Avoiding sourcing catastrophes, Part II

March 08, 2010 | Phil Fersht

Polarized on Cost

In Part I, cabinet-maker, gentleman and Fellow of Research, Lee Coulter, spoke about the misalignment of the sourcing relationship when the business objective and strategy becomes polarized on one aspect:  cost.  

Everyone loves to save some money, and often the misalignment isn’t felt for the first couple of years. Striking a deal that optimizes cost generally sub-optimizes other aspects. As I like to say, you can have speed, quality or cost; pick any two. This principle applies to the balancing of business objectives in an outsourcing relationship as well. 

A study was released last year showing that more than half of the largest 2000 companies in India actually outsource parts of their back office to other Indian service providers, often at a slight price premium. Why? Top answer is focus. Sure, these companies have access to the same low cost labor and could keep the processes in-house, but chose to do so because their business objective is focus. The message here is to spend the time to build strong linkage from the business objective to the business strategy to the outsourcing strategy and finally to the deal structure with an outsourcer.

Avoiding sourcing catastrophes, continued...

Catastrophe strikes when the strategic misalignment becomes profound enough for the client business to suffer strategic restrictions because their outsourcing relationship was optimized for a different business objective and can’t change fast enough to meet the needs of the business.

Second on my list is what I call the Mutual Assured Destruction (MAD) versus Mutual Assured Success (MAS) conflict. The simple fact is that there cannot be a single winner in an outsourcing partnership. This implies that if both parties are not actively holding (and working toward) the business objective of both parties as their own objectives, then the relationship runs the very real risk of MAD. Whatever issues exist with one party will eventually become issues for the other party – it is only a matter of time. At the time the partnership is formed, both parties believe there is commercial success potential.

However, things change and change fast; often before Day 1 of the active service relationship. Economics change, companies change, strategies change, and people change. It is the leadership challenge to constantly keep in crystal clear focus the ever shifting set of goals the parties each have. More importantly, both management teams must overtly discuss, integrate, and feed back into their own organizations a unified set of objectives. In the absence of working for mutual success, the default behavior is to place your own interests over those of your partner. That does not imply bad intent. That is just what happens. It doesn’t take conscious decision to find you are on a mutual destruction path. Think of the mutual success path as one that takes constant effort to maintain, and the mutual destruction path as the default long-term path.

Real business partnerships do not come naturally to most organizations. The vast preponderance of experience companies have with other companies is of a more tactical nature. When I speak on this topic, I use an analogy to human relationships. Most B-B relationships fall into the “Friday night hook-up” category and occasionally evolve into a “serial dating” type of relationship, but rarely ever turn into  a marriage-like long-term partnership. How do you manage this new kind of partnership? All too often, organizations revert to the only methods they know and when all you have is a hammer, everything is a nail.

It is unnatural for most organizations to do kind of work necessary for the health of a long term relationship. As anyone who has been in a long term relationship knows, the interests of both parties must always be held together, and often, one party must place their needs subordinate to the others’ to ensure the relationship endures. I do a lot of talking and coaching on this topic. I will again say that this is the leadership challenge in outsourcing. This cannot be legislated, although you can build governance structures and processes that are more conducive to it. To make matters more difficult, when it is working as it should, outside observers on both sides are critical of this new kind of behavior. The service provider account team might hear their own organization tell them they have “gone native” and the client management team might get the question of “who are you are working for? Us or them?”. Not easy words to hear.

Because of the depth and length of most outsourcing relationships, anything other than results that enable both parties to be successful over the long term, will eventually end in a significantly disruptive way that result in great loss and misfortune. Most (but not all) other symptoms of troubled relationships can find their root cause in either strategic misalignment, or the lack of committed action to keep realigning and adjusting the mutual goals and doing the work necessary to change the relationship to be able to deliver for both parties.

Lee Coulter is Research Fellow and Distinguished Analyst for Horses for Sources.  Lee supports Horses for Sources' enterprise customers with their outsourcing and shared services strategies - you can read his fill bio here.

Posted in: Business Process Outsourcing (BPO)Buyers' Sourcing Best PracticesIT Outsourcing / IT Services

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