When outsourcing fails to deliver

Terminating a contract for cause is a last-resort move that rarely happens

How often do outsourcings fail or become problematic? Estimates vary considerably, but all point to the idea that while outsourcing is maturing and generally working better than in the past, initiatives still frequently fall short of managers’ expectations.

In a 2003 issue of Academy of Management Executive, the article “The Seven Deadly Sins of Outsourcing” highlighted a survey by the American Management Association that found three-quarters of U.S. managers reported outsourcing outcomes failed to meet expectations. Another survey conducted this year by KPMG International of 650 organizations in 32 countries, paints a more positive picture. It found 89 per cent of client organizations say they plan to maintain or increase their current level of outsourcing. However, nearly 40 per cent of those surveyed reported that, to some degree, up to half of their outsourcing contracts failed to yield the expected level of benefits.

Research in Canada by the Centre for Outsourcing Research and Education (CORE), a Toronto-based research organization, indicates the majority of clients are largely satisfied with more traditional information technology outsourcing, but only about half of organizations that have undertaken business process outsourcing, such as HR outsourcing, are satisfied.

Underlying causes of outsourcing problems

Problems with outsourcing can rarely be traced to a single underlying cause, nor can blame be laid at the feet of either organization. Generally, outsourcing failures are a result of various factors, with both client and provider sharing part of the blame.

While there are many causes of problems in outsourcing, based on CORE’s research, the most important causes are:

Poor scoping and service definition: Activities are included or excluded from the deal inappropriately, making it difficult for the deal to succeed. In an HR outsourcing, including payroll and benefits administration without including retention of employee data is likely to result in a sub-optimal outsourcing, as the interdependence between the client and provider is increased to the extent that difficulties are likely to occur. Also, poor definition of the services included is a factor that results in ambiguity and difficulty measuring performance

Lack of leadership: Outsourcing represents change, often threatening change, within organizations. It is incumbent on leaders to sell this change and to show they are fully behind it. Where leaders do not demonstrate this visible sponsorship, the resistance and general negative reaction is likely to be high.

Poor governance of the relationship: The processes to address issues, and make decisions about changing needs, are not properly set up and maintained. Governance entails effective communication at the right levels at the right times and requires a disciplined approach. Where this discipline breaks down, issues do not get resolved, important decisions do not get made and the entire relationship drifts. Worse, the “noise” factor of rumours and complaints takes over, leading to a breakdown in trust.

Weak management processes: An outsourcing relationship requires strong management of people issues and effective performance measurement and reporting. This requires a very strong “stay-back” team in the client to ensure the outsourcing is effectively meeting the needs of the organization. It also requires an equally strong management team on the provider side. Where either or both of these management teams is weak, the likelihood of failure is high.

Getting it back on track

“Get back to the facts… get everyone to take a step back… allow people to vent, and then work together to figure out the root cause of the problem.”

These responses from CORE research capture the consensus that emerged around the basic need to deal with problem outsourcing on dual tracks: one track focused on diffusing emotions and mending the human relationships that are inevitably damaged when an outsourcing gets in trouble; the other track focused on in-depth objective “root cause” analysis and constructive problem-solving aimed at realigning the interests and efforts of the two parties.

Practically speaking, a team from both the client and service provider needs to be created to define the root causes of problems and actions to fix these. This team should include people independent of the actual service delivery, who are able to approach the issue with some detachment. Consideration should be given to including external advisors who will be seen as impartial.

Most importantly, if the problems are serious, senior management on both sides should get involved to show their joint commitment to the relationship and to getting it back on track. There is no substitute for senior management on both sides showing they want it to work.

Calling it quits (or not)

Terminating an outsourcing contract is a last resort, and a solution that should only be considered after all remedial efforts have failed. None of the interviewees who have taken part in CORE research had experienced premature contract termination strictly for cause (as either a client or a provider), something that is in line with other outsourcing surveys.

This reluctance to terminate outsourcing relationships does not mean clients do not think about termination or reassignment when designing outsourcing transactions. All respondents consider flexibility and strong termination provisions in the contract to be imperative, even though they rarely expect termination provisions to be exercised.

Over and above contractual termination provisions, respondents strongly emphasized the need for clients to retain access to operational procedures, to retain a strong “stay-back” team that understands the outsourced services and for clients to retain access to intellectual property underlying the outsourced services.

John Simke is president of the Centre for Outsourcing Research and Education (CORE), an independent outsourcing and research institute based in Toronto. For more information, visit www.core-outsourcing.org.

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