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A Template for Managing External Suppliers

Q:	How can I effectively outsource learning development and delivery?
A:	Follow a flexible, repeatable process for managing vendors.

In many training organizations the staff is lean and resources are limited; most are dedicated to administration of the learning events. Like many consultants, you may find yourself in a situation where you have to contract out your development and delivery work. Managing a project that will be delivered through an external vendor carries its own unique challenges, so it must still be managed carefully. Some people make the mistake of believing that once you contract out work, you never have to think about it again. In the best case, outsourcing means that 60 percent of the work will be done externally, but 40 percent of the work is so dependent on the expertise within the company that it can never be done outside. Outsourcing requires internal resource time and coordination but, if done correctly, not as much time as doing the entire project internally.

This chapter offers tips for managing external vendors, whether for a large learning event development project or simply the presentation of one workshop. You will learn about the following elements of dealing with contractors: the secret to success, requests for proposal, contractor law, confidentiality and security, communication standards, change management, knowledge transfer, and shared risk.

The Secret to Success

“He no longer trusts you because you insist on telling him the truth about his project.” You may overhear this strange statement from an internal person to the supplier of outsourced work. As the quotation illustrates, the secret to success with managing external suppliers is not about a detailed, unbreakable contract. Rather, it is about the quality of communication. People make an outsourcing relationship work through frequent, clear communication that is filled with integrity. The core capacity that drives the effectiveness of communication is trust. Figure 8-1 shows a model that explains this dynamic using the causal loop diagram (a technique used to document systems thinking) that you saw in chapter 6.

As a supplier’s trust in the internal contact increases, he is more open and honest in communicating with the internal contact because fear of retribution is diminished. As communication between the supplier and the internal contact becomes more open and honest, performance increases. The supplier and internal contact thus are able to move forward with a shared vision toward the goals of the business. In addition, they do not have to spend quite so much time covering their tracks or protecting their backs. Efforts then are expended more effectively toward the goals of the project.

Figure 8-1. Ideal Communication Dynamic With Outside Suppliers

This type of loop is called a reinforcing loop, which means that the situation reinforces itself. You are probably familiar with the expression “we seem to be in a negative reinforcing loop.” When reinforcing loops are working well, the situation—in this case, project work—just gets better and better; but when trouble hits, things get worse and worse.

The danger of reinforcing loops is that if any one variable starts to degrade, the rest will follow suit. For example, let’s suppose that one day there is a project glitch—perhaps the supplier misses a key milestone or the quality of the performance is not acceptable. As performance decreases, the internal contact’s trust in the supplier goes the same way—it also decreases. As trust in the supplier decreases, open and honest communication starts to degrade, which in turn degrades the supplier’s trust in the internal contact. Now the relationship is spiraling downward.

Hope is not lost. Although reinforcing loops are susceptible to a decrease in any one variable, they can be improved by increasing any one variable. In this case, the best intervention is to model open and honest communication at all times, regardless of the level of trust. This openness will eventually create trust if you hang in there long enough. Of course, the assumption here is that you only work with honest suppliers. Clearly, you can’t make yourself trust someone, but you can behave as though you do. The next section looks at the relationship between contracts and trust.

Requests for Proposal

When training departments decide that they are going to outsource some or all of their services, the first step is usually to create a request for proposal (RFP). The RFP provides the suppliers interested in the business with a list of the requirements for the project and may provide the evaluation criteria that will be used to compare supplier proposals. Suppliers then prepare proposals to sell their services. This can be a tedious and time-consuming undertaking, but it can help ensure that the best match is found.

Two types of RFPs create a trust problem right from the start: detailed and vague (see Figure 8-2). Before the supplier is even chosen, the RFP can set up a negative reinforcing loop.

