcing companies are staffing new clients’ projects, the brand greatly matters. From personal experience, it is significantly easier to staff projects for major international brands such as Microsoft, Amazon, and Nike over “ACME Meat Processing Company of Cincinnati, Ohio.” Potential employees want to work for a prestigious client.

Unfortunately, outsourcing buyers cannot control their global brand, reputation, and awareness when selecting an outsourcing firm. The client either has a compelling brand that will help staff their projects, or they do not.

While static factors affect outsourcing vendors’ approach to engagements, many factors are completely within the client’s control.

The volume or total contract value is of importance to each outsourcing firm. The phrase “strategic account” is often thrown around by outsourcing firms. In most cases, it is marketing fluff. The phrase is hard to quantify and put into a contract. Although the phrase “strategic account” may be a sales ploy, the larger the contract size, the higher up the customer ranks you typically go.

That said, total contract size is not a guarantee of being placed high or low on the customer ranking list. Referencing back to the home builder exercise at the start, a prospective home buyer that wants a multi-million custom home to be built but is incredibly difficult to work with will most likely be passed over by a smaller project with a customer that is much easier to work with.

I sat in discussions with a Tier 1 outsourcing firm in India as they met with a large existing client. Neither party was happy with the engagement, and the client waved around the bait of doubling the size of the already large engagement if the vendor improved performance. After the meeting, the vendor’s senior executive team sighed and stated, “great… they want to double my headache!”

While larger engagements will gain more attention from outsourcing firms, other variables count more. Most notable, the client can skyrocket or plummet on the outsourcing vendor’s potential client prioritization list by the client’s level of preparation in every step of the outsourcing engagement. Preparation is the most powerful tool prospective clients have in becoming a priority for outsourcing firms and improving the odds of success throughout the outsourcing engagement.

Prepare and Be Reasonable

Years ago, I was asked by two different customers to be an advisor to the procurement team throughout their RFP for new outsourcing services. As a coincidence, both of my customers held bidder’s conferences in the same city within the same week.

The first customer was a large and well-known technology brand that sought a new outsourcing vendor or record for their entire company. This company created a procurement team consisting of the internal purchasing department and representatives of each business unit that would use the newly selected outsourcing firm. Two days before the bidder’s conference, I flew into their headquarters and met with the extended team over dinner. In addition to getting to know the team, I asked several key questions.

I asked for the bidder’s information kit that should have been sent to all attending outsourcing vendors (containing all background information, policies & procedures that apply, organizational charts, problem statements, success definitions, methods to measure success, etc.) I was told that such a kit did not exist and that information would be pulled together with the chosen vendor if they asked for it.

I asked why they wanted to replace an existing Tier 1 outsourcing firm working with the customer for over a decade. I received completely different answers from each business unit representative. More than one representative noted they did not wish to replace the incumbent vendor and were happy with their services.

The top representative from one of the business units drove me back to the hotel after this initial dinner. He asked me what my first impressions were. I told him that I thought outsourcing firms would be confused. Although there was a formal procurement function running the RFP, it was not immediately clear why this company wanted a new outsourcing vendor, the specific problems they wanted to solve, how they defined success, and how they would measure the success. It was not clear who oversaw the potential outsourcing engagement.

The day of the actual bidder’s conference arrived, and teams from every major outsourcing firm were in attendance. After quick introductions, my customer (the outsourcing services buyer) opened up for questions. Immediately, attendees began asking the same questions I did. The business unit manager that drove me to the hotel after dinner the first night was sitting next to me. He soon leaned close to me, whispering the line from the 1998 movie Rounders, “…If you can’t spot the sucker in the first half-hour at the table, then you ARE the sucker.” I had difficulty not laughing.

Later that week, I went to my second customer’s office and met with their extended procurement team. Just as with the first customer, this company had representatives from all business units that would use the services of the outsourcing firm. Unlike my first customer, this company was smaller and less well-known.

My meeting with this second customer was completely different than my initial meeting with the first customer. The kickoff prep session with the second customer started with their greater team giving me a thick three-ring binder. They explained that the binder contained all information they felt an outsourcing vendor needed to know. They informed me they had already sent the binder to all outsourcing firms that indicated they would attend the bidder’s conference. We spent the greater part of the first day walking through the three-ring binder.

I have helped a near countless list of outsourcing buyers prepare similar binders as a component of RFPs over the years. This second customer had a few gaps inside the binder that I would typically include. Regardless, they had the material components in the prepared materials.

However, this customer did something relatively new for me. They dove deep into their internal shortcomings and dysfunctions more than any customer I have known. They noted challenges such as gaining consensus on requirements and keeping requirements stable throughout a project. They called out internal project management problems. They referenced some mistakes they made managing external teams with previous projects. Equally impressive, they outlined steps they are taking to address such problems. This company noted in this binder that an outsourcing vendor capable of helping them solve these issues as a component of the outsourcing engagement would be given preference.

