How Neighbourly Etiquette Could Account for a Near 60% Outsourcing Failure Rate

• Tuesday, 23 August 2005

Five personality types dominate outsourcing relationships

23 August 2005: While growth in IT and business process outsourcing continues to dominate strategic decision making, contractual relationships disappoint nearly 60% of the time, according to experience tracked by Compass Management Consulting. Findings extracted from the Compass FactBase, a database of worldwide experience across 8000 customers in 32 countries, indicate that 58% of all outsourcing contracts fail. The FactBase indicates that 80% of contracts that fail, fail due to poor governance, with problems covering issues such as a lack of pro-activity and a shortage of management skills on the part of the customer and service provider. As a consequence, such poor governance undermines the core objectives of an outsourcing strategy, reducing anticipated returns by as much as 75%.

“It comes down to the ability of all parties to forge good relationships”, says Ian Leask, Head of Compass’ Sourcing Practice. “These ‘soft’ intangible issues are all too often overlooked during sourcing and negotiations, yet it is here where the foundations for success or failure are set.”

According to Leask, outsourcing arrangements are akin to neighbourly relationships. Clients and service providers have a mutual interest in improving their quality of understanding if they are to successfully ‘live’ within the close proximity of each other. With an increasing dependency on high-value outsourced services such as application development and data centre management, along with business processes such as payroll, accounts and human resources, companies stand to sustain huge unanticipated costs unless they examine their own characteristics—with a view to becoming a ‘good neighbour’.

In its work across outsourcing contracts in the last 25 years Compass has observed that companies exhibit five primary personality types in the neighbourhood with only one forming the basis of a strong relationship:

The Curtain Twitcher – When interfacing with the ‘curtain twitcher’ suppliers will find them nosy, but not interfering. They will often complain to colleagues about their service providers’ short-comings, but not address the issue head-on. This irritable relationship, based on a sense of mutual suspicion, is often inherited by the company’s internal manager who may feel that there could be better supply options to hand, yet the decision has been taken to persevere with the status quo. A contract review, which should be implemented annually, would ensure objectives are understood on all sides.

The Trend Spotter – The internal team, lead by the ‘trend spotter’, has outsourced because it is the current trend in business service management. They have embraced help desk and IT maintenance outsourcing and currently are hurtling towards off shoring back office services. The pressure is coming from the top — 8 out of 10 IT Directors are actively pursuing off shore solutions, often fuelled by the perceived belief that outsourcing costs minus previous in-house costs equals cost savings. It doesn’t. Companies should fully quantify the extent of an outsourcing opportunity before embarking on a long, difficult and expensive process that is fraught with risk.

The Noisy Neighbour – This over zealous micro manager prevents the service provider from getting on with the job. A seeming obsession with the minute details can result in ‘analysis paralysis’ and confusion among colleagues. The tendency to escalate every service issue can interfere with a successful project transition and progression toward the business goals on which the contract was struck. Companies need to be sure that in-house teams are suitably reassigned to other tasks while new or different management skills are developed to ensure a proactive rather than interfering governance model.

The Hedge Builder – The ‘hedge builder’ sets up a contract and expects to watch it happen without getting involved. This cuts off the possibility of the service provider advancing with the contract and business working hand in hand. There is a tendency to keep ‘the roses well pruned’ on his/her side of the hedge and ignore the mess next door that may well be affecting property values for the whole street. The misguided belief is that outsourcing will cure all ills, once inefficient processes have been chucked over the hedge. Generally a budget of 4-6% of the value of the contract is required to ensure an adequate in-house team to manage the relationship.

The Good Neighbour - Representing only 20% of outsourcing deals, the ‘good neighbour’ understands that the retained in-house organisation should be designed to maximise value creation from the outset. A multi-layered organisation ensures alignment between client and service provider at the strategic, tactical, and operational levels. Working from a win-win mentality, the time is taken to assess not only technical competency but also the business goals of the provider, maximising the opportunity for a cultural fit. Service provider personnel receive ongoing training and key personnel are given individual incentives related directly to the client’s organisational objectives.
If companies are going to realise the objectives on which their outsourcing business cases are based, they must first recognise the need to develop a strong relationship along with a sound contract.

“Cultural differences between client and service provider must be actively identified and bridged and an environment developed that ensures client and service provider business interests are in alignment over the life of the relationship— including a joint commitment to an ongoing, expanding relationship between the parties,” says Leask.

Ends.

About Compass
Compass is an independent global fact based consultancy that advises organisations on operational improvement and agility, providing measurable benefit to performance, efficiency and profitability.

Compass business and IT consultants analyse and optimise the operational practices of large organisations in relation to their core business objectives. All recommendations are fully auditable and are based on data, not opinion, that quickly enables organisations to close performance gaps, develop best practice and drive effective change. Compass specialises in delivering positive lasting change to organisations through service improvement, cost management and revenue enhancement.

In 2004, Compass delivered over 600 engagements worldwide, delivering typical savings of over 17 percent of analysed costs.
Since 1980, Compass has delivered around 8000 engagements in 32 countries saving clients over US $20 billion dollars in yearly costs from total costs (of areas analysed) of over US $100 billion dollars. For further information visit: www.compassmc.com or call +44 (0) 1483 514 500

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