How to Rebound from a Failed Outsourcing Relationship | Article

business reboundOne of the interesting phenomena that we’ve noted in the relationships studied in Outsourcing Center’s annual Outsourcing Excellence Awards process is the fact that every year there are buyers that nominate highly successful relationships that come on the heels of those buyers’ failed relationships with prior service providers.

With the exception of two cases, where the providers were new to outsourcing and the buyers were the first client, and two other cases, where the outsourced function became a non-core line of business for the providers and they subsequently exited the service offering, the buyers cite three main areas of problems that characterize the failed relationships:

  • Trust–The buyer’s initial level of trust broke down during the relationship because certain things the provider initially told the buyer would happen didn’t actually happen; or the provider in one or more instances did not treat some ambiguous aspects of the contract in an honest, up-front manner
  • Money–The buyer felt the provider nickel-and-dimed the client at every turn in the road; or the buyer was not satisfied with the level of staffing
  • Flexibility–Over time, the provider became unwilling to work with the client’s changing needs

Buyer organizations that experience a failed outsourcing relationship have a barrier to overcome before they start looking for a new provider, warns Steve Haas, Associate Principal, Everest Group. “Usually they want to put in place a structure that treats the symptoms of the bad relationship with the previous supplier,” he explains. “That’s a mistake because, unless they determine what caused the original relationship to go south and fix that underlying problem, they will just hatch a new problem by over-treating the symptom in the new relationship.”

He cites an example of a buyer complaining that the prior provider kept rolling off good people and replacing them with inexperienced rookies. Upon switching providers, the buyer wanted a contractual clause with the new provider that required everybody must remain on the account for three years and no staff could leave without prior permission of the buyer.

But this contractual constraint on the second provider doesn’t take into account the underlying reason for the prior provider’s staffing strategy. “What the buyer in this case didn’t realize,” says Haas, “was that the parties structured the first relationship as a very low-margin deal for the provider to meet the buyer’s cost objective. Since the best people tend to make the highest salaries, the provider had to shed itself of high-salaried people and staff with lower-salaried, inexperienced people in order to break even or make a profit.” Instead of inserting a contractual constraint in the new relationship, the parties needed to establish a relationship that ensured the service provider’s profitability.

Despite a tendency to treat symptoms, it’s very possible for buyers to form successful relationships the second time around instead of repeating failure in a different flavor. What are the best practices that ensure success in these situations? Are there extra or different steps up front that the parties in a scenario following a prior failed relationship need to take when establishing their relationship? Here are some industry experts’ insights.

Don’t Hide the Failure

A key best practice is that the buyer should inform the new provider (or providers, if it’s a competitive bid) that it just exited a failed relationship and should relate some of the things they believe caused the failure. Everest advises its clients to also ask the providers for their help and guidance in avoiding that same kind of behavior.

This was one of the keys to success when ACS transitioned a client in the insurance industry in less than 60 days from a prior failed relationship. Using the ACS transition office management plan, ACS involved the client, the incumbent provider, and an independent third-party in developing the project plan. The parties took an honest look at what went wrong, and why; a fair review identified that both the client and provider made mistakes. An ACS Strategic Business Unit (SBU) manager says, “Candid honesty is necessary to correct the mistakes made by either the client or the provider and not repeat them in the new relationship.”

The SBU manager also says they “exceeded the client’s communication expectations to ensure that both parties knew they were informed.” Communication is vital; ACS recognizes that failed relationships are often more about missed expectations than service failures. Other keys to success in this transition included the incumbent provider’s willingness to facilitate knowledge transfer, and the independent third-party’s assistance in facilitating the buyer’s early trust in ACS. The relationship today is strong, due to the extra steps included in the early stages of the relationship.

Infocrossing successfully transitioned an automotive industry client from a prior failed relationship. In this case, the buyer became angry because the old provider nickel-and-dimed the buyer for services. Steve Reichert, Vice President, Client Services, says, “We flushed that out so we could avoid those mistakes and structure a deal that is all-inclusive of the various types of activities that would go on.

