Combining the thinking and feeling hemispheres of our brains, outsourcing value is frequently expressed as attaining or exceeding a fair equivalent for the resources put into the endeavor. Does the buyer get what it paid for? Does the provider get the revenue it anticipated? If not, why not?

In search of expertise on capturing value in outsourcing arrangements, we spoke with industry experts — an analyst firm, an outsourcing firm providing services to large enterprises and government buyers, and two consulting firms. We asked them to share their observances of the top three to five best practices for ensuring value-capture.

These interviews revealed a dynamic of either omissions or actions involving people, processes and behaviors that affect value-capture. They either catalytically contribute to value gain, inhibit/prohibit discovery and creation of value or cause the parties to lose value like a leaking bucket.

Numerous studies and surveys reveal that many ITO and BPO deals have failed. When asked why the community of practice has experienced lackluster results, Phil Fersht, executive vice president, NelsonHall, a BPO analyst firm headquartered in McLean, Va., explains, “There needs to be a big dose of reality in the industry in general.” He points out there is often a mismatch between value expectations and delivery. Fortunately, Fersht suggests the industry is maturing and is now at a point of change. “In many ways, we’ve gone full circle from the rush to do this quickly, to a let’s-do-this-properly approach.”

Here’s a look at our experts’ opinions on the behaviors that sabotage value and the industry best practices for ensuring outsourcing value-capture.

Control Unintended Consequences

There is a fairyland of artificial constraints and restraints; evidently, outsourcing has a Zip Code there. Both buyers and providers hold title to the manner in which a deal is structured. Often, third-party consultants also influence what constitutes a deal (and its value). Interestingly, the seeds of evasive value often correlate to the processes and methods associated with outsourcing “set-up.”

Ben Trowbridge, CEO and managing partner, Alsbridge North America, a global outsourcing and shared services consulting firm headquartered in Addison, Tx., declares buyers need to ensure they conduct real value discovery during the provider-selection process. He comments, “Fundamentally everybody uses the same process — RFI, RFP, site visits, etc. But at the core of that process are typically a couple of problems that prevent discovery. One problem is that the client (either itself or by using a consultant) typically becomes incredibly prescriptive on the solution and how it wants the solution delivered.”

Being descriptive and directive might be advantageous when one buys a commodity such as nails or flour, but not outsourcing. Alsbridge has accumulated sufficient data from buyers and providers to assert what’s wrong with the discovery process as it tends to go on today, and how it impedes value-capture. Says Trowbridge, “In BPO and oftentimes even in ITO, the discovery process becomes a limiting factor to success. If the buyer becomes too prescriptive, then the provider actually cannot deliver any interesting or unusual value. It hurts the ROI outcome and the satisfaction of both parties.”

There are all sorts of prohibitions of communication in the RFP process in the way that it’s run today, which makes for a circle of doom. For example, providers must go only to a certain single point of contact or only answer in written form; these and other sorts of imposed disciplines suppress value creation.

The second problem Trowbridge cites at the root of elusive value is a syndrome that may be expressed as squeezing blood out of a turnip. He cautions buyers to make sure they don’t have a deal where the provider doesn’t have any room to support its client. “Too many deals today are net-zero or small, single-digit margin deals; and that doesn’t help the provider love you or support you,” he explains. “By giving an extra three percentage points of profit to the provider, you might get 10 times the output from the provider.”

Tony Doye, president, North American Outsourcing Group, Computer Sciences Corporation (CSC), a global IT service provider, identifies another constraint — and potential value saboteurs. “There are too many retained people fearful of losing control,” he comments. “Usually they are not really committed to the change program that they signed up to.”

Ram Iyer, president and CEO of Argea, a practitioner-based based outsourcing consulting firm based in Princeton, N.J., believes there is a third culprit responsible for making value-capture elusive. He explains, “Short-term thinking permeates all over the place. That’s why 60 to 80 percent of deals don’t have the expected returns.” He aims his critique at clients that are just trying to get the outsourcing job done — not necessarily get it done right. He lays the same blame at the doorstep of providers that are just trying to get the outsourcing contract, not necessarily execute it in a way that is sensible for the long run.

Best practices for ensuring value-capture occur at every stage of the outsourcing lifecycle. However, the preponderance of these occur at the outset when structuring the deal. Unfortunately, this is often where both parties are so anxious to get the contract signed that they take shortcuts that eliminate or erode these crucial steps in ensuring value-capture.

