Contract 'overflow' support is a red flag

Improving Contracting

"Though the customer is always right, there are some customers you do not want"

Jeffrey Fry (whose other inspirational quotes include "A single thread of hope is stronger than all the chains that bind you.")

We’ve just turned down the chance to bid for “overflow support”, so now is perhaps a good time to discuss why bringing a supplier in for overflow support of repeatable work is not only bad for the supplier, but also bad for you.

I would emphasise the “repeatable”. If you need to get help with a one-off project or transaction and don’t have the internal capacity or capability then, of course, use a supplier. But the scenario we keep seeing is where an in-house team is able to handle some of the day-to-day contracts for a business, but not the occasional higher volumes, and so approaches third party suppliers to handle just the excess volumes.

Overflow is bad for your supplier

Work is work, right? Why would it be bad for suppliers to take on overflow work?

  1. The client is not invested in the relationship. By the very definition of overflow, the main supplier is the internal team, and clients in practice don’t spend much time on governance and developing the relationship with the ancillary external supplier. Without a real understanding of the client’s goals, business, and processes, the supplier won’t be able to do a very good job.
  2. Swings in volumes also make it hard to provide a great service. These swings look like 100% to the supplier (because they only see the peaks) and remember your team was struggling with handling far smaller proportionate swings. Suppliers will try to balance loads across accounts, but there are costs to context switching for the team members who will have to take the brunt of sudden rushes and then absolute silence. Consider also that the in-house team is no longer incentivised to try to reduce fluctuations in demand - they can always throw it over the wall if it becomes too much, which exacerbates the swings.
  3. Suppliers end up with demoralised teams and short-term relationships. It’s not fun for the team members working for clients that don’t give you the time when you want to improve things and who expect fast turnarounds out of the blue. Meanwhile, from the supplier’s perspective, you can’t show how good you could be, and the relationship is always at risk because you aren’t knocking it out of the park.  
  4. The supplier isn’t getting enough volumes to optimise processes and has little control over how it is normally done. They still have to manage the account even when volumes are low and it is hard to get team utilisation right, which needs a steady stream of work. This makes it more expensive to deliver the work, but given they are being compared all the time to internal costs, they will be under pressure to reduce prices rather than pass through the higher costs. The upshot is that overflow work is far less profitable.

So taking this on as a supplier is a dumb move. It still happens, especially among law firms that charge by the hour and are desperate to secure relationships. But suppliers serious about improving how the work is done learn to avoid these “opportunities”.

Overflow is also bad for clients

Even if this is unattractive for some suppliers, why should you care as a client?

  1. You won’t be able to access the best suppliers, because we’ve gotten wary of these requests and are bowing out of the buying processes.
  2. The services won’t keep improving because (a) you will control the bulk of the work so your team will have to lead it and in practice that’s a recipe for it not happening (we have extensive data on this), and (b) it’s not worth your supplier investing, given they are being paid intermittently. This repeatable work is the most ripe for improvement, so you are giving up a huge opportunity here.
  3. At best, you’ll get some data on some of the contracts but as the data will only be about some of the contracts it probably won't be practically usable. You’re giving up the opportunity to learn.
  4. You won’t be able to lock in great service levels with your supplier, because they won’t know what is going to come in when. That means turnaround times are going to be slower, and your internal customers may grow frustrated.  
  5. Pricing will be sub-optimal given the profitability challenges above. If you end up resorting to using the kinds of law firms that charge by the hour, you could easily put a material dent in savings that you made by creating an in-house solution in the first place.
  6. It will be hard to replicate your internal standards and approach with your supplier. They will be behind the curve on what is changing in your organisation and you will have to check the work more as it will be harder to build confidence in their work. You will have to also deal with greater turnover in supplier team members because you are forcing the supplier to balance workloads.
  7. You will have a shallow and increasingly difficult relationship with your supplier, which may mean that it isn’t long-term sustainable.

There is a better way

So what do you do if you have already invested in an in-house team, but have found that you don’t have the ability to add more people to handle the spikes?

The solution is to change the way you divide up the work between internal and external suppliers, as I explain in my book Sign Here: the enterprise guide to closing contracts quickly:  

Rather than splitting the same contracts between internal and external providers, give the simpler contracts to your supplier and let them transform those, while your team concentrates on the more complex deals. As well as dealing with all of the issues above this also gives your team the room to grow their skills, reducing both the need to use law firms and the risk of your team feeling they are capped and have to move on.

You can still start a relationship small with the objective to grow it over time, but if your ambitions are limited to just overflow then it won’t work for either party.

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