Steps the outsourcing industry needs to take to survive

Outsourcing: Making the same mistakes over and over and expecting people to stop moaning

One of the the core issues we discussed at last week’s Blueprint Sessions was the frustrating and seemingly never-ending issue of providers over-promising delights to clients to win engagements and then failing to deliver on them.  However, the group of 45 industry stakeholders all agreed that all of the entities are at fault in setting up too many of these engagements to fail:

Buyers:  Thinking that they are going to get wads of free transformational consulting that will miraculously appear from the provider – even thought they haven’t actually paid for any;

Providers:  Promising wads of free transformation consulting to augment their operational obligations, even though they probably will not really give the client any (but who cares, as it’ll be too late for the client to back out in two years’ time and they aren’t contractually obliged to provide it);

Advisors:  Strong-arming providers to respond to RFPs in three weeks and allowing very little (if any) interaction time for providers to interact with their clients in advance to develop the right solution and get a stronger balance between delivery capability and desired outcomes.

So what happens when you look at a culmination of many buyers’ first five years’ experiences after signing a contract?  Let’s take a look at some collective journeys:

Click to Enlarge

Four steps this industry needs to take to avoid engagement failure in the future

1) Less focus on the deal, more on the relationship. Providers are all-too-frequently being forced in the position of saying what they need to win the deal, as opposed to having a  structure to propose a realistic partnership that works for both sides, with specific milestones and balanced delivery expectations.

Possible Solutions: Advisors need to create a more collaborative RFP process that allows for more interaction between the buyer and interested providers. Advisors also need to set better expectations for their clients and potentially get their governance consultants involved earlier in the down-selection process.  In addition, providers need to take a stronger look at how to develop their existing clients – and view them as future growth opportunities, as opposed to always chasing that next deal simply because there’s more immediate money on the table, which means more consultative account managers and less out-and-out salespeople.

2) Buyers need to get real proof-points on provider culture, performance and capability. Buyers need access to pragmatic experts who talk to a multitude of peers in other organizations in order to get a stronger view of the post-transaction performance of providers.  Simply relying on the rose-tinted references ponied up to the advisor, or reading inaccurate analyst reports (usually premised on rose-tinted client references) isn’t going to give them the accurate expectation of what they are likely to experience down the road with each provider.

Possible Solutions: Buyers need to do their own research and exploration and use the expertise of advisors and analysts to validate their strategy. Talk to other buyers, go to conferences, seek them out on social media groups.  Ask advisors and analysts to make introductions to other buyers, and if they can’t do that for are probably wasting their money on them.  Buyers should also try to hire at least one inhouse expert to work with the internal and external parties to add a dose of realism and experience to the whole process – there are plenty of experience experts in advisors/providers shops who are interested in getting off the road to get some buyside experience.

3) Early exit provisions should be implemented as an insurance from “value disappointment”.  There needs to be smarter forethought in the whole process where the buyer and provider prepare in advance for failure to meet expectations.  Outsourcing relationships need to be marriages with pre-nups. Providers really do not want miserable clients and buyers need providers prepared to invest in them, or give up trying to outsource, as they clearly aren’t cut out for doing it properly.

Possible Solution: If providers are being shoe-horned into responding to a price-squeezing, innovation-sapping relationship, there should be an early exit provision for both sides (for example after 36 months).  If the relationship isn’t working – it probably makes sense for both sides to exit quickly, cost-effectively and painlessly.

4) Buyers need to recognize the profession of services and sourcing governance.  After seven HfS summits, we can declare officially that most corporate staff have little knowledge of understanding of what services and sourcing governance people do and why they matter (or even exist). In fact, we estimate that 90% of employees are ignorant of the role and value a services governance profession provides – or should provide. Until services and sourcing governance is recognized as a crucial professional discipline, we are going to continue to be an industry struggling for an identity littered with flawed relationships and ignorant perceptions of what we all do.

Possible Solution: Appoint a Chief Services Officer (CSO).  Many CPOs are proving ill-equipped to manage services governance, so surely its time for smart organizations to create the CSO function, with a direct reporting line to the top of the company?  It’s hard to convince top talent to work for buyer governance teams when they are submerged 4 layers down the organization form any decision-making authority. With the concerted move to increase investments in offshoring, shared services and outsourcing, not having an empowered senior corporate officer responsible for transforming operations is lunacy for so many of today’s organizations.

The Bottom-line:  If we are to survive as an industry, we need to stop making the same old mistakes

Didn’t Albert Einstein* once say: “The definition of insanity is to do the same thing over and over and expect different results”. Then, surely, it’s time for the industry formerly known and “outsourcing” and now known as many different things (including outsourcing), started to change the way it operates. Providers need to get focused on making their existing business really shine, buyers just need to take control and dictate what they expect and then figure out how to realistically get it, and advisors need to focus on more than forcing nice-priced deals frosted with bullshit.

*Most people will attribute this quote to Albert Einstein but there is no evidence to suggest that he made this statement. Current consensus is that it came from the author Rita Mae Brown in her book Sudden Death, but we needed to find a cheesy way to tie Albert to outsourcing, so there you have it…

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16 Comments

  1. Charles Sutherland
    Posted July 4, 2014 at 11:00 am | Permalink

    Phil. I couldn’t agree more. I’ve talked in past about how the basis this failure becomes especially acute in the last two weeks before a deal is signed. The pressure to sign and move on creates all sorts of unfortunate conditions that come back to haunt the operational team from Day 1 but especially in years 2-3. I’m going to follow on from this piece soon to talk about what investments need to be made in technology and process to overcome many of these points of failure in what will end up being Part II of this piece.

