Reality Check | Ephraim Schwartz » Can't get no outsourcing satisfaction?

February 19, 2008 | Comments: (0)

Can't get no outsourcing satisfaction?

TAGS: Outsourcing

Cost-conscious outsourcing could cripple your business for years if you don't hammer out innovation expectations up front

An important survey of major companies using outsourcing services shows a deep dissatisfaction with the outsourcing experience despite the fact that these same companies say they achieved as much as a 25 percent ROI.

The survey, "Why Settle for Less," put together by Deloitte Consulting, has what many similar surveys lack: a convincing substructure.

Rather than talking to a dozen top executives at Fortune 500 companies, as lesser surveys do, Deloitte talked to 300 CEOs, CIOs, CTOs, and directors at companies that spend a minimum of $50 million on outsourcing or $30 million annually on BPO, as well as organizations that invest more than $1 billion in what is typically called Very Large Scale IT Outsourcing Services.

Also included in the survey were conversations with senior executives at 31 outsourcing service providers.

Thirty-nine percent of the 300 respondents said they had terminated an outsourcing deal and went to another vendor or brought the function back in-house. In addition, 61 percent of those who said they were dissatisfied said they had to escalate the problem to senior management in the first year of a contract, with 53 percent of those escalating yet again in the second year.

The key reasons for dissatisfaction? Underestimated project scopes; "higher-than-expected" costs; and poor communication, service, and reporting on the part of the service provider.

Deloitte partner Peter Lowes, who headed up the report, admits to being surprised by the results, which included the firing of suppliers on a wholesale basis, more than you would think appropriate for a typical business arrangement.

"There’s a great deal of tension," between the two sides, says Lowes, who is the national service line leader for Deloitte's outsourcing advisory services group.

Cost savings remain the motivation behind these outsourcing deals, and the savings are real. But the problem is that there are other expectations, such as innovation, process improvement, time to market, and customer service, where the outsource providers fall down.

"In most cases, expectations exist and are discussed, but it is swept under the carpet so the plan on how this will be achieved is being overlooked," Lowes says.

Companies are too often overly hungry for cost savings, and because sales is motivated to get the deal signed, everyone decides they will sort out the details later. And guess what? There's no real follow through.

But dissatisfaction is more than just a thorn in the company's side. These long-term relationships -- typically three to seven years, with the bigger deals extended out to 10 years -- can put a company at a competitive disadvantage, according to Lowes.

Over the length of the contract, the service provider is expected to continually innovate. Respondents, however, were consistently disappointed in this aspect of the outsourcing arrangement. They felt that, at the conclusion of the outsourcing deal, they had fallen behind in their respective market. This was identified as a chronic problem.

And here is the real danger.

"The longer you outsource something, the more you fall behind," Lowes says.

The solution seems obvious, but let's put it down on screen, so to speak.

Services should be broken up into smaller pieces for shorter durations. Rather than a single $1 billion deal, sign smaller deals focused on smaller services. Outsource your desktops to one provider, servers to another, and your network to a third.

"Do a three-year deal instead of five years, or a seven-year deal instead of 10," advises Lowes.

Also, by breaking up the scope into more discretely defined pieces, you will find service providers who have deeper expertise.

It is also important to define an innovation plan going in and agree on how it will be delivered.

Be prepared, however, to drive that innovation with additional capital every couple of years. You can't just go to the lowest bidder. You have to make it worthwhile for the service provider.

Lowes says that past Deloitte surveys indicate the more profitable the relationship for the outsourcer, the happier the customer is, because the service provider has an incentive to do a better job.

Although it sounds like a no-brainer, many companies never think to align their outsourcing strategy with their business strategy. Blinded perhaps by the allure of cutting IT overhead by 25 percent or more, companies fail to do their homework, thinking all it takes is a financial business case to justify jumping into an outsourcing deal.

Posted by Ephraim Schwartz on February 19, 2008 03:00 AM

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