Figure 8-2. Diagram Illustrating Three Types of Requests for Proposal (RFPs)

The detailed RFP (often called a request for bid) contains every scrap of information that will be needed. Every detail of every task is specified, and measurements are defined. In a sense, the detailed RFP contains the project definition, the project schedule, and the project review criteria. In some cases, the detailed RFP may also attempt to quantify the manage phase. The belief behind this type of RFP is that it protects the business from being “ripped off.” Clearly, such RFPs are written on the basis of a lack of trust right from the start.

The lack of trust flows through to the response from the supplier, whose proposal will contain massive generalities that are wordsmithed to look like detail. Quantity will replace quality in the hope that the poundage of the proposal will serve as proof of its merit. Savvy, unethical suppliers know how to leave loopholes in this type of proposal so that the customer will not be able to catch them padding the hours or dollars. The bigger the proposal, the less likely it will be read carefully. Again, the lack of trust becomes contagious; across an industry, this behavior can become status quo.

It is irrational to believe that anyone can anticipate every need of a project or program before it begins. Trying to be exact about every aspect of the outsourcing ensures that some part of the proposal will be wrong. The only outcome possible when mistakes become evident is renegotiation of the contract (expensive), acceptance of the wrong service (expensive), or screaming and shouting at each other (expensive).

The other type of RFP that creates problems is the vague RFP. These are written by organizations that believe that outsourcing means that 100 percent of the project will be done by the supplier, including the RFP, with little or no help from inside resources.

In a vague RFP, the specifications are broad. They are often built quickly and with little thought. In a sense, the proposal must be created without a project definition—a situation which, as you now know, guarantees problems. Business and project objectives are not quantified, and measurements are nonexistent. These RFPs are generally used either to award contracts to suppliers who are picked before the RFP goes out or to outsource work that no purchaser really wants.

The implication of this type of RFP is that the supplier is trusted. Indeed, trust may exist at the beginning, but the lack of communication and the lack of a clear project definition ensures that performance will soon suffer. At that point, trust will degrade quickly, killing any initial benefit that came from early trust. Both parties will fall away from each other, pointing fingers.

The best approach is to strike a balance between detail and vagueness. The RFP you issue should clearly specify all the information needed for the define phase:

• project scope

• initial business and project objectives

• risk

• constraints

• governance plan

• communication plan.

The RFP also should specify a single internal contact for the suppliers to talk with as they develop their proposal. One of the most bizarre practices of outsourcing is that many companies limit or refuse communication with the suppliers while the proposals are being written. This may seem fair to all suppliers, but in fact, it just creates more distance between the suppliers and the customers, which carries over into the project work.

The chosen supplier, then, is responsible for the plan phase and will create a schedule with milestones for evaluation by the purchaser. A communication plan will ensure that as the project schedule changes, both supplier and customer are equally aware of the changes and maintain a good level of trust. The supplier also owns the manage phase; however, issues and surprises are dealt with through open communication between all parties. Both parties will work on the review phase together.

Clearly, outsourcing requires an ongoing, strong relationship based on trust. It is important to remember that both an internal person and the supplier must allocate time to maintaining the relationship.

Contractor Law

Some tax issues exist when outsourcing work. The IRS criteria for determining whether someone should be treated as an external contractor or as an employee has been applied inconsistently. You may be found liable for back taxes and penalties as a company if you treat an external contractor as an employee. Here’s an excerpt from the IRS website on some criteria to determine whether a person should be treated as an external contractor or an employee:

Check with the IRS for the most up-to-date requirements because the law is often interpreted differently in court case precedents as time progresses. Another good source is the U.S. Department of Labor, particularly the Office of Federal Contract Compliance Programs (www.dol.gov/ofccp).

This area of the law changes frequently and is difficult for a training person to monitor. Make sure that you involve your legal department with any contracting that you do, and proactively set up some time once a year to have a legal department or adviser evaluate your outsourcing plans. If a contractor is determined to legally be acting as an employee, the company will be assessed back Federal Insurance Contributions Act payments and fined. This can be extremely expensive and disruptive to a company.

