Growing consulting firms often reach a predictable crossroads: As a consultancy grows, they often find that some functions such as benefits administration, accounting, and human resources management take time and effort that would be better spent on strategic planning or generating more billable hours.

If you’ve reached this stage, outsourcing your noncore business functions is one option. If you decide on outsourcing, you should be aware of the complexities: Outsourcing business functions requires keen negotiation skills, relationship management expertise, and the flexibility and insight to know when to alter your outsourcing relationship.

In this article, we’ll cover tips on how to decide what to outsource, how to choose a vendor, and how to maintain a productive outsourcing arrangement that nurtures the relationship between your organization and the outside vendor.

Core competencies vs. business functions
As a first step, you should identify your company’s core competencies and the business functions an outsourcing company is better equipped to handle, according to Lorrie Scardino, a Gartner analyst.

“Keep those functions that are part of who you are and what you are in the marketplace in-house,” Scardino said. For example, marketing may be a core competency at your firm, but you may wish to outsource supporting activities such as public relations or market research.

For example, Getronics, an IT consulting firm with offices in Amsterdam and Billerica, MA, hired an outside company, Fidelity, to administer employees’ 401K plans.

 “We couldn’t provide this service internally at the quality level that Fidelity offers,” said Wayne Ogg, Getronics’s vice president of human resources.

Fidelity’s outsourcing service educated employees on the 401K plan and increased participation. Fidelity also surveyed nonparticipants and customized communication for those employees, Ogg said.

“I never would have had the resources to do this kind of targeted education and enrollment in the course of a year,” he said.

Getronics also outsourced the administration of their health and wellness plans to Synhrgy. Because they offer an array of benefit plans, Getronics used to overwhelm employees with paper directories for four different health plans, according to Ogg.

Synhrgy, on the other hand, offers online enrollment, a service center for employees’ questions, and tools like a healthcare cost estimator that helps employees pick the plans best suited for their medical needs and financial circumstances.

The outsourcing arrangement saves Getronics the cost of providing training and educating employees about the various health plans. Synhrgy also keeps up with current legislation regarding health plans and manages online enrollment and claims procedures.

“While there is a hard cost of outsourcing, we believe there will be a tremendous payback because the company doesn’t have to make huge investments in tools and training,” Ogg said.

According to Gartner’s Scardino, a company’s key business drivers will also dictate the selection of an outsourcing partner.

“If one of your key business drivers is the need to respond quickly to the changes in market conditions, then you’ll require a service provider who will work with a flexible contract, who has a proven record, and who will change the contract as business requirements change,” Scardino said.

Finding the right outsourcing partner
After you have identified the business functions you want to outsource, the next step is funding the right vendor. How do you narrow your search to find a reputable vendor that fits your needs?

Scardino offers the following suggestions:

  • Submit a request for information asking for details on their services, how they operate, and how they deliver their services.
  • Issue a formal request for proposal (RFP) seeking bids.

You should be wary of the customer endorsements supplied by the vendor. Instead, complete your own comprehensive reference check by asking an outsourcer’s customers the following questions:

  • How has the vendor performed on projects of similar size and scope?
  • What business drivers led to their decision to outsource? Why did they decide to use a particular provider?
  • Were business, technical, or financial representatives on the vendor-selection team?
  • How many companies made their “short list,” and how did they narrow the selection to one vendor?
  • Has the vendor satisfied the company’s business requirements? How accessible are the key people?
  • What are the staffing levels, and how well are they trained?
  • What about contract administration issues? How understandable are the invoices? How quickly does the vendor accept changes to the contract? (e.g. system upgrades, significant changes in the number of users)
  • What’s the vendor’s tolerance for innovation? Do they offer new applications and invest in their tools and technology in order to offer their clients better service?

Negotiating a contract
After you’ve selected your vendor, any outsourcing agreement will have to be solidified with a contract. Start by taking bids from the most viable vendors.

Getronics’s contracts with Synhrgy and Fidelity, for example, include language about length of service, response time, and access to the vendor. They also specified reimbursement of additional expenses, dispute resolution, and reporting requirements.

Scardino said many companies begin negotiations using a vendor-supplied contract rather than developing a contract based on their own unique requirements. Getronics drew on their expertise in negotiation and applied some of the same contractual terms they use with their clients to the contracts they set up with their vendors.

For example, outsourcing companies typically charge per seat in a help desk arrangement. Getronics negotiated a service level agreement (SLA) that included performance penalties: If the SLAs are missed three consecutive months, a percentage of the invoice amount is refunded to Getronics.

“This gets me as the client out of managing the number of people or tools used and puts that responsibility with our outsourcing partner, where it should be,” Ogg said.

Getronics contract also specifies that it owns all the data generated by outsourcing companies. And Getronics personnel have Web-based access to Getronics’s account and all of their data. This part of the agreement prohibits outsourcers from using the data in market comparisons for other clients.

“If we were to change vendors, they must return the data to us along with any files and reports,” Ogg said.

The company’s contracts with both Fidelity and Synhrgy discuss altering the scope of the work completed based on significant increases or decreases—20 percent or more—in the number of employees. The acquisition or sale of a segment of the business will trigger an automatic review of the contract.

Managing the relationship
Finally after you’ve chosen a vendor and signed a contract, you’ll want to make sure you maintain a healthy relationship with your outsourcing partner. In Ogg’s case that means having staffers whose main duties are dealing with the outsourcer. He offered the following common-sense suggestions for nurturing the relationship:

  • Approach the outsourcing relationship as a partnership.
  • Put everything in writing.
  • Insist only on the things that you must have.
  • Remember, you are dealing with a vendor, not a slave.
  • Help the vendor learn about your business so they can understand your position on issues.
  • Along the same lines, Scardino also stressed keeping current with the management and direction of the outsourcer. She offered the following tips for keeping the relationship running smoothly:
  • Make sure you have the staff to manage the relationship. Have someone who can serve as a conduit between business or end users and the vendor.
  • Make sure your contact person on staff understands the evolving business climate and the needs of the end users rather than focusing solely on contract administration issues.
  • Manage expectations. At the beginning of a contract, meet formally once a month to review problems, discuss performance, and explore expectations.
  • As the relationship progresses, schedule quarterly performance reviews to discuss performance, changes in the business climate, any innovations to services, and the potential costs of those innovations.

What’s your strategy?

How do you keep things running smoothly between your business and outsourcers? Are there agreements you have in writing or other steps you took that weren’t covered in this article? Share them with us by posting a comment or sending us an e-mail.