The High Costs of OutsourcingBy Channel Insider Staff | Posted 2005-11-16 Email Print
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A lot of outsourcing contracts end up costing more than they are worth. It's important for providers and customer to set the right expectations in advance.I recently led a session on IT outsourcing at the Outsourcing Institute's Roadshow in Chicago. The daylong event included an exceptional presentation by Sara Parker Enlow from Vantage Partners about relationship management that I believe would be of great interest to solution providers.
Vantage Partners, of Boston, works with firms on conflict resolution. Enlow's presentation focused on the cost of outsourcing when the relationship is unhealthy and the benefits of outsourcing when both parties go into negotiations with a win-win attitude. Based on Vantage Partners' research, the cost of a sour relationship can hurt both the service provider and the outsourcing company and have an impact the lasts through the contract term.
Look through the annual reports of the largest managed service providers, and it becomes clear there are numerous instances when a long-term contract worth hundreds of millions of dollars is better terminated than continued. There isn't a single global service provider that doesn't have at least three or four examples highlighted in their annual reports of a contract gone south.
Here is how a bum contract impacts the firm, according to Vantage Partner: The dollar cost of outsourcing relationship management is up to 75 percent of the value of the total contract. These costs include both substance and relationship items. Substance items are such things as pricing, reporting methods when and how, defining service levels, and service delivery.
Relationship items would be things like understanding each other's objectives, building trust and respect, and developing open and honest communication. If any one of these items is out of sync, costs creep up, quickly negating any cost savings associated with the initial outsourcing contract. Two, three or four items out of sync, and outsourcing quickly becomes an expensive exercise for both parties involved.
Here are some numbers on the cost of a sour contract:
Initial outsourcing contract:
One failed delivery schedule:
The meeting numbers are based on an average annual salary of a midlevel manager and three subordinates spending a total of 3 hours in meetings for problem identification, and two times that value for joint meetings between service provider and user. In this example, 22 percent of the cost savings associated with outsourcing has been lost. Assume there is only one problem each year over the course of a five-year contract, and the savings associated with outsourcing has been eliminated. Factor in metrics such as lost opportunity costs, and outsourcing becomes a burden to both the vendor and the user.
To get around these problems, Vantage Partners suggests the following actions by the user company during the negotiation process:
On the service provider side, Vantage Partners suggests:
In a healthy outsourcing relationship, Vantage suggests the following win-win strategies:
The net of Enlow's discussion is that an outsourcing relationship is very similar to a marriage or core relationship. Share responsibilities for successes and failures, work together to resolve the root cause of a problem to eliminate repeats, avoid ugly surprises, and most importantly, keep the lines of communication open and operational.
A free, complete copy of Vantage's report on the value of effective relationship management and governance can be obtained from its Web site.
Nova Amber, a founding partner of Perspective Group, is conducting a Web-based study on storage and storage management as a service. If you have a few minutes and would like to voice your opinion on the subject of storage, as well as have the opportunity to win one of a number of cool prizes, go to www.perspectivereports.com.
Some of the more interesting results of the study will be discussed here in my January and February columns. Wishing each of you a safe and festive Thanksgiving holiday.
Martha Young co-authored "The Case for Virtual Business Processes," published by Cisco Press. She has extensive global expertise in the outsourcing and managed services market intelligence arena. Young can be reached at firstname.lastname@example.org or (303) 642-0941.