Confidentiality and Security

Many companies require confidentiality agreements before they grant suppliers access to proprietary company information. The security of digital assets has also become a complicated part of a relationship with outside contractors. Although you may be hiring someone to teach a workshop on something nonproprietary, the instructor may be in contact with people who are working on sensitive projects. Intellectual property is very important to most companies, and much of it can be used in training workshops, so safeguarding it is of utmost importance.

In addition, be careful about what information you release in an RFP or in the discussion of an RFP with a prospective supplier. Although there is an element of lack of trust to this thought, it is vital to keep company information, rate information, and competitor information out of your discussions. Make sure that the people who will answer questions concerning the supplier contracts have been coached by your legal advisers on what can and cannot be said. Consider these seemingly innocuous questions that generally should not be answered:

• “Who else was sent a request for bid?” (Telling suppliers about their competitors can encourage them to practice a little corporate espionage, which is unethical, and can unfairly penalize anyone who did not ask.)

• “What price are you willing to pay?” (Starting with price, unless it is a constraint, will limit the creativity of the proposals and, again, may give the person who asked an unfair advantage.)

• “How far off were we compared with the person who got the contract?” (Although this question can be asked to get a better understanding of the market dynamics, it can set off lawsuits by suppliers who feel they have been eliminated unfairly.)

• “Who will make the final buy decision?” (Unless you plan to let the supplier talk with this person, don’t tell. Fairness dictates that all suppliers speak to the same internal contact people.)

Communication Standards

The stakeholder communication plan is even more essential when work has been outsourced. If you are outsourcing components of the project, you should expand this plan to include communication with the supplier. Figure 8-3 depicts a scope diagram for a project designed to create a training registration system. You can use a scope diagram from the define phase to document which pieces will be done internally and which will be done externally as a building block to the communication plan.

For each major deliverable, there needs to be one supplier “owner” and one internal “owner”—that is, a single point of contact with the responsibility and authority for the decisions that need to be made. As Figure 8-4 shows, each owner can have more than one deliverable; if possible, having one “overall owner” for the supplier and internal organization is useful as well.

Figure 8-3. Scope Diagram

Figure 8-4. Sample List of Deliverables Detailing Who Is Responsible for Each Item

Figure 8-5 depicts a relationship model that was popular during reengineering work in the mid-1980s. This type of model is a nice way to graphically display the internal and external roles on the project and how they will interact with one another; it also can clearly show whether a block or constraint exists in which one person is doing too much and everyone else is waiting on that person. In Figure 8-5, Supplier A interacts with many others and could become a roadblock.

Figure 8-5. How Internal and External Roles Will Interact With One Another

Before working with outside suppliers, sharpen your negotiating techniques. A good approach begins with the belief that the focus should be on the issue at hand and not the relationship. Do not confuse the two, and do not forget the importance of behaving with trust. The intent is to come up with a win-win solution. William Ury, in Getting Past No: Negotiating Your Way from Confrontation to Cooperation (1991), shares the following five useful steps of negotiating:

1.   Start with the outcome in mind. If negotiations fail, what will you do to satisfy your interests without agreement? What are your interests, their interests, and independent measuring standards? What’s the least you’ll take not to walk away? What is your best alternative to a negotiated agreement? What is their best alternative?

2.   Go to the balcony. Imagine seeing the negotiation from above. When someone negotiates with you using tricks like false data, refusal to take ownership, stonewalling, attacks, or add-ons to muddy the water, remove yourself personally from the emotions. Don’t get mad or get even. Know your hot buttons, and use silence to buy time, pause, rewind, and rephrase to mirror what you’ve heard.

3.   Step to their side. Take their position by listening, acknowledging, agreeing (where you can), and showing respect. Do the unpredictable by accumulating “yeses”—“I can see why you feel that way” or “Yes, you make a good point.”

4.   Reframe. Move from concrete positions to more intangible issues.
Accept their position, then redirect by saying “Tell me more” or “Help me understand what has put you in this stressful situation?” Brainstorm win-win solutions together.

