Let Me Count The Ways
The Internet has made offshore outsourcing easier in many ways. But the basic problems inherent in these relationships haven’t changed. “We used to send a truckload of paperwork to India to get source code. Now we do that electronically. The speed has increased but the problems are the same,” says Nich Mills, a partner with Procure-IT Strategic Contracting Consulting, an outsourcing consultancy in the Netherlands.
One of the primary problems is communication. This is the buyer’s responsibility, Mills says. “A buyer must understand an apple is an apple and not a pear or an orange. Then, the vendor has to use the same terminology,” he advises.
The price for not clearly defining terms beforehand can be high. Mills says “every service you don’t define will cost more later.”
Mills quotes a PricewaterhouseCoppers (PwC) survey that discovered the expectations of a buyer’s senior management and its IT department differed. As a result, the senior management did not receive the results it expected. Citing statistics from U.S. outsourcing contracts, Mills says 50 percent of American buyers feel their IT outsourcing suppliers are not delivering everything they promised.
Mills says this problem is due to “a lack of internal preparation.” Top management on the buyer’s side never distinctly defined the results its wanted. “Senior management sometimes goes with the flow and believes the vendor when it promises to look out for the buyer’s interests,” he says sardonically.
Haste Does Make Waste
Haste is another problem. Once buyers have decided they want to outsource, they are ready to rush into an agreement without the meticulous preparation crafting a successful outsourcing relationship requires. The solution here is to complete the proper planning up front. “Do a good Phase I and the war is half won,” suggests Mills.
Another mistake is to think the two parties will live happily ever after. Instead, buyers “should arrange for the divorce before they get married,” offers Mills. He says having a back out plan is crucial because the vendor “wants to lock you in for years and years.” Every business relationships will end, he says matter-of-factly.
Long before they sign an outsourcing agreement, Mills says buyers must determine not only their Service Level Agreements (SLA), but also who on their staff is going to monitor them. The buyer must have trained employees in place who can administer the SLAs. “Gear up prior to shipping functions to a third party supplier,” he says.
Buyers must ensure their SLAs are measurable. Once again, the buyer must do this before the outsourcing contract takes effect. Buyers with unmeasurable SLAs create a monitoring situation “that can lead to chaos,” Mills reports.
Subtle Culture Clashes
Building an interface between the buyer’s team and the supplier’s team can be problematic. Mills says something as routine as moving a PC from the second floor to the 14th floor can generate a great deal of frustration for the buyer if the two parties can’t work together to coordinate the move.
Buyers must pay attention to cultural differences. From his viewpoint, the U.S. is an open culture where the trust between partners is low. Asia is the opposite. That region is a closed culture but the trust between partners is high. Mills places Europe in the middle.
Widely divergent corporate cultures add another layer of complexity to outsourcing arrangements. For example, Mills says EDS is a formal place and requires its employees to wear blue suits and ties. But the government agencies in Europe that they work for are more laid back; business casual is the accepted garb. The two ways of thinking, as reflected in the dress code, can make it difficult for both parties to work together in the trenches.
If buyers are not going to hire an external consultant like Procure-IT to help them hammer out a fair contract, Mills suggests hiring an experienced negotiator as your sales manager. Vendors, especially the large ones, have highly skilled sales people. When negotiating an outsourcing contract, “buyers need skill sets that more closely match the skills of the vendors across the table,” he says.
Vendor Selection Criteria
Buyers also tend to select the biggest vendor. That is not always the best choice, Mills says. If a buyer selects a supplier whose work is critical to the company’s survival but who is too small to make much difference to the supplier, the buyer is “asking for trouble,” observes Mills. “You’re just not important to them.” Instead, each company should have equal influence on the other’s revenues.
Mills says procurement executives always try to match size and importance when selecting suppliers.† IT managers don’t. The Procure-IT site has a risk exposure map to help IT executives calculate the risks inherent in their relationships.
Mills reports that Europeans are watching the U.S. outsourcing market closely to analyze the relationships that went south. “We’re learning the lesson of how not to do things,” he says.
Lessons from the Outsourcing Primer:
- Buyers must clearly define what they are outsourcing before signing a contract. Failure to do so raises the cost of undefined services to the buyer.
- Define an exit strategy before consummating an outsourcing agreement.
- When selecting a supplier, make sure your business is as critical to it as its services are to you.
- Have the people who are going to monitor the SLAs in place before your sign the contract.
- Hire outside help when negotiating an outsourcing contract. If you are going to do it alone, make sure your team has the same skills as the vendor’s sales staff.