  2. Yatin Ubhaykar
    Posted July 4, 2014 at 12:47 pm | Permalink

    The bathtub curve and the marriage with prenups make an interesting point ! Thanks Phil!

  3. Thomas Johansson
    Posted July 4, 2014 at 5:30 pm | Permalink

    Phil,

    This is the best analysis I have read of where outsourcing industry needs to change. Until buyers think about more than the costs first and realize the change they have to go through themselves, nothing will change,

    Thomas

  4. Susan
    Posted July 5, 2014 at 6:11 am | Permalink

    Phil,

    I couldn’t agree more with the need to recognize outsourcing as a profession and a career path. We’ve been rotating staff into the sourcing governance office at our firm which is opening up many eyes to global delivery. Love the “Chief Services Officer” idea,

    Susan

  5. Eric
    Posted July 5, 2014 at 8:19 am | Permalink

    Phil,

    This is the best piece written on the direction outsourcing must take,

    Eric

  6. Steve H
    Posted July 5, 2014 at 8:49 am | Permalink

    Excellent article. Looking back at our deal, we didn’t have all the data-points we needed at the time and made some fundamental mistakes. We picked a provider which did not lavish the attention on us we were promised and it became obvious quickly that were not on their “Diamond Client List”. Once we realized this, it was too late to go back and fix many of the changes we needed without throwing a lot more money at them. While the advisor we used may have been at fault, we also need to look at our own actions of not conducting enough diligence on what our relationship would look like in a few years. I would add “avoid short-term thinking” to the list. Its very hard to fix mistakes made on this business.

  7. Subir Dhar
    Posted July 5, 2014 at 3:09 pm | Permalink

    Hi,

    A great timely article – touches some key elements on why the outsourcing engagements become “sick” over a period of time.

    The Buyers and Advisors need to understand that a good well thought out big proposal is very difficult to put together in 3 weeks.. and providers can come up with truly innovative and transformational proposals if adequate interaction time with clients is available.

    The Providers too have to make investments in building an “innovation culture” so that they can come up with adequate improvements/innovations and thereby keep clients happy over the duration of the engagement.

    Regards
    Subir

  8. Phil Fersht
    Posted July 6, 2014 at 11:16 am | Permalink

    @Susan – it’s especially important with the younger staff to expose them to real global delivery experience. They are the ones who will need to work in increasingly diverse and global business environments over their careers, whereas many of the older generation are just counting the days to retirement and ignoring many of these disruptions to their comfortable existence.

    PF

  9. Phil Fersht
    Posted July 6, 2014 at 11:16 am | Permalink

    @Eric – thanks :)

  10. Phil Fersht
    Posted July 6, 2014 at 11:20 am | Permalink

    @Steve – as I keep on saying, “learn from everyone else’s mistakes”. What is clear is how much faster clients are getting operational and looking to the “what next”. In most cases, providers simply are not ready for the demanding customer and do not have the resources to throw an existing business where the “immediate” revenue opportunities are far less attractive than those on offer from a new deal. The smart providers are the ones currently making the discrete investments in their own delivery capabilities to be at the front of the queue when their clients come calling for higher value help – areas like consultative talent, better tech/cloud platforms, better analytics tools and support and emerging areas such as robotics,

    PF

  11. Phil Fersht
    Posted July 6, 2014 at 11:22 am | Permalink

    @Subir – I genuinely feel for many of the providers which get squeezed by advisors to take on new deals at minimal margin, then get chastised for not giving enough free transformation (whether they actually can is another matter). Buyers need to understand this and ask more of these questions when negotiating a contract,

    PF

  12. Nagaraja
    Posted July 7, 2014 at 4:59 am | Permalink

    In my opinion, outsourcing is misnomer though widely in use. For successful program delivery and to achieve desired transformational benefits, the initial meetings as well as program governance should be more focussed on Benefits management (from articulation of benefits, realization plan and benefits governance) rather than focus on cost cutting by provider without fine assessment of supplier understanding or capabilities match, or focus on bagging on deal by provider without ensuring they have what it takes to deliver.

  13. Posted July 8, 2014 at 6:09 am | Permalink

    Managing an outsourcing relationship is increasingly becoming a challenge, and businesses should consider many key aspects such as proactive communication, SLA’s, and performance framework etc, before embarking on outsourcing a business function.

    We recently did an article on how businesses can make the best out of their outsourcing relationships.

  14. Posted July 10, 2014 at 2:07 am | Permalink

    This is definitely a good read. Couldn’t agree more on your point about focusing more on relationship instead of the deal. Outsourcing should always be a collaboration between the involved parties. This allows for better understanding of the requirements that need to be met and formulation of the right solutions to meet those requirements. When outsourcing is treated more as a collaborative work, success is easily achieved and costly mistakes are minimized, if not avoided altogether.

  15. Posted July 13, 2014 at 7:22 am | Permalink

    Interesting details emerging from the article, many organizations implement Business Process Outsourcing strategies to reduce IT costs and increase overall efficiency. However organizations should implement the right outsourcing strategy and choose the appropriate provider to benefit.

  16. Posted July 23, 2014 at 4:43 am | Permalink

    Excellent article aboutHuman Resource Outsourcingby 2025-2030 india will have india outsourcing will grow 10 fold so it has great future.

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