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In this series on
outsourcing contracts in the financial services industry, I’ve discussed the
importance of negotiating
the initial outsourcing deal
, reported on the benefits of a well-planned Business Process
Outsourcing (BPO) partnership
, and—last time—explained the rationale behind
the decision to outsource
. However, what if your organization is already in
the middle of an outsourcing deal that isn’t providing the services or benefits
that you bargained for?

Outsourcing contract woes: What went wrong?

Many outsourcing
contracts are now entering middle age—particularly in the financial services
sector. A look at these maturing partnerships gives cause for concern. Three to
five years into the outsourcing of large, complex, multimillion dollar, front-
and back-office functions (including HR, procurement, and accounting), the
strain is beginning to show for some of those companies who didn’t negotiate
flexible deals or skimped on the due diligence of finding the right partner.

“It is a
market in turmoil,” explains Linda Cohen, Gartner V.P. and Chief of
Research in IT Outsourcing. From now until 2008, she estimates that up to 70
percent of deals will be afflicted by some kind of malaise—which she refers to
as “offshoritis”, “deal paralysis,” and “management
deficit disorder.” And less than 50 percent of these problems will be
fixed to anyone’s satisfaction.

The difficulty
with many contracts is the fact that they have not aged well. For example, outsourcing
is reliant for its success on people, as much as technology, and while technology
is relatively predictable, people are not. The individuals who set up large
outsourcing deals are not the same people who are then responsible for
delivering the services.

The entrepreneurial people do the first part, which includes the
6-18 months when tasks are set, staff is reallocated, and benefits are
identified. But once the deal is rolled-out, they are off to the next project.
Then, a new set of individuals is brought in: They are not entrepreneurial and,
to put it bluntly, can lack the skills that lay behind the early success. From
this moment, the partnership is under threat.

If a firm wants to make changes over the length of a five- to ten-year
contract, which is very likely, the original outsourcing deal may not be flexible
enough to accommodate them. For
example, consider the way market attitudes are changing in relation to call
centers—in particular, the way that off-shore call centers are increasingly
beleaguered by complaints. (NatWest recently
went so far as to run an advertising campaigning appealing to customers to
switch accounts for the very reason that it uses only locally-based call centers.)
A bank stuck with an intransigent call center deal, or one in which it is
unaware what part of the service is off-shored, may well be unable to respond
to these changes in good time, and so lose competitive advantage, if not market
share, as a result.

Another outsourcing problem stems from the point in the business
cycle at which these older outsourcing deals were signed. For example, in 2002,
the IT services industry experienced only around 2 percent growth, according to
Gartner—the lowest for 10 years. Vendors offered apparently lucrative long-term
outsourcing contracts, and firms that faced tight budgets and pressure to meet
short-term cost reduction targets might have been tempted to sign them.
However, the “good deal” in 2002-2003 may not be such a good deal in
2004-2005, let alone 2006.

Plan to
renegotiate long-term outsourcing deals

Now, if a bank finds itself in such a position, then it really
only has one option: to renegotiate the deal (consolation is found, Cohen says, in the fact that an unworkable
deal is often as uncomfortable for the provider, and so they are only too glad
to make changes).

However, there is
more to be learned from these kind of situations, namely in relation to signing
up new providers in the future. The key is to recognize that over the lifetime
of an outsourcing relationship, commercial variables are bound to change. So, renegotiation should be built into the deal
right from the beginning.

It is possible to
put together a deal that manages risk and builds in flexibility. A case in
point is the recent relationship between Lloyd’s
of London and Unisys
; they are partners in an infrastructure managed
services agreement, worth $17 million over five years. “Lloyd’s chose to
partner with Unisys because of the professionalism and knowledge displayed
during the tender process,” says Chris Rawson, CIO at Lloyd’s. “[But]
Unisys also presented an imaginative proposition designed to continually
improve the quality of services delivered in line with our organizational change
and business objectives.” In short, rather than constructing long-term
outsourcing deals on the basis of control, companies should base them on
flexibility. Perhaps then, fewer outsourcing deals will go sour before the
benefits can be reaped.