Argea points out the demand for shortcuts comes from buyers and providers. Buyers ask consultants for shortcuts that could cut seven weeks out of the RFP process. Similarly, providers want to get the contract signed sooner. Iyer explains, “We tell the client that, based on our experience, we can take out three or four weeks by using the model we developed for another client. But wanting to reduce the money you pay to consultants and reduce the time to benefit is just short-term thinking.”

Cultural Fit = Fiscally Fit

As individuals, our path to physical fitness is heavily dependent upon behavior. Likewise, the organizational chemistry among partners determines the ROI they can achieve together. The experts we consulted suggest not trying to change the other party through compliance/submission-oriented Service Level Agreements (SLAs) and governance models as substitutes for ensuring a good cultural fit at the outset (during due diligence and source selection).

Some clients have a very open, trusting way of doing business. On the other end of the spectrum, some clients have a much stronger procurement/commodity way of thinking of their provider, resulting in behaviors such as treating the provider as if it’s “dumb” or pushing the provider pretty hard for performance. Trowbridge admonishes, “If fundamentally the culture of the client and the provider don’t match, and there’s a difference in the way they treat each other, then you have a relationship that is fundamentally set up to fail.”

Industry best practices dictate buyers bond with providers possessing a congruent decision-making style, problem resolution style, communication style, level of hierarchy/red tape, philosophy on investing, risk-taking advantage of opportunities, etc. More importantly, a buyer must be conscious of these factors and comfortable with not only the provider’s posture, but its own in relation to value-capture goals. Both parties need to be critically self-aware and have cultural fit assessment frameworks/criteria as part of their source selection process.

Understand Context

A key best practice for capturing mutual value in a short- or long-term relationship is ensuring both parties understand the buyer’s context for outsourcing. It seems that would be obvious, but studies reveal that discovery of the context for outsourcing often doesn’t occur until too late in a relationship.

Argea recommends using the SIPOC model (originated at GE) to facilitate determination of context. SIPOC is one attempt at capturing context early in the relationship. SIPOC (an acronym for Supplier, Input, Process, Outsourcing, Customer for that particular process) is a tool facilitating initial understanding of context. Iyer, Argea’s president and CEO, says, “To the extent that the provider and client better understand the buyer’s context of outsourcing, the more successful the outsourcing effort will be.”

Following the SIPOC model allows buyers to understand who the stakeholders are; the human impacts to internal and external suppliers and customers; as well as the financial, people, technical, strategic and practical ramifications. Iyer does not advocate the model as the universal answer but recommends parties use some framework that provides a contextual map of the outsourcing deal under consideration. “Understanding the context of the outsourcing the client is trying to do is extremely important to the success of outsourcing. If the parties don’t use some framework to learn the context, they’re likely to fail,” he warns.

Iyer articulates what happens in a commodity context. “In this approach, the provider’s perspective is very short-sighted. They are worried about making quota for the quarter, and they’re also looking for a quick hit. It may give both parties short-term results; but neither of them partners to understand what the context is within the buyer’s company.” Thus, there is no foundation for broader value. “Very often, deals with these commodity contexts fail,” says Iyer.

Additionally, when a buyer experiences chaos or blissful ignorance of its baseline, any service provider predatory practices will exploit the weakness. If a buyer doesn’t know its baseline numbers, how can it figure the return? Iyer indicates such a move is folly and, in the long run, hurts value-capture for both parties. Even worse, to the extent a buyer doesn’t understand what its baseline is, it gives providers an opportunity to unfairly make more money — which satisfies the provider’s financial interests for the short term, but the long-term probability is that the buyer won’t get the kind of return it wants. Iyer says providers make a more honest start in an outsourcing relationship when they first point out the folly to the buyer and then suggest ways for accomplishing the baselining with or without the provider’s help.

As an aide toward establishing and documenting contextual baselines in contemplated outsourcing arrangements, Alsbridge uses a Source and Alignment System (SAS), an enabling subset to its overall methodology. The SAS supports a series of collaborative work-activity-driven meetings as a way of guiding the buyer and provider together, trying to ensure communication and eliminating value-draining proscription and prohibition.

The RFP state-of-the-art in the outsourcing industry is not always focused on value-capture, according to Trowbridge, “The typical way of doing it is that the consultants build a set of requirements of what should be outsourced and what the scope should be — sort of like a bunch of squirrels gathering nuts and then delivering the pecan pie back. We think that’s broken because typically the client and provider will later fight on what is in or out of scope.”

Instead, Alsbridge assembles a cross-functional team of client staff into an SAS meeting and goes through a series of structured activities to get buy-in on scope. These are followed by collaborative activities. For example, they divide the provider and client SAS meeting attendees into two-man teams. “They go through a 20-minute activity where one person from the client and one from the provider match the client’s goals for the objective with the provider’s strength that could be interesting to the client,” explains Trowbridge. “We try to help the client help the provider understand where they can fit and why the client might choose them.”