“We also discussed how we work and how we would manage the situations where they experienced trouble in the prior relationship,” says Reichert. “Their biggest frustration with the prior relationship was that the supplier had absolutely no flexibility and would not work with them as their needs changed. The client now has a better understanding of the kinds of things that are likely to change, so that can be contemplated in the deal structure.”

In selecting Infocrossing, the buyer had looked for a provider that had experience in and understood the automotive industry’s dynamic environment and the buyer’s changing business situation better than the prior provider. Even with this expertise, Infocrossing took a further step and put in place a deal that accommodates growth or shrinking the services as the business changes. “It’s built with flexibility so they won’t feel nickel-and-dimed when things change,” Reichert explains.

The key for the buyer, says Haas, is to use a third-party advisor’s assistance in taking a “relationship health check or soul-searching assessment of the buyer’s role in the failed relationship and addressing the behavior or mind-set root of those issues with the new supplier. The buyer needs to determine how much of its behavior–either during the course of the relationship or in establishing the relationship initially–became issues for the supplier that neither one of them could overcome.”

Gianni Giacomelli, Head of Global Strategy and Marketing, BPO Business Unit, SAP AG, says a failed relationship often leaves the buyer asking itself “if it is right for BPO.” He believes the incoming provider needs to not only be sure the parties unearth the reasons for the prior failure but that the situation needs to be “explained to the parts of the client organization that manifested more strain.” Instead of just noting the “frequently missed” performance items, he says they need to understand the structural reasons for those problems, such as dilution of the provider’s potential economies of scale.

Haas notes that the C-level suite often recognizes the buyer’s role in the failure but that the end users and business leaders only know the relationship ended and the performance was unsatisfactory. That perspective and lack of understanding of the root of problems will color their attitude toward the new outsourcing relationship.

Todd Lawson, Global Principal, Client Service Excellence, Unisys Global Outsourcing and Infrastructure Services, says the services provider and the client’s executives must communicate to the end-user community why the new outsourcing engagement will be valuable, exactly how it will benefit them, and what processes they need to follow to make it valuable.

Transitioning from an incumbent provider can be very difficult and often is a hostile situation. Vincent DeLuca, Senior Vice President, Client Services, Infocrossing says, “We put a tremendous amount of emphasis on getting the transition right because it really sets the stage for a healthy ongoing relationship. We take extra precaution to make sure everything is nailed down from the prior provider.” Infocrossing advises that buyers need to recognize that an incumbent provider often needs an incentive to “keep its head in the game” and fully cooperate in the transition.

Starting Off on the Right Foot

In every case in the Outsourcing Excellence Awards where there was a successful relationship that followed a failed one, the buyers came to recognize after the first relationship ended that the relationship did not have an effective governance process. In many cases, their comments about the new relationships were:

  • We now have a formal, contractual structure for management meetings on a more frequent basis than we did with our first supplier
  • We increased our customer relationship management skills and learned how to manage the new relationship more effectively

Capgemini and CFO Research Services conducted a survey of 288 senior finance executives (“Outsourcing the Back Office: The Path Toward Sustainable Benefits”), published in May 2006. This study found that most failed relationships occur because they lack governance processes designed to make sure the outsourcing efforts will meet the parties’ goals.

Similarly, findings in Outsourcing Center’s study of 305 buyers and service providers on the topic of root causes of failure in outsourcing, published in August 2004, revealed that respondents ranked poor governance as the number-three cause of failure.

Giacomelli advises the parties establishing a relationship after a failed one to “heighten governance attention at the outset and take stock of all previous problems so that they can better pursue initial stability and prevent their ‘boat’ from becoming unstable before it sets off for the sea.” Here are some best practices known to result in effective governance of an outsourcing relationship.

Bob Pryor, CEO, Americas Outsourcing, Capgemini, recommends the following steps:

  • Establish a structure for open, non-judgmental communication. Create protocols to have regular discussions about the engagement, its staffing, progress, and other issues. By dealing with issues before they become problems, the likelihood of success rises dramatically.
  • Assign oversight responsibilities to a team of client-side professionals and require them to be actively involved in decisions.
  • Make sure the outsourcing agreement enables the outsourcing partner to make decisions that benefit the client. Usually, this will require both the provider and client to share risks; this creates an incentive to make the right decisions.

