Outsourcing Center's in-depth study of 42 relationships among those nominated for the Outsourcing Excellence Awards in 2008 reveals some important findings regarding the impact of service provider selection criteria on the ease or challenges during the transition/migration phase of outsourcing relationships.
Our study focused on transition/migration or IT implementation challenges. For purposes of the study, we excluded the following types of challenges often encountered at the outset of outsourcing relationships:
- Buyer's employees' resistance to outsourcing
- Communication challenges in offshore relationships
Aside from these two issues, we found that 21 relationships (50 percent) (hereafter referred to as the "challenged relationships") experienced one or more significant challenges as they transitioned the work to the service providers or started the relationship with a major IT implementation. The 21 challenged relationships can be segmented into 12 BPO deals and nine ITO deals.
Further, 24 percent of the challenges were because of inadequate preparation or lack of communication.
Service provider selection criteria
The study revealed a significant phenomenon associated with selection of service providers. Twelve of the 42 buyers stated the primary reason they selected a particular provider was because they had a prior relationship with the service provider or an existing relationship with the provider in a different area of the buyer's business. (See Figure 1)
Top Reasons for Selecting Service Provider
Among the 12 buyers who stated a prior or other existing relationship was their top reason in provider selection, 42 percent experienced major challenges during transition or implementation. The 42 percent can also be segmented as representing 25 percent of the BPO challenged relationships and 22 percent of the ITO challenged relationships.
In contrast, among the four relationships (out of the total 42 studied) where the top reason for the provider selection was cultural fit, and among the four where the top reason was the provider's capability and track record for meeting challenging timelines in transition or implementation, the relationships experienced no major challenges during transition.
Among the 12 relationships where a prior or other existing relationship with the provider was the top reason for selection, the parties experienced types of challenges that are tied to other provider selection criteria that the buyers did not rank as the top reason for selecting their suppliers. Table 1 highlights this phenomenon.
|Challenge encountered during transition or IT implementation
||Selection criterion ranked lower to having a prior or existing relationship with the provider
|The caliber of the service delivery team recruited by the provider was not as strong as the buyer desired
||Strength of the delivery team
|Ramp-up time during the transition was too short
||Provider's process expertise
|Difficulty in meeting the anticipated level of performance
||Provider's process improvement capacity
|The parties found that they could not build the solution as originally designed
||Provider's claim of cost savings in implementation
|The buyer required a major component of services be added (which it had not communicated as part of the original deal), which caused a high-velocity ramp-up for which the provider was not prepared
||Provider's experience in quick ramp-ups
|Needed to implement multiple lines of business concurrently at buyer's request, which was not the provider's transition business model
||Provider's proven ability to execute in an aggressive timeline
Our interviews of the buyers whose top service provider selection criteria was a prior or other existing relationship with the provider revealed they assumed that a level of trust that had already been established in a prior relationship would be a key to success in the new relationship.
However, the study clearly reveals that a prior or other existing relationship actually caused the buyers to overlook other important selection criteria, which then resulted in transition or implementation challenges. Each of these challenges was costly in time, effort, money, and the ability to successfully meet the buyer's end users' expectations for the outsourcing relationship.
In the challenged relationships where the top provider selection criterion was the provider's domain expertise in the buyer's industry, we found five industries involved:
- Consumer packaged goods
In addition to a prior or other existing relationship with the provider, our study found two criteria frequently cited among buyers' top three provider-selection criteria, which have not been at the top of the list in prior years of the Outsourcing Excellence Awards program. The three criteria reflect changing priorities in the use of outsourcing:
- Provider's global presence
- Provider's domain expertise in the buyer's industry
- Time to market - Provider's ability to meet a challenging transition timeline or IT migration
In addition, although client references have traditionally ranked high on the list of provider-selection criterion, most buyers in the 2008 awards nominations ranked references low on their list of criteria, and only one of the 21 challenged relationships cited it.
Lessons from the Outsourcing Journal:
- Cultural fit, domain expertise in the buyer's industry, and proven track record in executing against a challenging timeline in a transition or migration are important factors for outsourcing success and should be included in a buyer's list of provider-selection criteria.
- A prior relationship or an existing relationship with a provider in another area of the buyer's business should not be a buyer's primary reason for selecting a provider. It is crucial for the buyer to ensure the provider has the requisite capabilities and meets all other selection criteria just as though there were not a prior relationship.