Fersht of NelsonHall concurs on the need for collaboration. “The sourcing advisory process, historically, at some point keeps the buyer and provider at arms-length. And that is necessary. But there are also times when the provider and buyer need to come together more to understand each other’s business. It’s very much a relationship.”

Iyer of Argea summarizes the need for discovering context. “If you understand the buyer’s context for outsourcing and structure the deal in that context, then many of today’s governance models and tools would be suitable.” But he stresses that it’s like a marriage. “You can say you will go out on dates every Friday night, etc. — that’s governance. But not even good governance will fix a fundamentally flawed relationship built without the parties’ chemistry and both properly understanding the buyer’s context for outsourcing.”

Being on the Same Page

Both SIPOC and SAS are effective ways to initially get the provider and buyer on the “same page,” facilitating understanding the buyer’s context for the outsourcing initiative. However, the importance of a deep mutual understanding across all stakeholders of the deal as to the value objective can’t be emphasized enough. According to CSC’s Tony Doye, “Capturing value demands all parties — the customer’s business units, the IS organization and the outsourcing supplier — be on the same page.”

Behaving according to an effective governance structure, or relationship management system, will keep the parties aligned and on the same page over time. Doye believes, “To get value out of an arrangement, you need to be efficient and need to know each other’s roles. A management system is the prescription for how to go about that.”

The system needs to be almost prescriptive around who does what on Monday, for example; who sits in which meeting and what inputs and outputs there are for the meetings; how the provider invoices; and numerous other day-to-day processes. It should also include operational, project, financial and strategic reviews. The system should be deployed at the start of the engagement.

Unfortunately, many providers and customers spend too little time talking about governance and how the relationship will work. Moreover, some relationships don’t end up actually implementing or following through on what they discussed about how they would work together.

“When it comes to getting greater value from the arrangement, you have to have the right forums to facilitate that,” claims Doye. “Where you don’t have a well-defined set of governance processes, it’s often hard to even find the right audience to sit down and discuss what solutions and opportunities are available when facing an outsourcing challenge. If you have the right meetings and processes, you won’t be in meetings with mixed agendas where the parties never get agreement.”

He says, the management system is “the underpinning framework that allows adding best practices and skills that add value to the deal. With the appropriate management system, you know when you’re attending discussions around strategy, you know what discretionary dollars the parties have to spend, you know what the critical success factors are and you know what else the parties can bring to bear.”

Transparency

The ultimate outward appearance of the parties being on the same page is observed when no one can readily guess who is the provider and who is the buyer — commonly referred to as badge transparency. The parties work together as one organization.

“Transparency is vital,” states Doye. “If you don’t start off with that level of trust, assuring that the leadership of both organizations will not allow finger-pointing, you allow more micromanagement.” This always leads to sabotaging value in an outsourcing relationship.

In addition, where transparency does not exist, end users tend to blame the outsourcing provider for many problems, and they never perceive they are getting the value they thought they were going to get from the arrangement.

Another transparency behavior Doye considers vital is the buyer’s executives allowing the outsourcing provider to be connected to the buyer’s business units. He observes, “Some buyers put a barrier between the provider and the end users, acting like gatekeepers. It’s rooted in a concern for loss of control. But it results in end users who have not bought in to what the executive decision-makers expressed in the outsourcing agreement.” All the business units need to be fully briefed on the scope and the expectations of the outsourcing arrangement.

Communication breakdowns between provider, buyer and end users are a transparency pathology that is perilous to the parties’ ability to capture value through their outsourcing strategy.

“When I look at our customer accounts, it’s pretty clear that where we are bringing added value to the business is where the customer’s CIO allows us, and encourages us, to meet with the actual people who run the company,” states Doye. He defends this customer attitude as a winning formula. “Once the provider has a line of communication with the business units, it can learn much more about what is actually going on in the business, which enables it to add more value by bringing solutions for the issues. It also helps in driving out perceptions that might be incorrect.”

Doye also cites the phenomenon whereby buyers essentially issue competing and mutually destructive objectives to the providers because the business units are not synchronized with the objectives. Many of today’s outsourcing arrangements now have a transformational objective. This is a significant investment, usually affecting applications almost without exception and, therefore, affecting the business units. A provider may have signed up to bring value and drive down costs, but driving down costs is often dependent on implementing big change programs in the business units.