5.   Build a bridge. Use their values and interests to build the solution together and then create a way for the “opponent” to save face and have victory. As Sun Tzu said, “Build your opponent a golden bridge to retreat across.”

Change Management

“I like long walks, especially when they are taken by people who annoy me.” This quote, attributed to Noël Coward, nicely describes how many internal managers feel about their suppliers as projects hit inevitable snags. It is easiest in the short term to avoid conflict and change issues by hiding; however, it is the most damaging thing you can do in the long term.

In chapter 5, you learned about the need for a simple, agreed-upon process for managing change, because change can have a damaging effect on the progress of a project team. Adding a supplier to the mix magnifies most peoples’ discomfort, which comes from the following elements:

• Self-interest: The stakeholders feel they will lose something of value because the vendors will dominate the conversation.

• Misunderstanding or lack of trust: The stakeholders expect the worst.

• Different assessments: Different stakeholders have different cost/benefit perceptions.

• Low tolerance for change: Stakeholders fear they will not be able to change quickly enough.

Different change strategies will be useful for different types of needs. Table 8-1 lists the advantages and disadvantages of different types of change initiatives. Planning for transition is usually part of the work that must be done internally—it is not a good place for outsourcing. A clear connection to a person in the organization is essential for change initiatives to take place and succeed at an individual level. Managing Transitions: Making the Most of Change by William Bridges has more thoughts about managing change and transition.

Table 8-1. Advantages and Disadvantages of Different Types of Change Initiatives

Knowledge Transfer

Be sure time is budgeted for the supplier and customer to share knowledge through the post project review. Many contracts are set up to reward (through payment) only completed deliverables (for example, the delivery of a workshop) and do not include criteria for knowledge transfer to the internal staff. Time must be built into the contract and the project schedule to determine the knowledge that must be transferred to internal staff, the way it will be transferred, and how the transfer will be measured for the accountability of both parties. As a vendor works on a project with your team, he becomes very knowledgeable. Without intentional time to document that learning, a great amount of valuable business knowledge walks out the door at the end of outsourced projects.

Shared Risk

Consider being specific up front about how the internal and external partners will share the risk of the outsourced project. In their book The Discipline of Market Leaders, Michael Treacy and Fred Wiersema introduce the term customer intimacy. Because outsourcing in the training field is almost always for the delivery of a service, it often makes sense to build a customer-intimate relationship, meaning that both the provider and the purchaser of services equally share the cost of failure and the benefits of success. Consider what will happen in the following situations:

• The project deliverables are late. (Options: sliding pay scale, fines, penalties.)

• The project deliverables are not high enough quality. (Options: predetermined quality measurements, escalation procedures.)

• The project deliverables are over-budget or too expensive. (Options: development of renegotiation guidelines at the start, padding.)

Summary

In this chapter, you read about how to manage outsourcing training services. You learned the importance of trust, contracting, contractor law, clear and effective communication, and change management. To summarize, here are some pointers:

• Appoint an internal project leader with accountability for both internal and external personnel.

• Explain to your staff why and how the consultant or supplier will be used.

• Balance flexibility of requirements with the need for control.

• Put your expectations in writing, including milestones. Hold regular performance reviews (before there is trouble).

• Measure project objectives consistently and choose measurements carefully.

• Check references of all workers carefully. Years of service do not guarantee they have the skills you need.

• Design a shared reward for both internal and external team members.

• Build contingency plans for all work.

• Don’t let suppliers staff up too soon—if too many staff are around during the analysis phase, people will build before they analyze.

• Act as though you trust each other.

As in previous chapters, you now have the opportunity to apply what you have read to your own work.

Practical Exercises

Now practice creating an outsourcing plan. Again, think about your own project and consider some aspect that could be outsourced. Go back and review the documents you created during the define and plan phases, and determine what the ramifications would be to these documents. How would they change?