The bidder’s conference for this second customer started with almost the same list of outsourcing vendors in attendance as my first customer (including the same company representatives). Unlike the superficial conference with my first client, this bidder’s conference was significantly different. Every outsourcing company in attendance zeroed in on the specific internal challenges my client noted in the three-ring binder. Each vendor in attendance thanked my client for such detailed information and began almost a consultative question and answer process with my client. It was obvious that all outsourcing firms attending the bidder’s conference had read through the binder at length, prepared specific questions that would allow them to understand better how to be a success with the customer, and used the conference to explore various ideas on how they could work with this customer to solve these issues collaboratively.

Following the bidder’s conferences, I continued to work with both customers until they selected their new outsourcing vendor. I read through the proposals submitted by all vendors and was surprised at how different the responses were.

Proposals for my first customer were generic. The pitch from each outsourcing firm consisted of stating they were the world’s top outsourcing firm, they have the best talent, and the best methodologies will be used to ensure customer success.

Proposals for the second customer were significantly better. Each proposal included a detailed explanation of the outsourcing firm’s understanding of the customer’s challenges and how they would work together to solve these problems. There were real thoughts and insightful understandings in each proposal. All proposals defined a valid framework for working together to resolve operational shortcomings inside the client. It was obvious that each outsourcing vendor had put forth significantly more thought and time into each proposal.

A few months later, I was retained as an advisor by one of the outsourcing firms that submitted bids to both of my customers. I had the chance to ask their US sales team about their experience with both RFPs. Although they did not win either contract, they had a lot to say about both opportunities.

The outsourcing vendor referred to the first customer (the customer that was not prepared) as “unprepared arrogant asses” that gave the outsourcing vendor little insight into what they wanted. They explained they felt it would have been difficult to work with the customer over a multi-year outsourcing contract and stated they had an internal debate about walking away from the opportunity without submitting a proposal.

The outsourcing company then noted their disappointment in not winning the second contract. I was not surprised; I also wanted to continue to work with the second company. This outsourcing company noted they felt this prospective customer was highly prepared, and they (the outsourcing firm) understood who the customer was. The outsourcing firm further stated, “We knew how to be a success with that client and thought they would be fun to work with.”

Success in Outsourcing = Preparation

In 2003, I completed my first formal study on success factors in outsourcing. At the time, I identified the top three factors for outsourcing success to be (in order):

1.       Preparation by the client before engaging the outsourcing vendor.

2.       How effectively the outsourcing vendor and client work and communicate with each other.

3.       The quality of the team the outsourcing vendor can place and keep in the engagement.

I took a lot of criticism from the market for claiming the top issue affecting outsourcing performance was the level of preparation by the client. Numbers do not lie, and time has proven that a lack of preparation by the client continues to be the top success factor in outsourcing.

If we go back to the home builder exercise, the potential homeowner’s level of preparation is important.

Consider two prospective customers:

The first prospective customer has never been involved in a custom home building project. That said, they have spoken with everyone they know about their experiences. They have read every book they can find and spent countless hours on YouTube watching videos on the overall home-building process. They have purchased land for their new home, have hired an architect, and have completed designs- including a 3-d model created in foam. While this potential customer has exhausted every conceivable idea they had in preparing for the meeting with you, they also note that there are likely many questions still to be answered and would love additional guidance from you (the home builder).

The second prospective customer comes into your office. They noted they have had a custom home built before and understand the process well. They have not hired an architect, are not familiar with local laws and permit processes, and have not put in the time to decide the basics you need to know to give an accurate quote.

If you had to choose one customer, who would you choose? If you could handle both customers, which customer would you give the most time to? Provide your top workers? Lastly, what house do you think would likely be the reference project you showcase to your future customers?

The key takeaway from this is that you, the customer, impact how every outsourcing vendor approaches your projects. If you take the time to prepare before engaging outsourcing firms, they will rank you higher in their prospective customer list and offer you a fair deal in their proposals. The result will be felt almost instantly after signing contracts. Your chosen vendor will place a priority on staffing your projects over other customers that are rated below you, you will gain greater access to SMEs that are needed in all outsourcing contracts, and the vendor will be more willing to work with you through challenges that will arise in all outsourcing contracts. Investing time in preparation before engaging any vendor and your odds of success throughout your outsourcing engagements will grow.


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About Phil Hatch

Phil Hatch is a twenty-year senior executive in global outsourcing, workforce, and economic development. As a noted thought leader in outsourcing, Mr. Hatch has held senior executive positions in several major outsourcing firms. He has worked extensively with buyers to improve the overall performance of their outsourcing engagements. Mr. Hatch has also worked extensively with countries globally, helping them modernize their workforce and grow their outsourcing industries.