Business process outsourcing deals are complex to construct and require focused management attention from the client side as well as the supplier side in order to make them work. This is something that still isn't well understood by many client organisations. Most of the problems with these deals are the result of underestimating the complexity of setting up and managing the deals - but you generally don't hear too many horror stories as it tends not to be in either the client's or the supplier's interest to go public when things go wrong.

As consultants specialising in advising clients on their sourcing strategies, Alsbridge's specialists have come across three common mistakes clients make which could all be avoided if properly addressed in the deal planning and construction phase. There is nothing too surprising here but in the rush to get the deal done these fundamentals are often missed.

1. Not getting all the stakeholders on board.

These deals are not just rational and economic; they are political and emotional too. Taking a function out of your organisation and giving it to a third party to run can be difficult for many involved to accept, especially when the inference is that the in-house team wasn't doing a good job, or when it comes with job losses and the attendant publicity. The key is to identify who all the stakeholders are - both internal and external - and ensure that they are properly involved in the decision.

If this isn't done, it is likely that the deal will not even be signed - disgruntled stakeholders can easily derail a complex and sensitive deal. And who the stakeholders are needs thinking about - in one instance a major corporation on the verge of a multi-national finance and accounting outsourcing deal aborted the entire deal just before contract signature. Even though the CEO and FD had approved the deal, the Chief Accountant raised a last-minute concern about confidentiality, which resulted in the deal being shelved despite over six months of work and considerable expense on both sides.

2. Not understanding the economics of the deal.

The sustainability of all deals rests on their economic viability for both parties. If the deal begins not to work for just one party, it puts intolerable strain on the deal as whole. The only way for a client to know whether a deal is sustainable is to understand how the supplier makes their money. If the supplier is taking over your function and doing it better for less, you need to understand how.

There are many methods at the supplier's disposal, including re-engineering; automation; and offshoring. It doesn't matter exactly how, but it does matter that there is a plausible way to deliver the services, charge a lower fee, and still make a profit. Because if there isn't, then the deal will either collapse or be re-negotiated. And that is an expensive problem for both sides.

With outsourcing we are always at pains to stress to clients that there is no secret sauce available to suppliers: they may change the way services are delivered, they may even be fundamentally better at this than you are - but deals which work for both sides need to be understood by both sides. There is simply no point in negotiating such a tough deal that the supplier can't make money - the only long-term result will be that either you don't get the service, or the supplier goes out of business.

3. Not anticipating future change.

A deal may well be reasonably structured for the existing circumstances that are in place when the contracts are signed, but in modern business change is constant: the key question is, how will the deal handle future changes? Will a deal which is state-of-the-art in 2005 still be good in 2009? And will a deal which meets the needs of your business now still meet them in four years time when the business has changed - products; geographies; acquisitions, or divestments?

It is a minimum requirement to have a structured change control process, but in itself this isn't good enough. There was a case at the height of the dot-com boom when a major telecoms player signed a deal to help it handle its booming growth - only for the bottom to fall out of the telecoms market. Transaction volumes collapsed, but neither the supplier nor the client had thought to plan for such a scenario.

Net result - the contract had to be terminated through negotiation, which was time consuming and expensive, and a new delivery model established by the client. Extreme scenarios may well be hard to accommodate in a deal structure - if business volumes really are collapsing, that's clearly going to be bad news for all involved - but at least both sides should know what they would do in such a situation.

We now advise clients to include costed scenarios in the contract before they sign. That way everyone goes in with their eyes open - who pays for what, who takes what risk? You can't control the future, but you can make sure you have anticipated the likely scenarios and planned accordingly.

When things do go wrong, they can have a dramatic impact. One of the oft-cited benefits of outsourcing is that it allows management to focus on its core business and leave support functions with the outside experts. This is true if things are going well, but if they aren't then management attention will be sucked into fixing the problems. This is particularly true where the problems are commercial as well as operational - commercial problems can only be fixed through negotiation between business people, and in significant deals it tends to be the business leaders who are needed.

In Conclusion

Outsourcing can act as a catalyst to drive change, and it can provide access to skills, resources and systems that may not be available to clients through any other means. But it is not a panacea, and management cannot hide behind it, abdicating responsibility - that's when things go wrong. Better by far to put in the effort up front to structure a deal which is sustainable for both sides and all stakeholders, than to potentially spend years sorting out the mess caused by avoiding these issues in the first place.