Unfortunately Outsourcing deals fail to reach their true potential most of the time. Over the course of assisting many clients we have found the following six reasons, either alone or in combination, to be the major causes of dissatisfaction with outsourcing.

1) Failing to Define Goals and Objectives

Perhaps the largest source of value leakage in the outsourcing process is failing to articulate a clear outsourcing strategy. Why? Because, most companies don’t state or even understand what their ‘real’ objectives are from outsourcing. Much has been written that suggests focusing strictly on reducing costs leads to problems. Our experience corroborates this. For example, excessive focus on cost in the negotiation process can lead to an adversarial supplier/customer relationship. Rarely are services truly a commodity. What is critical to the long term success of the service provision is that companies need to establish is a healthy teaming relationship with the service provider. Outsourcing offers many non-financial benefits. However, frequently companies do not understand or articulate their non-financial objectives when working with and evaluating service providers. More on this subject is contained in our white paper, The Outsourcing Lifecycle, on the Resources page of this website. Bottom line: you will not reach your destination if you don't know where you're going.

2) Fumbling Contract Management

Outsourcing a process does not relieve you of the responsibility of managing the vendor and your strategy. You should not be providing day-to-day management of the service provider. However, companies often think they are outsourcing but are actually subcontracting for cheap labor and keeping the management overhead.

You’ll need to invest time in defining how you will work with your new business partner along with the new management processes.

3) Doing It Yourself

Entering into an outsourcing relationship is not something most companies do on a regular basis. Seek professional outside assistance from a company whose primary business is outsourcing transaction advice.

A simplified analogy is buying new car. You may engage in that transaction every few years. The dealer does it several times a day. Who do you think has the advantage in that transaction? If you could retain the services of someone who could level the playing field for a small percentage of the savings in time, frustration and cost that they would save you, wouldn’t you?

4) Not Getting It in Writing

Get everything in writing BEFORE signing the contract. This sounds obvious but this blunder occurs all the time. Time spent in defining the services, roles and responsibilities, as well as costs, for all parties will serve you later.
An agreement at minimum should contain four elements:

• Terms – should focus on how to manage the relationship and what happens if disagreements arise. It also needs to cover termination rights.

• Services – what services are being rendered and each parties responsibilities (the SOW – Statement of Work). The ‘how’ is often documented outside the contract (in a Procedures Manual) to allow for more flexibility, however all procedural changes must be approved by both parties.

• Service Levels – the key measurements of what is expected and the minimum acceptable levels. Penalties or ‘Performance Credits’ are clearly documented.

• Prices – get prices for everything you can imagine you might want. The price will better during contract negotiations than when you ask for something later.

We could write a book on this topic (and several have been written). The short version is that writing it down causes both parties to better understand the other parties’ vision. In most cases it is the process of “writing it down” that really adds the value.

5) Using Black Box Pricing

One price for everything sounds great until something changes and the provider can charge whatever they want because there is no pricing transparency. All of these agreements will go through Change Orders over time.

Many vendors will price their services low with the objective of making up the shortfall on the change orders. Clearly understanding the components and what drives them gives you greater ability you have to make decisions regarding possible changes.

6) Not Devising Strong SLAs

This is one of the key reasons that outsourcing fails. Even though you’ve outsourced a process or function you’re still accountable for its performance as viewed by your organization. Ongoing proactive management of performance to SLAs and the overall relationship between you and your service provider is the only thing standing between you and service degradations, dissatisfaction, executive escalations, unplanned change orders and early renegotiation or termination of the contract.

Depending on the scope and scale of what you’ve outsourced you’ll need to assign full time resources or a team to manage your contribution and the service provider’s performance. If this relationship is treated as a partnership, and the issues that will invariably arise are quickly addressed, it is likely your contract will run its term and allow you to renew or begin this process again.

Is Outsourcing Right For You?

Alsbridge works with you to leverage our senior technology and consulting leadership to quickly and objectively ensure your sourcing success. We’ve helped companies from Fortune 100 global giant clients to small rapidly growing companies, evaluate sourcing opportunities. When outsourcing makes sense we help our clients select vendors, negotiate contracts and prices, supervise the transition and monitor the ongoing relationship. Equally important is that in many cases, we recommend internal changes instead of outsourcing.

For more information on how Alsbridge can assist, contact your local Alsbridge partner or call Patrick Garrett, at: 818-991-8056 or via Email at Patrick.Garrett@Alsbridge.com.