10 tips for managing outsourced contracts

Outsourcing is an increasingly popular way for universities to keep costs down and to focus their activities on their core business, but there are risks involved. London Universities Purchasing Consortium’s Andy Davies gives his top 10 tips for managing big-ticket outsourced contracts.

Outsourcing is a rapidly growing area of activity in higher education. It can be a way of letting specialists run certain activities both on- and off-campus, with operational and strategic benefits for the institution. It can be a way of externalising operating risks, of reducing costs, of accessing capital investment or it can simply be a way of focusing minds on what universities do best.

But how many institutions feature the commercial risks associated with managing outsourcing relationships – or other major procurement activity – on their corporate risk registers? Do boards of governors or audit committees test their managers’ mitigation from the risk of failure of critical commercial relationships like these? And just who is charged with managing these critical relationships?

Contract management – and its trendier cousin supplier relationship management – are social sciences. Although there are many software packages on the market, research has shown that it is overwhelmingly human contact that will make or break a successful outsourcing. Trust is the key – if you and your contractor know each other and can understand each other’s needs and goals, then the relationship has a far greater chance of making it to term.

So here are the Top 10 Tips for Managing Successful Outsourcing:

10. Consider continuity of personnel

Most important relationships are personal, not organisational. Trust, openness and honesty require longevity. But we should remember the skills needed to manage the contract may be different from those of the negotiators who did the deal. Many contractors have a bid team whose job it is to win business, who are then replaced by an operational team once the contract starts. And sometimes the ops team can’t believe what the bid team has promised!

9. Build good structures for liaising with your contractor

Seek the right mix of formal and informal structures. By using them appropriately, you’ll resolve problems swiftly and strengthen your relationship. Consider establishing a Partnership Board so that senior managers can lead by example and make joint decisions.

8. Consider co-locating with your contractor

Working in the same place allows personal relationships to be established. Co-location supports better communication and allows messages to be given and received on an informal basis. You’ll be more inclined to discuss issues face-to-face and resolve problems together.

7. Record all the benefits as they are delivered

Benefits management ensures success in the eyes of both parties and stakeholders. Prepare a benefits realisation plan showing how and when they will be achieved and who will deliver them. Then monitor benefits against expectations, tracking both ‘hard’ and ‘soft’ benefits, and report them regularly to stakeholders. There’s nothing worse than stakeholders forgetting why they outsourced a service in the first place.

6. Control all changes to the contract

Every contract needs a clear and agreed change control process. You’ll need to understand the whole-life cost of every change. And obviously, all changes must be fully recorded and agreed. It’s tempting to rely on trust alone. Don’t.

5. Put the right people in place to manage your contract

Good contract and relationship management requires skilled resources. Well-managed contracts have people dedicated to the task. Their duties may be financial, technical, risk, performance and relationship management. For critical services, it is definitely not a junior management activity. If it has to be left to the manager who used to run the in-house service, s/he’ll probably need some decent training.

4. Incentivise your contractor to perform

All well-managed contracts establish clear performance standards. Many link payment to performance. If you do, manage it properly. Decide whether to apply performance deductions automatically or with discretion. Ensure that good service is the priority, not collecting service credits or fines.

3. Create the environment for good communication

This is often the make-or-break in a relationship. It enables problems to be resolved early. Support an atmosphere of mutual trust. Get together regularly, and in person. Decide who will communicate with whom and review at intervals throughout the contract.

2. Recognise that culture, attitude and behaviour are as important as the terms of the contract

There are always some tensions between different perspectives of customer and contractor. You are there to keep costs down. Your contractor is there to make money. But firms can’t achieve business growth without happy customers. Show your interest in your contractor’s aspirations, and they will in yours. Find common ground and build on it. Above all, remember that the experience of working together to solve problems builds trust, the essential ingredient for long-term success.

And at number one…

1. Manage the relationship, not just the formal aspects of the contract

It’s in both your interests to make your relationship work. A well-drafted contract provides a legal ‘safety net’, but well-thumbed copies can be a sure sign of problems. But good, mature relationships don’t come overnight – don’t expect trust from day one. As commercial professionals, we must learn to manage relationships effectively if service excellence and value for money are to be assured for our institutions.

The original version of this post appeared on Andy Davies’ blog. It is based on a short talk he gave to the HE and FE Show.