It's the relationship, stupid.

That was the message at the Outsource World conference in New York Oct. 17-18, where the subject of how to get around outsourcing relationship pitfalls was front and center during various presentations.

Most customers and providers entering outsourcing relationships know the litany: You've got to manage as you have never managed before, if you want your outsourcing relationship to succeed. Even so, plenty of mistakes are made—so many, in fact, that nearly half of all outsourcing deals end in failure, according to some experts.

"Somewhere near 50 percent of relationships fail. Companies are just beginning to understand the importance of contract governance. It's not brain surgery; its basic, but it requires discipline," said Claude Marais, a partner at outsourcing advisor TPI, in Atlanta, and former head of outsourcing at General Motors and Coca-Cola.

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Creating a basic contract framework that can be applied to many outsourcers globally is critical, Marais said. "We're shifting from 'think global, act local,' to global collaboration. In sourcing terms, no one supplier can provide all services everywhere, so you have to multisource. You need to develop a manageable contract profile. Managing hundreds of small contracts globally is too difficult," said the veteran IT executive.

Marais also said it's necessary to make sure that suppliers are prepared to serve you globally. Customers can play a role in bringing this about, he said. "Understand supplier incentives and infrastructure. Incent your supplier to provide globally. You have to help your suppliers act globally—can't expect them to do it themselves," said Marais.

John Elliott, senior managing director at Bear Stearns in New York, said he's seeking a "machine-like apparatus" to make his outsourcing relationships. Building such an apparatus means forming a team with the right mix of skills ranging from legal to procurement to clerical, he said. The bottom line for success, according to Elliott, is taking a no-nonsense approach. "We're doing it [outsourcing] because it makes sound financial sense for the firm. We keep that focus in front of us at all times. We want access to the right talent at the right time at the right price."

Fred Mapp, CEO of Quality Service Solutions, a consultancy in Scottsdale, Ariz., said communication is the most critical factor in making a relationship work. "In managing the relationship, 60 percent of problems are due to communication."

Communication gaps can arise from a lack of understanding of the customer's business on the part of many outsourcers, said Bob Schwartz, former CIO of Panasonic America. "The skills will be pretty solid in most cases. What's missing is a sense of the mission of our company—that's not something that people can learn when they're remotely located."

Peter Nag, managing director of Opera Solutions, a management consulting firm in New York, said: "In India, many young people are working for the outsourcers with only three to five years experience. They understand the technology, but not the business."

But understanding is a two-way street. Lori Goldman, president of DNL Global, a human resources consultancy, has found that outsourcing relationship managers need to be chosen for their knowledge and adaptability. "Lots of customers are dissatisfied with their outsourcing relationships, but they blame themselves for lack of skills. ... Management takes a lot of rigor and patience," she said.

Ben Trowbridge, managing partner for Alsbridge, an outsourcing consultancy in Addison, Texas, said many companies choose technology veterans rather than skilled managers to handle outsourcing relationships—and that's a mistake. "It's a different skill set to manage the provider under a contract. Companies try to find jobs for loyal people, they make them contract managers. They may really hate the outsourcer."

Trowbridge added that too many penalty clauses in contracts can alienate outsourcers. "Would you hire a person on the same basis?" he said, pointing to a litany of conditions in many contracts, all of which threaten penalties for the outsourcer.

He said customers should take heart that their outsourcing provider is turning a profit. "It's a good thing to know where your provider's profit is coming from." But, he noted, U.S. providers have the lowest margins in history. "So behaviors need to change," he said, suggesting that contracts be crafted with shared risk and reward in mind.

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