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Outsourcing - is your deal set up to fail?
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“75% of managers believe that outsourcing outcomes have fallen short of expectations” Source: AMA Survey
“25% of all relationships fail within 2 years and 50% fail within 5 years” Source: D&B Barometer of Global Outsourcing
Outsourcing, whether it be front or back office services; specific functions or applications; on-shore or off-shore, has been around for nearly two decades. It is now a fairly mature industry, so why are so many outsourcing contracts still going wrong?
The answer is as simple as it is unpalatable; far too many deals go wrong because they are, albeit inadvertently, set up to fail.
Research specialists the Gartner Group have identified the six most common reasons for outsourcing deals to fail:
- Short-termism;
- Communications;
- Service levels;
- Benchmarks;
- Risks; and
- Resources.
All of these I agree with, but to my mind they are all a little mundane and don’t go quite far enough. So I have added a couple of my own which in my experience are potentially far more significant areas:
- Commercials; and
- Governance.
1. Short-termism
If the client agenda is simply to cut costs or avoid dealing with some management inadequacy, then think again. Entering into a 3 year, 5 year or even longer term contract is not the best way to address issues of the ‘here and now’. Those issues may be better dealt with by effective management action.
2. Communications
Communications can be a major problem in an outsourcing process. Nothing is more guaranteed to turn off the very people that you need onside than not explaining what you are seeking to achieve and why. The message they then receive is that they and their potential contribution are neither valued nor particularly important. The result – morale plummets and the very people that you need to deliver successful change find better jobs elsewhere with employers who value them.
3. Service Levels
These can fall short in three main ways. Firstly, by not being set up appropriately, for example focussing too much on how the supplier will deliver rather than the expected outcomes or outputs of their delivery. Secondly, by not communicating service level requirements effectively, especially to the customers on the receiving end day in day out. Finally, by being insufficiently flexible to take changing business or customer needs in their stride.
4. Benchmarks
Mechanisms to benchmark performance of the contract are far too often inappropriate or in some cases absent. Problems are compounded if there is no baseline performance measure in place at the point of outsourcing. Under these circumstances determining whether performance is good, bad or indifferent can only be subjective.
5. Risk
Far too often a proper consideration of risks, their potential impacts and how to contain them, is fairly cursory. There is also a strange poker game that seems to be played between buyer and seller. For some reason there can be great reluctance to discuss risks in an open, objective and comprehensive fashion; perhaps in case this should be taken as exposing weaknesses. Yet it is those very weaknesses that if not addressed, can lead to failure.
6. Resourcing
There are buyers who enter into term contracts without having more than one year’s visibility of how they are going to fund the contract. There are others who will seek to drive suppliers’ prices so low (beyond the point of reasonableness) because they cannot face going back to the Board for more funds because their original estimates were insufficiently accurate.
The other mistakes that are often made relate to people: the organisation not recognising properly that they will have an ongoing need to manage the supplier; and the client not investing in the skills of their people for a very new and different operating environment.
Plus the two points that I have added.
7. Commercials
Salespeople are simple souls that bear some resemblance to Pavlov’s dog. I know because I am one. Their rewards schemes incentivise achieving revenues, particularly large revenues, sometimes with scant regard to profitability. But if the supplier cannot make a profit, corners will inevitably be cut on the service and change control will become the order of the day.
Buyers tend to get things wrong in two areas. Firstly, going for a pricing regime that is inappropriate for the service. A recent example is one of my clients that was seeking maximum flexibility for a very dynamic, innovative service. We had, we thought, negotiated a good deal at the right price; then at the eleventh hour, an edict came from on high that said that it had to be a fixed price deal – totally inappropriate for the service being bought.
The other area is the tendency to seek to transfer risks to the supplier without an upside to reward success. In my experience, many suppliers are highly skilled in managing risks but there must be a benefit to them in doing this.
8. Governance
Partnership is my hate word of the moment having taken over from seamless. Everyone seems to want it whether it’s relevant or not. Very few define it and more importantly, not enough effort is put in to thinking through how it will work in practice.
So those are the main reasons why outsourcing contracts go wrong.
Solutions
Fixing the Gartner points is in many cases fairly straightforward and to an extent mechanistic.
- Short-termism – only outsource where there is a full business case justification
- Communications – thorough planning, consistent messages; you cannot over-communicate
- Service levels – develop outcome-focussed SLAs; keep under review for business and technology changes
- Benchmarks – identify relevant comparators and keep under review
- Risks – robust risk assessments and joint management plans
- Resources – align service expectations with the ability to invest.
As for the commercials, the first thing to recognise is the value / price equation:
- You can achieve ‘high’ quality service at an appropriate price
- You can achieve ‘ordinary’ quality service at a lower price
- But high quality service at bargain basement pricing is untenable!
Risk transfer must be accompanied by an appropriate reward mechanism. If there are to be penalties for failure then there must be incentives for success, otherwise failure will just be assumed and priced in. The objective should be to find the place where all parties can only win together, not the place where I can only win if you lose.
Yet buyers continue to shift goal posts at the last minute. And salespeople will always be highly focussed on closing deals. Because after all, in a year or two’s time, it will be someone else’s problem to live with!
Governance of the relationship is an even less straightforward area to resolve. It requires maturity, trust and personal effort to make it work, especially as very few (if any) of the people striking the deal will be around by the end of the contract. Tips are:
- Design different approaches for each lifecycle phase – transition, transformation and steady state operations
- The structure and mechanisms should cover all key levels from executive through to operations
- Don’t forget to include the customers and stakeholders
- Focus on building a shared purpose and a common agenda; keep under review and look for continuous improvement.
If you have any questions about the subjects covered in this white paper or you would like to find out more about how Oakleigh Consulting could help your organisation, please contact us on 0161 835 4100 or email us.
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