He suggests that the business units need to be engaged in moving applications around and rationalizing applications as part of the change program in an outsourcing arrangement. “Once we move out of our own internal area and need to work with the business units, if they aren’t fully on board with the scope and speed and scale of what’s happening, they don’t have to say “no,” — they can easily slow us down to a large degree,” he explains. “Once the provider gets slowed down, the dominoes fall and it has a problem on its hands around bringing value to the client.”

“Team” Attitude

Another component of being on the same page is both the client and provider approaching the work as a team. Motivating a provider is, in some ways, like motivating an employee. Companies have learned over time that the best way to motivate an employee is with small, positive incentives that make him or her feel valued, part of the team and a welcome contributor/collaborator. Buyers need to apply this behavior toward their outsourcing providers.

Alsbridge equates being a good client with obtaining good service. “Forward-thinking managers are very aware of motivational behaviors and try to build a positive work environment and positive outlook,” advises Trowbridge. “If the provider is screwing up that bad, terminate the relationship. But if they’re not, try to motivate them and make a positive relationship instead of keeping track, waiting and watching for the provider to screw up.” He advocates a treat-rather-than-trick philosophy. “The buyer needs to bring its provider into the process, let them be part of the planning and communicate completely with them.”

Focus on Outcome, Not Compliance

If a buyer wants to quickly determine the value-capture index of its outsourcing management system, start by reviewing the SLA metrics. Does the metric set look at success drivers or failure drivers? A proscriptive buyer has numerous SLAs, often impeding impede value-capture.

Trowbridge comments on the pervasiveness of this situation, “Sometimes a client wants to track literally hundreds of SLAs. That disconnect, coupled with mistakes in determining the most important things to monitor, will often negatively impact a relationship.”

Industry best practices for value-capture now recommend focusing metrics on desired outcomes instead of counting bad events. Failure to heed this may be hazardous to the buyer’s wallet.

For example, the client in an existing outsourcing arrangement retained Alsbridge to review existing SLAs. The client believed things were not working well and wanted to renegotiate the deal with the provider. Alsbridge discovered the client was spending over $11 million each year just tracking the contract SLAs and managing the contract; yet it was unhappy.

Trowbridge’s post-mortem analysis of the struggling deal is chilling. “In being overly prescriptive in the contract on how things were going to happen, they actually lost value. A significant part of what they thought they were going to save by outsourcing was lost in just tracking the SLAs — which were unnecessary in that they only tracked technical statistics and were not appropriate to business outcomes. The client had no way of determining success except to monitor SLAs, which were not structured to communicate, watch or encourage value.”

Fersht of NelsonHall predicts a revolution in BPO metrics in 2006 and 2007, focusing more on quantifiable links to business outcomes. He also believes there must be more give-and-take on both sides.

Buyers need to challenge their “old-think” assumptions when formulating SLAs — focusing, for example, on measuring basic performance. There are not many incompetent providers that last more than a year, so the ones still around are competent. Tracking how many invoices the provider manages to get out the door in a month is basic performance. Tracking business outcomes such as the quality and accuracy of the invoices as well as customer satisfaction are more important.

Nevertheless, this best practice of building appropriate SLAs that measure business outcomes fails at the starting gate when buyers and providers go into outsourcing without understanding the buyer’s context.

Accountability

One way the buying or providing organization can influence their extended organizations to be part of the solution instead of being part of the problem is by wielding internal and external governance structures to do the job. Establishing reviewing bodies (including end users) is an excellent method to ensure everyone follows best practices and adheres to what the parties agreed to.

CSC utilizes a review body that audits CSC accounts to see that the management system is in place and whether the provider is actually utilizing what it said it would implement.

This approach garners optimal results when the model is copied vertically into the executive suite as part of the governance structure. Doye says CSC conducts quarterly account performance assessment reviews. “Our outsourcing account executive is reviewed by the buyer’s CEO with the buyer’s CIO in attendance where they jointly report on our performance. One section of the review asks our clients to give us a view on how innovative we’re being. There are also questions around whether we bring value to the arrangement and whether we are linked to their business priorities.”

The buyer’s leadership must ensure that nothing, including internal roadblocks, gets in the way of ROI in an outsourcing arrangement. Doye cites an instance where a client’s CEO said to his business units: “You signed up for this, so get out of CSC’s way. We need the return on the investment.” Leadership of both companies must be committed to change and must drive value-capturing behavior from the top down.

Even with the best communication plans, some people will still behave badly. Both parties need to eradicate such behavior when it occurs and strive for consistently achieving a seamless approach. Again, the buyer and provider executives must be on the same page. Doye warns, “If one party tries to knock down the bad behavior and the other one does not, the relationship won’t get anywhere.”

