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Use Scenarios to Retest the Need for Outsourcing Before Signing a Contract

Feb 25, 2008
Let's assume that you've moved past silly rules and individuals pursuing "I'll scratch your back, if you'll scratch mine" at the company's expense. There's a seemingly legitimate outsourcing offer on the table. You've investigated all of the reasonable bidders and looked carefully at what you are doing now.

Outsourcing seems like the way to go. But you know a lot of people have been burned in the past. How can you test your thinking before you sign on the dotted line?

Many organizations have found that scenarios are helpful that consider the extreme possibilities of what could go wrong. The wisdom of this approach was validated a few years ago when an earthquake damaged many electronic manufacturing facilities in Taiwan.

If you had outsourced all of your production to firms on that island, you could have been left very short of finished inventory. A scenario built around the possibilities of natural disasters would have counseled in favor of selecting at least two geographically dispersed outsourcing providers who could handle all of your needs in a pinch.

Any scarcity that can affect performance should be investigated and considered. For instance, is the supplier dependent on the availability of one or two key people? What could happen if those people were injured or left the company?

Technology substitutes should be carefully evaluated. Many outsourcing contract offers suddenly become very competitively priced when the old technology is about to become obsolete. It's a chance for the outsourcing firm to dump equipment, products, or services with little or no value onto a customer.

Within two years of the switch from analog to digital copiers, for instance, the pricing was very aggressive among those offering ways to outsource print shop and copying activities. Otherwise, a lot of analog machines would not have been placed.

The clients, of course, ended up paying more in total despite the lower prices per unit. Why? The digital copiers could eliminate some of the need for paper copies through electronic access and distribution.

Examine the penalty clauses through scenarios as well. Many outsourcers depend on their customers making lots of mistakes to turn a money-losing contract into a gold mine.

Printing is a typical problem area for this practice. Most organizations will rely on a printer to take care of most publications, forms, and routine documents. To protect themselves against high prices, the customers usually put the jobs out to bid.

Customers receive a fixed price before various "discretionary" items such as authors' alterations and overtime. If you switch printers, you can be sure that there will be more mistakes than usual in getting the work done properly and on time from our organization's staff.

Why? Your organization has to become used to a new process. Those errors and delays will probably, however, end up on your bill as "discretionary" charges.

Role-playing exercises involving scenarios can be a quick and easy way to spot such vulnerabilities. Have people in your company who are good at persuading your customers to spend more play the role of the new outsourcing provider. Let your team that will work with the outsourcer play themselves.

Encourage the outsourcing role players to find ways to increase their profits by suggesting things that your team will be eager to do. Here's an example of what you may find: If the outsourcer makes packages, you'll be astonished by how many new packages are being developed and used.

Why? There are usually all kinds of custom charges that can be added that aren't affected by the agreed-upon quantity discounts for mass-produced items. After you've run the role-playing exercise, have those playing the outsourcers explain their strategies and ask your financial staff to calculate what those strategies would have cost your company.

Another sort of scenario-based role playing can be helpful as well. Put yourself in the role of key stakeholders who could be harmed by the outsourcing.

Experience how it feels to receive bad treatment and find out that an outsourced supplier was part of the problem. In many cases, you will feel let down twice: Once because you had a bad experience and twice because the organization felt like it made more sense to cut costs in this area than to meet your needs as well as possible. Many firms that outsource answering customer service calls probably wouldn't do so if they had gone through this exercise first.
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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