Every now and then I find out something about outsourcing that really surprises me. That’s what happened recently when I learned the status of an outsourcing relationship I’ve followed for several years. I bet the service provider in this relationship was just as surprised as I when the deal was turned on its head.
The buyer outsourced its total IT infrastructure and application development and maintenance to a leading service provider more than a decade ago. They renewed the contract early, and they added scope. The provider achieved the targeted cost savings and productivity improvements. When I’ve talked with the companies’ executives a couple of times over the years, they used the word “partnering” to describe the way they work together.
Wouldn’t you say this looks like a successful outsourcing relationship?
As it turns out, the buyer ended up taking most of the applications development scope away from the service provider and awarding a contract for that work to a different provider. “But why?” I asked. “What happened? The buyer responded, “The former provider wasn’t flexible.”
That didn’t jive with the “partnering” behaviors they’d always claimed to have.
Delving deeper, here’s what I learned. As the buyer’s business grew shortly after the contract renewal, it had new requirements for special expertise. It expected the provider to meet those needs. But the provider didn’t bring expert resources into the picture and provide added value. The fact is the pricing model in this relationship was not aligned to motivate the provider to deliver such services.
The pricing model was like kinks in a garden hose – at some point, it prevented the desired flow of services.
Companies can change the pricing model as a means of addressing operational and relationship issues, but these two didn’t do that. Before they even discussed such a step, the buyer became attracted to the possibilities with a different provider that was already on site doing BPO work for the buyer. The buyer didn’t go out to market with a request for proposal, nor did it do any benchmarking. Though the second provider had world-renowned expertise in application development, it had not been providing those services to the buyer. The attraction? In providing the BPO services, the second provider continually demonstrated that it wanted to partner with the buyer in its strategic direction and consistently suggested ways it could provide added value.
The pricing model with the new provider is a key to their relationship success, they report. It ensures flexibility and the ability to be responsive to evolving needs. The buyer pays a base rate for the standard services. There is transparency as to cost elements. They negotiated a win-win rate for value-added, ad hoc services, with some of the value-added funding in a pool in advance and a true-up twice a year. With their negotiated pricing model, the buyer gets the level of services it wants, while also getting decreased prices year over year for the standard services; and the service provider ensures its revenues grow with increased scope and minimizes its exposure to financial risk when the scope changes.
But it’s not all a rosy picture. There were switching costs. There were challenges in transitioning the work from the existing provider to the new one. And now there is some finger-pointing going on when issues arise in the multisourcing environment.
What are you doing to avoid such a situation in your own outsourcing relationship?
What do you think the original provider and buyer could have done to avoid this situation? Why weren’t they able to discuss the issues around the pricing model? Where did the trust break down, and what could they have done to avoid that? Please take a moment to click on “leave a reply” and share your opinion.
Since 1998, freelance writer Kathleen Goolsby has studied outsourcing relationships’ successes, failures, trends, and best practices. She has interviewed more than 860 executives at buyer and service provider companies and is the author of “Critical Requirements for Building and Sustaining a Successful Outsourcing Relationship,” a chapter in Global Outsourcing Strategies: An International Reference on Effective Outsourcing Relationships (December 2006, Gower Publishing). As a freelancer, she also currently serves as the Senior Writer for Outsourcing Center (whose parent company is sourcing advisory firm, Alsbridge) and has authored dozens of articles as well as white papers. In a past role, she was editor of Outsourcing Venture (a former print publication). You can contact Kathleen at ksgoolsby@gmail.com.
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I am always worried about the over-use of the “partnering” word. In the end, clients want to save money, sow an improved service and look good to their bosses, and providers want to deliver a standard service with as little hassle and as big a margin as possible. The relationship does not have to be adversarial but it can never be “cosy.” From my point of view, in order to have the best chance of a good relationship you need the following from both sides:
– absolute honesty about what is achievable, no vapourware and no smoke and mirrors
– As much transparency as possible about cost
– Efficiency is better than emotion – clients may love to hear providers tell them how much they care but not if the service is rubbish
– A real understanding on the provider’s part of ther client’s business landscape, drivers and pinch points.
Simple!!
I have been the manager for HP’s BPO for IT Infrastructure procurement operations outsourcing at Chennai. Essentially it started with order entry from one system to another and slowly moved into managing the catalog , checking the requirement , order follow up and finally to controls to even check requirements. What was significant in the outsourced operations is that within a year of operation the knowledge shifted form front end to the back end. Significant knowledge was gained to bring in efficiency and improve the systems.By itself the overall process transitioned had significant advantage of efficiency of work, single point control , ability to monitor spends and get an overall tracking for global operations.
When this is set into a smooth routine operation , BPO outlook tend to change with a narrow focus on transaction alone forgetting the work itself. This is the crux of the problem when senior staff from front end and BPO are taken off and management applies pressure to use new recruits to cut costs . This is where failure starts when BPO management does not value knowledge and operations significance but reduced to just plain Head count costs and high value transactions are reduced to time components .
This is the case when its outsourced internally within HP, then just imagine case when its outsourced to third party . I would only stress on understanding the overall outsourcing knowledge and management requirements to have a continuity to make outsourcing a success. Alternatively, if this is not done the new teams do not know the implications and processes leading to costly failures generally not visible in first 2 years of outsourcing. Essentially lack of knowledge and sending out of core expertize have lead to outsourcing failures
This is to caution operations where BPO management looks at transaction cost reduction only and looses in essence the importance of the operation and its significance to the company .
I completely agree with you. Thanks for sharing this information. You may want to read more from “Outsourcing Philippines.”
When it comes to large outsourcing deals, partnering can definitely help. But when there’s a contract in place and you’re working within the bounds of the contract, it is hard to just implement a change – unless there are revisions to the fine print. Yes, projects do evolve along the way and one needs to be flexible. But how to weed out innovation from scope creep? This is why no matter how easy to turn to plan B when plan A fails, people stick to what was originally planned.
I think your assessment of the “crux of the problem” is correct. What can be done to eliminate this? Can buyers add this provider characteristic to their selection criteria when considering which provider would be the best partner? Can they check with the provider’s other clients to detect whether this has happened — and would those clients tell the truth? Sometimes, though, the buyer is the source of the problem in its demand for continual cost savings. What needs to change to prevent this demand from resulting in loss of expertise? Must it be handled up front in the contractual terms, or is it best handled in governance meetings where cost-reductions ideas are discussed?
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Interesting post! Outsourcing the lead process increases the company’s sales and revenues while cost is reduced. Anyway, thanks for sharing this informative post. Looking forward for your next post.
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This is an interesting story and I have he following takeaways from it:
A service provider can never take an outsourcing relationship for gramted – The value of the relationship is only as strong as the value add that the service provider offers the buyer and in addition to creating the value add how effectively the provider communicates to the key people in the buyer’s organization. This does not seem to have happened in the case of the provider wh lost the business
It is critical to estimate effort -’what it takes’ to do a job rather than yield to short term business pressures – While cost is important outcomescould be even more important to the buyer organization. The service provider seems to have compromised delivery quality because of profitability concerns.
Partnership is a two way process – When two parties describe a relationship as a partnership there are a set of behaviors that both provider and buyer need to manifest. It helps to articulate the behaviors early in the relationship. This would help either party to evaluate the dispalyed behavior with respect to the desired behavior and make needed course corrections. Otherwise there is a clear and present danger of the partnership deteriorating without it being consciously noticed