Outsourcing Relationships Become More Complex

By Outsourcing Center, Beth Ellyn Rosenthal, Senior Writer

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Outsourcing Relationships Become More Complex

Four years ago IT managers had one question: “Should we outsource?” Today, the questions are more varied. Instead, they are asking: “What should we outsource?” and “How should we do it?”

Benoit A. Aubert and Suzanne Rivard, both professors at the Ecole des Haute Etudes Commerciales and fellows at the CIRANO in Montreal, Canada, monitor trends in outsourcing as the co-chairmen of outsourcing mini-track at the Hawaii International Conference on Systems Science. The conference, held every January, attracts the top academic papers on the subject. “We are trying to provide a forum for IT outsourcing,” says Aubert. HICSS attracts academics and industry leaders.

This year the mini-track examined the changing relationships between buyer and provider. The researchers discovered outsourcing relationships today are a lot more complex than they were five years ago. Back then a buyer would outsource the entire process to one provider. Today there may be several suppliers or a lead supplier who then works with a chain of suppliers.

This increased complexity is forcing buyers to more actively manage their outsourcing relationships. The professors say buyers’ experience is showing: they are becoming quite adept at it.

In addition, buyers are stepping beyond the traditional buyer/supplier relationship and working to help their suppliers in mutually beneficial ways. One paper described how a buyer worked diligently to promote a supplier who was selling the software it developed for the buyer. Both partners shared the profits.

Signing Better Contracts

Research conducted by Aubert, Rivard and Patry (HEC and CIRANO) indicates that clients are now more aware of the risks inherent in outsourcing a non-core process. They understand that their entire IT infrastructure is in their supplier’s hands, which means they will have to bear a large expense if they switch providers or decide to bring the function back home.

This is causing them to write better contracts, which (hopefully) reduce the opportunity for misunderstanding and conflict.† Buyers are now less “naÔve,” says Aubert. But they are willing to take the risks inherent in outsourcing because they understand how difficult it is to implement an up-to-date IT system.

Smaller companies are willing to take on even more risk since outsourcing is the only way for them to have access to ERP solutions.

The professors note there are now more suppliers in the market. This translates into more competition for bids. Buyers are able to negotiate more favorable prices because they can pit one supplier against another.

Buyers Applying Metrics In House

Buyers are also insisting on service levels. They are not shy about announcing they will look for another supplier if the current one doesn’t perform according to the metrics.

Buyers, realizing the power of service level agreements (SLAs), now believe they are not only for outsourcing providers. Aubert says companies are now requiring their in-house IT staffs to meet the same metrics as their outsourcing providers. “If a company outsources 60 percent of its IT needs, it will manage the 40 percent that remains in house as if it were an outsourcing contract. SLAs now apply universally,” notes the professor.

Moreover, buyers have learned what can and can’t be included in an SLA. “They have figured out what information is useless,” says Aubert. Also, buyers are now using independent bodies to oversee the evaluation of the SLAs. Aubert says third parties are more efficient and unbiased than companies trying to assess the numbers on their own.

The papers pointed out IT outsourcing was still growing. But other research conducted at CIRANO indicates that the other departments in the corporation are beginning to outsource their non-core functions after having watched the successes in the IT sector. The research unveiled that one of the biggest growth areas in the future is human resources outsourcing.

Executives are using the lessons their colleagues learned in the IT sector to avoid mistakes when they negotiate their own contracts. IT departments are sharing their contract expertise and knowledge with other areas of the corporation. For example, contract terms today are getting shorter, a trend that started in IT.

“Suppliers are smart. They know how to write contracts that are favorable to them because it’s their bread and butter,” says Aubert. “But buyers are learning. Contracts are much more balanced now,” he says.

Lessons from the Outsourcing Primer:

  • When corporations discuss outsourcing, the questions have changed from “Should we outsource?” to “What should we outsource” and “How should we do it?”
  • Buyers today may prefer to work with many suppliers or one lead supplier who heads up a supplier chain instead of outsourcing with just one provider, as they have done in the past. They are avoiding lock-in relationships.
  • Buyers are less naÔve and understand the risks inherent in outsourcing. This knowledge is letting them negotiate better contracts.
  • Buyers are now applying service level metrics to their in-house IT staff just like they do to their outsourcing supplier.
  • Recent research predicted one of the biggest growth areas in the future is human resources.

About the Author: Ben Trowbridge is an accomplished Outsourcing Consultant with extensive experience in outsourcing and managed services. As a former EY Partner and CEO of Alsbridge, he built successful practices in Transformational Outsourcing, Managed services provider, strategic sourcing, BPO, Cybersecurity Managed Services, and IT Outsourcing. Throughout his career, Ben has advised a broad range of clients on outsourcing and global business services strategy and transactions. As the current CEO of the Outsourcing Center, he provides invaluable insights and guidance to buyers and managed services executives. Contact him at [email protected].

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