Posted by: Arun Gupta
CIO, Leadership, outsourcing
Recently I met a friend whose company had signed a strategic outsourcing deal a few years back with much fanfare and was talked about as one of the first in his industry. His company made news in restricted industry circles and the vendor gained good leverage out of the deal. The long-term deal was expected to create efficiencies which were acknowledged by the Management and the Board. The teams were excited with the prospects of the new engagement and the benefits outlined.
From initial discussion to closure of the deal, it had taken a lot of groundwork between both the teams who toiled for over a year. Setting the baseline was the most rigorous task which required everyone to agree to the “as-is” scenario; number of assets, age and residual life, upgrade and replacement norms, scale-up of the business operations, revenue growth targets, additions to workforce, industry outlook; everything was required to be put in writing to ensure that the contract survives the signatories.
I asked him on how it was going; after going down the journey for close to three years, had they started seeing the benefit of their decision? How was the service delivery and how had the users taken the change? What would be his advice to others who may want to go down the same path? After all not many had signed long-term deals in recent times. He looked at me hard as if trying to understand why I was asking him all that. Seeing no ulterior motive in my query, he responded:
We have decided to terminate the deal; it is not working out. Our problems started during service transition. The team misinterpreted almost every clause and intent; we had to involve the pre-sales team and escalate across layers to get to the shared understanding that went into the contracting. The people on the ground had skills deficit and were unable to come up to the same level of service pre-outsourcing. In every review meeting they promised improvements and then nothing changed.
The commercials were based on certain assumptions of growth and efficiencies. They were expected to make upfront investments on tools and technologies which took longer than committed to materialize. Business had also started slowing down and the cost was beginning to hurt. The vendor was unwilling to accept this and review terms of engagement even though one of the primary benchmarks, cost as percentage of revenue, was broken and going north instead of the promised south.
After much discussion, escalation and negotiation, small tweaks were done to the model which survived a stormy year. When business growth eluded us as per original plan and required deferral of certain initiatives and hardware refresh, the dialogue was not very encouraging. All the spreadsheets that made lot of sense prior to commencement now appeared to be work of fiction. The contract did not allow significant change downward while it captured the upside. Short of suing each other the only recourse was termination.
In recent times there have been many outsourcing contracts that have run into rough weather; what seemed like a great idea in the late 90s and turn of the century have lost charm. Back then everyone was racing to outsource; now it seems that everyone is in a race to find a way out. Most contracts that are coming up for renewal are finding favor with neither incumbent vendor nor new partners. Have the outsourcing benefits suddenly disappeared? What has changed that suddenly makes enterprises shy away?
It is evident that for many who outsourced with large long-term deals with big service providers have not gained the promised benefits. Where did it fall short? Sales organizations did a great job of painting a rosy picture while the delivery and execution team ran out of color red. The gap between intent and execution and the inability to adapt to variability of business has resulted in both sides feeling shortchanged. The advent of newer services and scenarios like RIMS and BYOD has anyway changed the game.
One of the models that I have found survive over others is a deal where service parameters and expectations are reset every year. It requires IT, business and the vendor to work on the same side of the table. I have observed many successful deals that survived multiple challenges; they had clearly defined ownership. When you outsource, you still are accountable and responsible; it is not abdication of responsibility. New models of outcome based engagements are appearing on the horizon, their efficacy is yet to be experienced.