I can’t tell you how much money I’ve wasted with bad contractors over the last 20 years with missed deadlines, over-charges, restarts and having to redo the same work I paid them to do a few months after they were gone. Consultants, contractors and agencies that seemed so good when the PowerPoint slides were flying and the sales guy was smiling… only to end months later in frustration for myself and my team.
The first few times it happened I blamed the contractors. They weren’t honest, they didn’t do what they said they would, they were lazy, etc. However, as I gained experience and started to really analyze the failures, I began to realize that the reason I was having so much trouble was because I didn’t have a good system for hiring and managing outside teams. Once I accepted responsibility for the process, I developed the following 4 steps that have made a world of difference. Today, my company outsources more than 50% of our core service activities and our margins and productivity are higher than any of our competitors.
Here’s how we do it:
1) Know what great looks and feels like.
It is critical that you have someone on your team, as an advisor or personal friend that can give you an understanding of what great performance in the area you’re hiring for looks like. Someone who has led or managed highly successful teams for that specific type of work and understands how the process, metrics and workflow should function. Without someone like this on your side of the table, you are literally flying blind and will almost always lose in the end.
If you don’t have someone like this on your team already for the specific set of tasks you’re hiring a contractor for, find one. Ask a friend in the industry, get a referral or hire a consultant, but get someone who knows the services you’re hiring for – and get them involved on the front end.
There are several advantages to having this person involved on the front end of the hiring process:
- The contractor knows up front that you understand their business and can tell whether or not they are completing tasks properly.
- By understanding their pricing models and margins you can negotiate for terms and preferences in the right areas and protect yourself against service failures.
True Story – I was close to signing a $100,000 hosting and IT agreement with a company recommended by a friend when I brought in an outside consultant to review the deal. He recommended a completely different strategy which reduced our hardware needs by 70% and cut the contract cost down to $65,000. I saved $35,000 and paid the consultant $2,500.
2) Interview multiple vendors.
Always interview at least two, preferably three companies for any contract job and make sure that they all know you are talking to their competitors. This seems like a simple one, but it is often overlooked when the individual or company is referred by an internal source or has a previous contract relationship with the company. No matter who referred them or how much work they’ve done for friends or colleagues, talk to their competitors.
When talking to potential partners, don’t just ask them for pricing, ask them for their input on your project. Good questions are:
- “Given your experience, how would you approach this problem?”
- “How have you seen other companies successfully tackle this problem?”
- “What do you think will be our biggest challenge with the direction we’re taking on this?”
True Story – My team decided we needed to license a major database from an existing partner of ours for $45,000/year for a big insurance client we had. Before approving it I called 2 of their competitors to see if they had competing data sets and one of them said they could assemble the data from scratch for $10,000. In three weeks we owned all the data and saved $35,000 a year in fees.
3) Agree on metrics up front.
Once you know who you want for the job, engage them in a conversation about performance metrics. I like to start by asking them questions like:
- “What do you think are the most critical metrics for success on this project?”
- “What metrics do you think we should hold you accountable for on this project?”
- “If you were me, how would you judge performance on this project?”
Agree on a regular (usually monthly) reporting schedule, and if applicable, set up a series of milestones that you agree on in advance. This way, if something is going wrong with the project you’ll know sooner rather than later and avoid nasty surprises.
Lesson learned – I had a major product launch scheduled and the team in charge kept telling us they would be ready on time. We had no metrics or performance benchmarks in place and took their word for it. 24 hours before the launch they told us they weren’t ready - in fact, they were weeks behind! Blown press coverage and mad customers because we hadn’t demanded regular progress updates and proof of work.
4) Maintain a competitive environment.
If you’ve done the first three steps right then you’ve got a good contractor in place at a fair price with agreed on performance metrics. Now the trick is to maintain your edge over time. No matter how good a contractor is, human nature is to become complacent over time and start up-charging services once there’s no competition around.
A good way to avoid this is to have a few standard practices in place:
- Any time there are additional charges added to a contract or the scope of the contract changes, get competitive pricing information and let your vendors know that any price increases beyond the initial contract terms will trigger a re-bid (in other words, don’t raise prices on me).
- Have your expert from Step 1 regularly review progress reports and interact with the contractor to let them know that you have someone on your side watching every detail.
- Set up an annual contract review where you go over performance metrics with the contractor and ask detailed questions about pricing and competition. Let them know you are always shopping.
True Story – Before implementing this annual review process, our average cost increase on contracts was over 11%. With competitive annual reviews in place we have actually reduced our average annual contractor costs by 3%.
David Moses and Max Helmer are seasoned executives who can help you grow your business. Please contact us to setup an evaluation with them.