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Users: Examine These Outsourcing Concerns

By Clifford F. Lynch

Transportation & Distribution Magazine, November 1997

Outsourcing has grown dramatically in the past five years. There are hundreds of firms who profess to be logistics service providers, and some very exciting arrangements have been made.

The firms seem to multiply daily as do the outsourcing agreements. But from a user or client perspective, the rapid growth and increase in the number of providers marketing their services is of some concern. The industry might be entering a period of significant growing pains. There have been some striking successes and some striking failures in outsourcing. The failures, of course, are the ones heard about most, and the ones that give rise to concerns about the providers.

Experience and credibility are one of those concerns. How does a client know which firm to select or even with whom to have preliminary discussions? A number of firms are selling total logistics packages, yet have basic core competencies of freight bill payment, equipment leasing, trucking and other individual skills. This is not necessarily bad, but too many providers are taking the stance of marketing everything, then finding a firm to subcontract those services they don't provide and may not understand.

Another major concern is financial stability. Many of today's contracts are quite large, and many providers simply don't have sufficient financial resources. Some user companies have placed minimum limits on financial assets. Others have awarded contracts only if the total value is below a certain percentage of the provider's total revenue. Again, with the influx of new firms into the industry and the financial performance others, it's become difficult to identify qualified and stable providers.

Lack of strategic direction is a critical concern. More often than not, logistics strategy is discussed as it relates to user firms. Providers often suggest their prospective clients have no real strategy. But do they themselves have one? It's probably more important that providers have a strategic direction than it is for their clients. Do they have a market niche or do they try to be all things to all people? Prospective clients want providers to have well-grounded knowledge of their particular industry and a strategy for maintaining and expanding on it. They must have commitment and direction.

Management depth is another major concern in selecting a provider. Finding qualified managers is difficult at best. Even when good managers are found, many provider companies simply can't afford to have the bench strength some of their clients require. Providers should try to introduce the potential client and the manager with whom (s)he will work. If that's not possible, the provider should be honest about it. They should indicate that, if awarded the business, a qualified candidate will be found and the client can participate in his/her selection. Don't dress up the firm's best manager and trot him/her out in front of every prospect. And don't have the provider CEO tell the client (s)he will be personally responsible for their account. Nobody believes that.

Finally, there is the controversy of asset-based versus non-asset-based providers. Most prospective clients are concerned about providers who don't have a fairly large stake in the game. Providers that broker other firms' services are just that, which is acceptable as long as they don't represent themselves to be anything else. However, to be a credible provider, there must be a strong ownership of the process.

Outsourcing is fashionable today. Often, it is forced on logistics managers by senior executives. In these instances, the concept may be misunderstood and clouded with unrealistic expectations.

I believe the biggest cause of failure in third-party relationships is the client trying to define requirements (s)he doesn't really understand, and the provider promising to meet them. Expectations and promises become unrealistic. Some user firms simply lack accurate or detailed knowledge of their own logistics activity.

On the provider side, the cost of providing the service often is underestimated - especially in the information technology area. By the time the provider gains broader knowledge and experience with the account, (s)he discovers (s)he has made a decision that is impossible to live with. Make sure you structure a relationship for the long term.

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