Giacomelli at SAP echoes this last point as key to giving the new relationship a jump-start for success. “The parties need to add a deeper analysis of the business fundamentals of the new deal in order to fully confirm that the economics of the service delivery (not just the contract terms) make sense in the long term,” he warns.

A key factor to consider, according to Giacomelli, is whether the buyer will actually allow the provider to drive process optimization to make the service delivery more efficient and effective. While it may seem obvious that the buyer would, this is not always the case. To drive optimization, the provider may need to leverage labor arbitrage and send some functions offshore. It may also need to make technology decisions that affect the customer and the overall cost structure, regarding manual hand-offs, required technology integration, and changes to retained processes. He says the people who are responsible for the overall success of the deal–rather than special interests within the client organization–need to deal with these factors in a strategic fashion.

DeLuca at Infocrossing agrees that the parties need executive meetings to discuss the relationship status so they won’t let things go too far south. “You can’t over-communicate in these kinds of arrangements,” he says. In addition, Infocrossing recommends the following practices:

  • Look at multiple dimensions, placing the relevant importance on the relationship, the technology, and the contractual sides of the deal. Make sure it is a give-and-take relationship, that it is sound at the executive level down to people in operations, and that the contractual and financial structures are also sound.
  • Spend time jointly defining the detailed service levels that will drive the client’s business and be an effective measurement of success. Especially when the client comes from a prior bad relationship, the parties need to ensure the service levels protect the right things.

ACS recommends that the parties create service level agreements (SLAs) that are less punitive and more productive in nature.

Jim Way, Vice President, Siemens Medical Solutions Managed Services IT group, has similar recommendations for effective governance:

  • The provider needs to be sure it aligns its activities to the clients’ overall business drivers (such as clinician and employee satisfaction, financial performance, and quality of care in a healthcare business).
  • The parties need to build multiple levels of accountability and feedback into the relationship using not only performance metrics but also executive and operational checkpoints on the health of the relationship. This strategy may include the presence of an onsite site executive or account manager who is a customer advocate, resource broker, and liaison to the provider.

In addition, Siemens Medical commits to a fixed price for agreed-upon services. Way says, “We don’t take the common approach of providing low pricing initially with the intention to later cover costs using a change order process.” This certainly eliminates the nickel-and-dime complaint of many buyers in failed relationships.

Judy List, Vice President and Managing Partner, Services and Solutions Management, Unisys Global Outsourcing and Infrastructure Services, says clients emerging from a negative experience are in a similar situation to clients that have never outsourced before–both “need to collaborate and communicate with the provider so they fully understand the value that outsourcing can bring to their business, how the provider proposes to deliver that value, and how the relationship will be managed to benefit their business.”

To that end, Unisys applies its 3D Visible Enterprise (3D-VE) approach, designed to enable a client to see and then act on cause-and-effect relationships among business strategy, processes, and IT requirements throughout the entire enterprise. They then develop a Joint Responsibility Matrix, which serves as the roadmap for relationship governance.

List explains, “This approach provides a greater level of transparency and visibility into outcomes and benefits and reduces risk significantly. It is particularly effective for a client that is understandably gun shy-due to a prior negative experience with outsourcing.”

Lawson at Unisys adds, “Clarity is a key best practice that can help a client recovering from a previous negative outsourcing experience gain trust in the new service provider.” Clarity depends on having a clear, mutually agreed-on governance structure and having the right people connected to their counterparts throughout the provider and the client organizations.

Another key to success, according to Lawson, is that the communication structure must include a means for end users to clearly communicate what is and isn’t working. “The services provider and the client’s executive management must listen carefully to this feedback and be open to implementing changes that will bring about the desired enhancements and make the relationship more successful,” states Lawson.

Mind-set the Second Time Around

Participants in the 2004 Outsourcing Excellence Awards relationships revealed that success starts up front with the parties looking at the long-term value proposition and focusing on building a mutually beneficial relationship that will be strong enough to collaboratively work through challenges and opportunities that come their way.

