Is Active or Passive Management Best for your Outsourcing Relationship?
Byon July 31, 2018
Academic analysis of the outsourcing sector would likely compartmentalise partnership relationship management into two clear camps – active and passive. In the active outsourcing relationship management camp, clients take an overarching governance role that some might say risks stifling vendor creativity and expertise; in the passive outsourcing relationship management camp, others could suggest, the client leaves themselves open to a litany of potential unscrupulous activities they are ill-prepared to cope with.
So, can either of these ‘textbook’ management styles be right for your outsourced relationship or are they both possibly too polarised for the real world of outsourcing, requiring us to consider a third option, a balanced middle-ground approach? Could the question of active or passive management alone be fundamentally flawed?
Weaknesses of a purely active management stance
Active management will seem to many to be the safest of options. You select a vendor for your project, then manage the process as closely as you like. You expect them to report to you on a regular basis, pass all major decisions by you, and for them to stick to the parameters of the agreement you set out at the inception of your relationship. This way you are in control, all productivity drop-offs will be recognised and dealt with swiftly, all issues noticed early, and all opportunities for abuse of trust stamped out.
However, in such a prescriptive relationship, innovation can be dissuaded as a deviation from agreed expectations. Furthermore, expertise that could suggest alternative solutions, added value, or vital ‘sense checking’ of strategies and processes could be held back because the vendor does not have a strong enough position at the decision-making table. Choking the very expertise that you chose your vendor for, supressing the innovation that their creative minds could reveal, or silencing best practices that have been learned on many similar projects – hard-won valuable experience – is inadvisable.
While ‘control’ may be enhanced, the time and resources spent on management will be higher than with passive management, trust can be eroded, and opportunities may be missed to achieve better outcomes, or even just the outcomes defined at the outset themselves.
Weaknesses of a purely passive management stance
Passive management is all about emboldening your vendor to best exploit their expertise, leveraging every ounce of experience they possess to achieve the best for your project.
Many clients are only too glad to pass all responsibility to a vendor, to rely on them to do the best for the relationship. After all, they have done this dozens of times before, so they’re sure to be able to handle it. And many vendors prefer this form of management as it minimises client ‘interference’.
However, while most vendors are honest and hardworking professionals, to simply hand over complete control and responsibility means three very clear risks will be at play: 1) with no, or too little, in-house expertise, clients have insufficient independent knowledge or understanding of the project and its progress, leaving them totally reliant on the vendor, 2) ‘lessor governance’ means more room for unscrupulous behaviour to flourish and go unchecked, and 3) while you are showing trust, you have little opportunity to control or guide behaviours with rewards and penalties.
With such hands-off management the vendor has only the contract, drawn up at the outset, to refer to when deciding on direction and objectives. Unfortunately, the realities of the relationship and the needs of the project often deviate from those estimated at the outset of a project and which were placed within a legal agreement. This increases the risk of contractually agreed expectations falling out of step with the needs of the end user, and the vendor’s charges falling out of step with changes in the market.
Three benefits of a sensibly weighted third option
The above descriptions of active and passive management are of course polarised perspectives, but there is no rule that says you must use one or other exclusively. They both have weaknesses, risks, and costs that make them imperfect. But the right blend of management styles, weighted to consider the current needs and demands of your relationship with your outsourcing partner, could well be a better solution for all.
The reality of outsourcing relationships and the projects they facilitate is that they are not conducted in a vacuum. Change is inevitable, whether it is in the technology being used or developed, the management or ownership of either party, the personnel working on the project, or the needs and wants of the end user. Even the outcomes painstakingly established at the outset, the contracts laboured over by legal teams and the processes and KPIs that will lead the way, may require adaptation along the way. Whatever resources you put into establishing what you need and how you will get there, at the beginning of your relationship you are often just ‘best-guessing’ and the further into the project you trek the clearer your path will be. You should give yourself every opportunity to adapt to this reality.
So here are the benefits of a well-balanced blend of passive and active management styles, your third option:
1. Validation, professional responsibility and expert knowledge
To get the most from your expert outsourcing partner you need to have the right balance of freedom and control. Vendors must be given the space to determine for themselves, from their years of experience, the best way to achieve your goals – the outcomes you have fastidiously researched and calculated then clearly communicated you wish to achieve. However, in-house expertise should be maintained at some level to ensure that you have the capacity to oversee the project from afar (how ‘afar’ should be determined by the state of the project and relationship). Be prepared for this balance to shift as the relationship changes and the project advances, but developing a collaborative and close working relationship with your vendors will allow for such flexibility to exist between you.
Asking your vendor to sense check your plans and leaving them to formulate the best strategies for achieving them places responsibility for best advice on their shoulders. Vendors have a duty of care to accurately and honestly advise on their own capacity, capabilities and shortfalls and whether your outcome expectations are realistic or not. This offers a client some legal protection should things not go according to plan, but it also implies trust in your vendor’s decisions which may encourage more value-adding behaviours and innovative strategies.
2. Good governance means a stronger relationship
Within most outsourcing relationships it is important for clients to take some responsibility for overarching governance, to fully understand the trajectory of the project. While the right blend of benevolence and control in the form of rewards and penalties used in the correct manner can create an environment for getting the most from your partners, how this is employed can be a delicate affair.
For this blend of hands-off management and knowing when to intervene to work you need to have a team of talented individuals in your corner, staff with the right technical and operational expertise to know when things are running smoothly and when problems are on the horizon. A team that has the social experience to work collaboratively with your partners without encroaching on their space or impeding on their creativity, but who can be your first line of defence against issues that arise. This is your Intelligent Client Function (ICF) team. Make good use of them from inception to completion of your project, as the steadfast advisory resource, knowledge base, and direct connection with your vendors, they are designed to be.
3. Don’t break, become flexible
Contracts, processes and service level agreements are created at the outset of a relationship – the point at which the parties know least about one another and the stresses and strains of the project ahead of them. As they move forward they get to understand one another’s strengths and weaknesses, to recognise the complexities of specific areas of the project, and all the while the world moves on, tastes change, technology advances, competitors expand. As the potential for agreements formulated at the start of a project to fall out of step with the needs of its stakeholders grows with time and progress, so does the need for flexibility.
Ensure that your contracts require all parties to meet at least biannually to determine whether they and the processes, KPIs and service levels they govern and work alongside are running at optimum levels. If any improvements can be made, new agreements can and should supersede old ones.
Flexibility also applies to your ICF team as well. Resources are always in short supply and sometimes quality must win over quantity. At the procurement stage of a project you may require more legal minds in your ICF team, whereas later on it may be the relationship management side that needs boosting. Ensure that your ICF team contains the right mix of skills and talents not only for your project, but also for the point in time you find yourself within your project.
Active and passive management theory can still be applied on any project, but it’s the weighting that you give each that will determine the correct blend of management for your outsourcing relationship.
For the majority of projects it is your flexibility to adapt that is more important than management style perfection locked in at the outset. Flexibility to adapt your working relationship with your vendor, your contractual agreements and your governance to suit the needs of your relationship, end users, stakeholders and environment.
This will often require more resources but the result could well pay dividends in the end in the form of more stable partnerships and greater vendor innovation, which may lead to enhanced outcomes.