A simpler way to manage finances when outsourcing

How do you approach managing the finances of an outsourcing transaction?

The approaches I've seen span all the way from the simple "this is my budget, the supplier's fees will have to be within that, regardless of the contract", through to robust management of demand and capacity to support financial management. If you want some interesting reading on the differences between demand management and capacity management, have a look at the ITIL V3 definitions.

Yet, in many ways we can make things much simpler with a focus on two key drivers of cost--the fee per unit of resource and the number of units of resource. Yet, how often do we find IT executives or HR executives or finance executives who know intuitively what these figures are or should be for their area? Imagine trying to run a telco without understanding ARPU (average revenue per user) or an airline without understanding ASK (and I could go on and on for each industry).

Of course, there will be different business models with different target unit costs but that is not an excuse for not knowing and managing at the proper level. For unit costs, understanding:

• 1. what they are today;
  
• 2. how they will change over time;
  
• 3. how they change with changes in volume;
  
• 4. how they compare with others' unit costs; and
  
• 5. what you can do to influence them,

and for volume, understanding:

• A. what it is today;
  
• B. how it is likely to change in the future; and
  
• C. how you can manage both demand and capacity,

gives one greater opportunities to influence and manage the associated financials.

So, which items in the above lists do you have well under control and which need more work to help you more effectively and efficiently manage your finances?

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Michael Rehkopf

Michael has more than 20 years of experience in operations, strategy and sourcing covering all major parts of the globe. He has also worked for Australian, Canadian, German and Japanese companies in both business process outsourcing and IT outsourcing.
Michael's industry experience includes the financial services, manufacturing, telecommunications and travel sectors. He leverages this diverse industry experience and his university background in accounting, IT and his Master of Dispute Resolution, to assist clients in the development of business strategies and the implementation of sourcing strategies. These include the associated evaluation, negotiation and organizational change.
Michael is currently a partner at TPI, the world's oldest and largest sourcing advisory firm. Prior to joining TPI, Michael held leadership positions with Siemens Business Services, OpenPlus International, Mitsubishi Electric and Netron.