Outsourcing relationships are often like a marriage where the people realize after they get together that there are aspects about each other and the relationship they hadn't anticipated and planned for or issues about which they had mistaken assumptions. Those moments when the buyer becomes aware of such circumstances are what I call "aha" moments. The buyer's thought process is: "Aha; I now realize we need to change the way we are operating together."
Those are crucial moments.
If the parties don't manage to satisfactorily address such issues by changing the way they work together, they will end up going their separate ways.
Outsourcing Center's 2010 Outsourcing Excellence Awards program surveyed buyer participants about the timing of their aha moments, the root causes, and outcomes from addressing the issues uncovered in their aha moments.
Of the 64 buyers surveyed (whose outsourcing relationships had been in existence for longer than one year and had moved beyond the transition phase), one reported a significant aha moment 10 years after signing the contract. Two buyers said their moment occurred two years after contract signing, and one was four years into the relationship. They are unusual cases. The remaining 60 buyers reported their aha moments occurred during the transition phase.
In fact, the study revealed that nearly all of the aha moments occurred in the early weeks or months of an outsourcing relationship - when it's crucial to achieve some "wins," crucial to develop mutual trust.
Root causes of aha moments
It's important to note that all of the relationships studied had aha moments, regardless of the buyers' prior experience in managing outsourcing relationships. The root causes of most of their aha moments lie primarily in incorrect planning and expectations up front.
Among the causes of aha moments that led to a change in the way the parties worked together, the most frequently cited cause was that the buyer's business (or its IT system) was so complex that it required more communication and collaboration than originally anticipated. Seventeen percent of the surveyed buyers encountered this situation.
Ranking as the second most frequently cited root cause (six percent) is the fact that the parties began their relationship without financial incentives to motivate the service provider to achieve continuous improvement.
At five percent, the third most frequently cited source for an aha moment was that the buyer failed to realize at the outset that the service provider could do more work and at a higher level than had been contracted.
Some of the other triggers for aha moments the surveyed buyers mentioned include:
- Ineffective contractual process change control (in some cases, it was not rigorous enough; in others, it was too restrictive)
- Wrong baseline data at the outset (which then impacted the provider's operations)
- Faster-than-anticipated growth of the buyer's business
- Overly aggressive expectations of each other at the outset before facing the realities of working together
- Inflexibility in the pricing model
- Inefficient allocation of responsibilities and accountabilities between buyer and provider in cases where the buyer retained some functions of the outsourced process
- Provider's lack of expertise in a process that the buyer added to the scope early in the relationship but after contract signing
- Ineffective SLAs not driving the right behavior
- Provider's lack of insight into some critical aspects of the buyer's industry
- Negotiated rate was not high enough to ensure the provider would hire people with the necessary level of skills to manage some complexities of the buyer's business
All of these factors, if left unresolved, would lead to one or more of the following outcomes:
- Increased costs for the buyer
- Increased costs or lower profit for the provider
- Missed opportunity for creating greater value through outsourcing
- Dissatisfaction among end users
- A growing number of relationship challenges and issue escalations
Addressing the issues
When and how the parties addressed the issues depended on (a) whether the issue was a critical matter they needed to resolve in a short time frame, and (b) how much informality existed in the relationship's communication patterns.
The study found that 50 percent of the buyers raised the issue during a regularly scheduled daily or weekly operational meeting or in daily conversations at the work level. This discussion around observations of an issue led to fact-finding, which then led to escalating the issue to executives in a formal governance meeting or a project management meeting to resolve the issue.
Twenty-nine percent first brought up the issue in a regularly scheduled monthly or quarterly formal governance meeting and then assigned a task force or scheduled additional sessions to resolve the issue.
Twenty-one percent handled the issue entirely in informal conversations between the relationship managers and did not escalate it to a governance meeting.
Outcomes of aha moments
Bringing the issue to light and discussing how to resolve it, whether in an informal conversation or a formal meeting, achieved more than resolving the actual issue. It also resulted in the parties turning a corner and going in a different direction together.
For example, some of the buyers studied in the Outsourcing Excellence Awards program stated their aha moment resolution discussions had the following outcomes:
- Defined how the parties will interact when push comes to shove on difficult topics. (Example: "It became apparent that we had to get everything on the table before we could have an honest dialogue.")
- Resulted in an agreement that one party doesn't have to pay all the costs of resolving an issue
- Led to a commitment to cooperate, not just compromise
- Developed a methodology for determining what the real problem is
- Led to an understanding that the parties lacked the right level of executive focus on the relationship
- Learned to listen and understand the other party's feelings. (Example: "It doesn't feel right to me, even though the contract is structured that way.")
- Created visibility into whether one party is hiding behind an issue and really does not want to resolve it for mutual success
- Led to more openness in discussions, which helps build trust (Example: "We didn't initially pave the way for openness when things get complicated.")
- Led to renegotiating the contract to be more mutually fair
- Resolved to fix issues by looking at not just the facts but also seeking mutually beneficial opportunities
- Caused a commitment to ensure that addressing issues takes an approach of helping each other be a success
All 64 study participants reported that their aha moments became a major positive factor in the way their relationships developed thereafter.
When it comes to facilitating success in outsourcing, those are crucial moments, indeed.
Lessons from the Outsourcing Center:
- After signing the outsourcing contract and starting to work together, many companies find there are aspects about each other and the relationship they hadn't anticipated and planned for or issues about which they had mistaken assumptions. If they fail to satisfactorily address such issues by changing the way they work together, they will end up going their separate ways.
- Most incidents that cause buyers to recognize a need to change the way the parties work together occur in the early weeks or months of an outsourcing relationship - when it's crucial to achieve some "wins," crucial to develop mutual trust.
- A top cause of such incidents is that the buyer's business (or its IT system) is so complex that it requires more communication and collaboration than originally anticipated.
- Another frequently cited root cause of such incidents is the fact that the parties begin their relationship without financial incentives to motivate the service provider regarding continuous improvement.
- Many buyers make a mistake at the beginning of the relationship in failing to realize at the outset that the service provider can do more work and at a higher level than may have been contracted.
- A proven way of operating for mutual success in outsourcing is for the parties to resolve issues by not just looking at the facts but also seeking mutual beneficial opportunities and taking an approach of helping each other be successful.