Third-Party Involvement

Once the parties and the consultants understand the context and make sure the requirements are properly baselined, at that point, the experience and judgment of a consultant will help the buyer choose well among the multiple service providers that could meet those needs. That is an invaluable service, according to Iyer of Argea. “Companies need to very heavily leverage somebody who has been there and done it before. Relying on that judgment will result in achieving benefits quicker and with lower risk.”

Can a buyer successfully find the right provider without consulting help? Iyer likens consulting expertise from practitioners who have “been there/done that” to using a dating service. “If they haven’t done it before, they won’t know what they’re looking for. Very often we run into clients who read some books and articles and attended seminars and know theory. But it’s like reading about how to date properly and pick the right partner. If you’ve never done it before, you’ll go through trial and error. Using an experienced practitioner can help you make a better choice. It doesn’t guarantee success, but it reduces the risk.”

Nevertheless, even with third-party involvement comes a possibility that a methodology may erode value-capture. Methodologies not updated to focus on context discovery and collaboration to ensure the parties are on the same page may result in unintended consequences. The buyer needs to examine the third-party counsel’s methodology to critically determine whether it facilitates value-creation and capture.

Value Beyond Original Vision

Exploiting or enhancing an outsourcing relationship by following industry best practices not only can help attain buyer goals, but capture value beyond what was originally envisioned.

CSC’s Doye offers a practical example of the provider’s role in adding value. “We try to drive our people to be more innovative. Our account planning process features a small staff responsible for defining the client’s business, strategy (with multiple business units, it could be many different strategies), challenges the business units are trying to overcome and how we might be able to help them on that.” Subsequently, CSCs account planners must define a sales strategy to work with the business units’ challenges. That part of the process drives and delivers added value to the buyer’s business units.

One component of the planning is CSC’s team developing a plan on how they are going to grow and expand in the client’s space. “We often bring in the client to help us develop the plan,” states Doye. “They like that and are very interested in helping us develop. They look at it as a valuable resource that can bring value to their business.” Also included in the planning is an innovation program. All in all, the client does not slip out of touch with the other skills and services the provider can bring to bear.

Doye refers to some CSC accounts that took the account planning innovations a little further, “By working out in the business units using some technologies, we found areas where we’ve been able to marshal sets of resources from both companies and put some go-to-market opportunities together. That takes the relationship and the value potential to a much higher plane.”

While he says categorically that successful outsourcing relationships typically don’t occur without a lot of hard work, he opines they are even harder to accomplish in a government deal. “Much federal work consists of short-term systems-integration contracts. It’s harder to get badge transparency and long-term joint client planning if you’re on a project-by-project basis. It’s much harder to do than when you have a five- or seven- or ten-year arrangement; you know you’re in a marriage, and you both want to get the best out of it.”

Summing up, our experts’ insights revealed that value-capture is first dependent on understanding the buyer’s context for outsourcing. Then both parties need to work as one — transparency, team work, being on the same page and allowing providers to connect with the buyer’s business units. They also need to establish an outsourcing management or governance system, often with third-party consulting assistance. Finally, the leadership of both companies must be committed to change and must drive value-capturing behavior from the top down.

F. Keaton Whitlow is a writer with Outsourcing Venture. Contact him at editorial@outsourcingventure.com. Kathleen Goolsby is editor of Outsourcing Venture. Contact her at kgoolsby@outsourcingventure.com.

BPO Value Pitfall

Why have so many Business Processing Outsourcing (BPO) deals in recent years not been successful at capturing the value anticipated by the parties? According to Phil Fersht, executive vice president, NelsonHall, a BPO analyst firm headquartered in McLean, Va., the primary pitfalls are around cost issues.

“Up till now, we’ve seen the customers promised cost savings of 20 to 30 percent in many cases, or even more, for pushing out non-core activities that can be hosted and managed by a provider. But it’s not as simple as that. There is a mismatch between expectations and delivery. There has to be a better common ground between buyer and provider for BPO than just costs.

He says the old model from 2000 to 2004 of a provider taking a customer’s existing services and absorbing them does not work. A customer’s business processes are usually too unique to be leveraged across multiple customers; so the provider cannot realize the cost savings by economies of scale. Many providers are now reluctant to take on a buyer’s existing infrastructure for far lower costs if they know they cannot deliver what the client wants.

“Buyers need to adapt more to the provider model, and the provider needs to explain it more effectively. It’s as simple as that,” says Fersht. He firmly believes the over-promises of immediate cost savings have to end. He notes the industry now needs to better educate buyers on what is involved in actually achieving cost savings. This will help to ensure their expectations will be held in check in relationship to delivery.