Project Management

Decision Support: Design outsourcing relationships that yield long-term ROI, part 1

Do you want to forge outsourcing relationships that will meet your short- and long-term ROI expectations? This two-part series will cover the basics of preparing the contract and planning for governance.


I recently spoke at an event where one of my fellow presenters compared the signing of a new outsourcing contract to a wedding. He then followed up with statistics that showed that much like the other happy event, 50 percent of these “business marriages” end in bitter divorce. (Gartner Group studies show that 50 percent of the outsourcing deals do end in failure). According to the experts, this high outsourcing "divorce rate" results from disappointment on the part of the buyer when ROI and other nonfinancial expectations are not met. These experts also agree that this is caused primarily by three key factors:
  • Lack of goal alignment and agreement on how to measure success between the client and the supplier
  • Poorly designed agreements
  • A lack of a good governance process

In this first article of a two-part series, I will examine the alignment and agreement challenges more closely. In part 2, I will explore the governance challenge and conclude with a focused list of three things you can do to forge relationships designed to meet your current and future ROI needs. For additional information, you may want to download "Tips for crafting better outsourcing relationships."

Making sure you and your prospective partners see eye-to-eye
According to Jon Piot, COO of Impact Innovations, a Dallas-based IT consulting company, outsourcing marriages get off on the wrong foot when partners fail to completely communicate information during the “courtship” process. “Generally, the customer is hoping to satisfy a set of objectives and solve historical problems but the supplier doesn’t get the full picture due to the rigidity of the RFP process,” states Piot. “In many cases it is only after the transition and a healthy dose of negative feedback that the supplier begins to understand what the customer really wants,” he adds.

Jim Leto, a 30-year industry veteran and president and CEO of Robbins-Gioia, LLC, a leading program management consulting firm, agrees. “If the supplier is totally focused on cost reduction and has metrics set up to track this—but you, the client see success in terms of time to market—you are almost certainly going to be at odds with the supplier,” states Leto. The way to avoid this lose-lose situation, according to Piot and Leto, is to make sure that there is a generous amount of open, focused, and direct communication about goals, as well as what constitutes success and how success will be measured during the selection and negotiation process.

Leto advises future outsourcers to identify their goals and what they will measure early in the discussion phase with the service supplier. He strongly advises that you start with the identification of goals, since once these are clearly understood, the prospective partners are in a better position to clearly recognize which financial, which performance, and/or strategic metrics are appropriate for measuring success. These metrics should be, according to Leto, as focused as possible on measuring results as well as the degree to which the supplier is truly producing those results. With this in mind, Leto advises, “Make sure your metrics capture not only whether your supplier is contributing to your goals—but how much they are contributing to your goals.”

Having decided what you want and how you will measure success, the next step is to develop service level agreements (SLA) and contracts that capture these components and are structured to evolve with your foreseeable needs. The latter part of this objective, which deals with the potential evolution of your “needs” is as important as the former, since, as we all know, rapid corporate change is inevitable in our present business climate.

Developing contracts and SLAs with the short term and the long term in mind
In numerous conversations with my friend Jim, a director in an outsourcing supplier company who specializes in designing customer SLAs, the topic of what goes wrong often comes up. “The biggest problems I see are that parties who understand the particulars of these agreements fail to make them explicit enough, so that when new managers on either or both sides enter the relationship they can draw from the documents the exact terms of the agreement,” states Jim. I’m sure all of us have experienced the confusion that occurs, as well as reinterpretation of terms, when one or both of the original contracting parties leave their companies or move on to a new assignment.

According to Piot, in his practice, he finds that most SLAs do not detail the ramifications of such basic things as the supplier under-performing. “They basically forget to specify what happens if the SLA isn’t met,” states Piot. Furthermore, on the contract terms and conditions side of the equation, Piot says that while conditions of termination are usually well documented, the back-out requirements on the part of either the supplier or customer are typically missing. These contracts, Piot adds, say nothing about what happens from a logical business perspective when the contract ends. For example, will the supplier assist the client in transitioning the function back in-house or to another supplier?

Often, the reason for these omissions is that the two contracting parties have an unwritten understanding in these areas, which they do not feel compelled to commit to writing. The problems arise when either or both of the people who know the “unwritten” rules leave, and new players are left to fill in the blanks. As a general rule, the best way to approach the building of the SLA and other contracts is to avoid these future issues by putting it all down on paper. As a lawyer friend of mine is fond of saying, take the obvious and make it explicit.

The second reason for problems that my friend Jim cited is the lack of scalability and flexibility needed to adapt to the clients evolving needs. Typically, the problem arises when your business evolves and your needs change, but the contract cannot be modified to accommodate your new needs. Three ways to avoid this are to:
  • Make sure you take potential changes in your business into account in your initial assessment, and only enter into contracts with terms that are limited to the timeframe within your line of sight. So for example, if you can only see out for three years, don’t sign a five-year deal; sign a three-year deal that is renewable at your request.
  • Make sure you are engaging with a partner that has the scalability and flexibility to meet your potentially evolving needs. While it may make sense from time to time to use a specialty supplier that offers a great deal of focused expertise, I would highly recommend that you engage with top-tier service suppliers that can handle your changing needs. For example, if you are initially looking for a help desk supplier to reduce your current cost of support operations, it is of value to engage one that has a clear strategy as well as the flexibility and range to ratchet the service and cost up or down as needed. You would also do well to partner with a supplier that can scale its services into related areas such as break/fix, install, moves, adds and changes, and so on through the network support arena. This is especially true if your forecast holds the possibility of increased hiring, downsizing, or wanting to outsource more components to further optimize the IT budget and increase ROI.
  • Make sure your contract includes a well-defined “change-process.” A well-defined change process provides the means for changing components of the agreement in a fair and equitable manner for specified business reasons.

Summary
The effort that you put into aligning goals and metrics with your supplier, crafting solid SLAs and contracts, and ensuring the scalability and flexibility to meet your changing needs is vital to the success of your outsourcing relationship. However, like marriage, the work does not end after the wedding. In order to reap the benefits of your hard work in crafting a solid foundation, you need to have the right governance mechanism in place. That topic and a summary of actions you can take are the focus of part 2 of this series.

Editor's Picks

Free Newsletters, In your Inbox