Nearly every one of the buyers that came from a prior failed relationship stated a common theme around what they did differently the second time around in their successful relationships–“We positioned this one as a real partnership where we both focus on shared goals and shared perspectives and where we’re honest and don’t hide anything from each other.”

Haas at Everest says a common thread among failed relationships is that the parties don’t start off with a trusting working relationship where they understand each other, understand each other’s expectations and motivations, and can engage in good dialogue.

“Where they do start off the relationship with those understandings and effective communication processes, they will disagree at times and work through their issues,” Haas states. “With the right expectations and a mutually beneficial relationship, they can overcome virtually any flaws or imbalances in the contract (i.e., service levels that are too tight, or service descriptions or statements of work that are too vague or too specific). If they’ve made mistakes at the negotiation table, they can identify them and can adjust because this is now a partnering relationship that happens to be cemented legally with a contractually binding agreement.”

Conversely, if the parties take an adversarial approach when forming the relationship–where there is a winner and a loser in every conversation, instead of a win-win approach–Haas says “it won’t matter if the contract is perfect. This type of relationship will always end in failure.”

The bottom line: Build at the outset an outsourcing relationship based on trust and mutually beneficial goals and with a highly effective governance process that facilitates dialogue, visibility, and realigning interests. Otherwise, the relationship health will suffer and the relationship will ultimately fail.

Lessons from Outsourcing Journal:

  • Buyers that experience a failed outsourcing relationship usually want to put in place a structure that treats the symptoms of the bad relationship with the previous supplier. This is a mistake because, unless they determine what caused the original relationship to go south and fix that underlying problem, they will just hatch a new problem by over-treating the symptom in the new relationship.
  • A best practice is that the buyer should inform the new provider (or providers, if it’s a competitive bid) that it just exited a failed relationship, should relate some of the things they believe caused the failure, and should ask the provider for its help and guidance in avoiding that same kind of behavior.
  • After a failed relationship, the services provider and the client’s executives must communicate to the end-user community why the new outsourcing engagement will be valuable, exactly how it will benefit them, and what processes they need to follow to make it valuable.
  • Transitioning from an incumbent provider can be very difficult and often is a hostile situation. Buyers need to recognize that an incumbent provider often needs an incentive to fully cooperate in the transition.
  • After a failed relationship, the parties in a new relationship should over-communicate to ensure that they properly set expectations. Failed relationships are often more about missed expectations than service failures.
  • Especially in cases where the buyer felt nickel-and-dimed for services in the failed relationship, the provider in the new relationship needs to put in place a deal that accommodates growth or shrinking the services as the buyer’s business changes.
  • The parties need to establish a structure for open, non-judgmental communication. Create protocols to have regular discussions about the engagement, its staffing, progress, and other issues. By dealing with issues before they become problems, the likelihood of success rises dramatically.
  • Make sure the outsourcing agreement enables the outsourcing partner to make decisions that benefit the client. Usually, this will require both the provider and client to share risks; this creates an incentive to make the right decisions.
  • Make sure it is a give-and-take relationship, that it is sound at the executive level down to people in operations, and that the contractual and financial structures are also sound.
  • Spend time jointly defining the detailed service levels that will drive the client’s business and be an effective measurement of success. Especially when the client comes from a prior bad relationship, the parties need to ensure the service levels protect the right things. In addition, they should create SLAs that are less punitive and more productive in nature.
  • The provider needs to be sure it aligns its activities to the clients’ overall business drivers.
  • The parties need to build multiple levels of accountability and feedback into the relationship using not only performance metrics but also executive and operational checkpoints on the health of the relationship.
  • The parties need to collaborate and communicate so the buyer fully understands the value that outsourcing can bring to its business, how the provider proposes to deliver that value, and how the relationship will be managed to benefit the business.
  • At the outset, the parties need to look at the long-term value proposition and focus on building a mutually beneficial relationship that will be strong enough to collaboratively work through issues that arise.
  • A common thread among failed relationships is that the parties don’t start off with a trusting working relationship where they understand each other, understand each other’s expectations and motivations, and can engage in good dialogue.


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