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Predictions: Marketplace Turmoil and Change in How Outsourcing Relationships Work Over the Next Five Years

Getting from A to Z (from the current state of outsourcing relationships to the future state of how relationships will need to work in order to bring about the outcomes that buyers demand) is not an easy path, and some providers will fall away during that journey. In addition, cloud computing changes the entire picture.

To better understand today’s outsourcing relationships from the lens of the client as well as understand how to drive change that will result in more successful relationships, CompuCom conducted a number of roundtable discussions with buyers of outsourced services.

What clearly came through in buyers’ comments is that they are not happy, states Ed Anderson, Chief Strategy Officer at CompuCom. “They’re not happy with current contracting methodology, the way SLAs stifle innovation, what happens to the value proposition in the way things get implemented and, frankly, they’re not happy with the partnering aspect in how the two sides work together.”

Based on this roundtable feedback — and from similar comments that other outsourcing providers shared with CompuCom — Anderson sums up the situation: “The current way of doing things is not working very well.”

Yet, in complete contrast to this expressed dissatisfaction, the other industry experts we interviewed about how outsourcing will function during the next five years described future relationships as follows:

  • “BPO deals of the future will become more relationship oriented, more long-term, and more strategic,” states Abid Ali, Vice President and Global Head, BPO Services for Tata Consultancy Services (TCS).
  • RamPrasad Kan, Chief Technologist at Wipro Technologies, says, “There will be a fundamental change in the relationships because the service providers will be getting more and more into the core business processes of the customers.”
  • Les Mara, HP’s head of Enterprise Services BPO in EMEA, says in the next five years, buyers in the provider-selection phase will look for providers that can prove more than their capability to deliver the services day-in and day-out. “They will need to demonstrate how they can take an enterprise to a new technology-enabled paradigm where there are fewer transactions and greater working capital performance.”
  • “Relationships over the next five years will be far more joint-ownership based, with both companies becoming intimately involved in a true partnership through effective governance and a combined approach to achieving strategic objectives,” says Don Schulman, General Manager, Finance and Administration at IBM.
  • “Relationships will be more like a virtual captive, where the culture and values are similar, buyers are involved in selecting key people delivering the services, and the provider is a true partner and has the strategic role of trusted advisor,” says Mohammed Haque, Vice President and Head of Enterprise Solutions Service practice at Genpact.

Obviously, they predicate these predictions on an assumption that relationships over the next five years will work much more successfully than the dissatisfaction that currently exists among buyers.

Cross-purposes versus trusted advisor

As CompuCom’s roundtable feedback revealed about many relationships today, the trusted advisor role and partnering feelings often fly out the window as soon as the relationship begins. “Buyers are happy on the day they sign the contract, but the day after, they feel like they’re working at cross-purposes with their service provider because the provider seems to be trying to catch them in a request that isn’t part of the statement of work and then bill them on a separate item,” explains Anderson.

The providers’ trusted advisor role will become even more crucial to successful outsourcing in the future because the impact of opportunities from cloud-delivered services will create a lot of innovations and start-ups in the industry, says Ken Stephens, senior vice president, Strategy and Transformation at ACS. “If I were a CIO during the next five years, I would expect my provider to be knowledgeable and help me make intelligent decisions about how to run my company’s business — even if that’s moving some services away from my current provider or restructuring my existing agreement so I can get the benefits of cloud-like services immediately.”

Unfortunately, that type of partnering relationship and trusted advisor role does not exist in many outsourcing arrangements today. “The trusted advisor role will take on more importance as the cloud becomes more and more prevalent,” says Stephens. “CIOs really need a provider that understands what can and cannot happen — otherwise, they put their companies at risk by moving it to a public or a private cloud environment that is potentially not a long-term, sustainable solution.”

So how will the industry move from its current relationship state to its near-future state?

Overhauling contracting methodology

CompuCom predicts that the process of changing the way relationships work will start with changing the contracting methodology. Anderson says that in the next few years “buyers and providers will overhaul the contracting process and replace it with something that will give more value and freedom to innovate and thereby also improve the quality of the relationship.”

Even though today’s complicated contracts spell out the scope of services, performance requirements, prices, and what to do if something goes awry, they aren’t adequate. As a buyer in a roundtable discussion pointed out, “We can’t anticipate how our business needs will change over the term of a contract, whether that’s due to a merger or divestiture or even changing the quality of service that we’re delivering to our end users. The contract is where it all begins to break down, because we’re locked into contractual specifications that work against our changing needs.”

As CompuCom’s CIO, John Douglas, points out, both parties in an outsourcing relationship start out operating in the “partnering spirit of the agreement. But very often the contract locks both sides into a position where it’s difficult to be flexible in working through the mechanics of change and difficult to maintain that partnering spirit.”

A buyer at one of CompuCom’s roundtable forums believes a covenant approach is a better way to structure an outsourcing relationship. Similar to a marriage where the man and woman actually have a legal contract that changes the way their lives will work from then on, that legal contract doesn’t mean they will be happy. In a covenant approach, it’s all about each side focusing on the other one winning — on the other one being happy. It’s more than just saying “that’s not in the contract.” The buyer stated that a covenant approach means the parties would work together always from a value-creation standpoint.

Impact of the cloud

Sue Marks, CEO of HR provider Pinstripe, points out that the industry has seen a lack of execution even where there is a clear vision of what a partnering-type of relationship should be. “There has been a great deal of press about outsourcing relationships that haven’t met expectations. But in reality, each partnership bears the responsibility for meeting or not meeting its expectations.”

CompuCom’s CIO says the opportunities available in cloud-delivered services now add urgency to the need for embracing change together in relationships. “If the service providers don’t get their act together, the buyers have other choices. They can go out and quickly buy what they want in the public cloud.” It’s faster than changing complex contracts, and they can get their services in just a few days or weeks.

What will have to change

Three things will have to change in order for buyers and service providers to be able to work from a value-creation approach.

  1. Service level agreements. CompuCom’s CIO suggests that moving to a covenant approach and overhauling contracting methodologies starts with SLAs. The metrics measuring the provider’s performance need to focus on measuring client (or end user) satisfaction, he advises. Industry standards often shape SLAs today (e.g., average time to answer, system availability, accuracy, etc.), but clients may have a resounding “no” answer regarding their happiness or satisfaction even if the provider meets the industry standards.”SLAs need to measure the value that the buyer’s users receive, not the mechanics of delivering it,” says Douglas. “That requires understanding the critical leverage points that are important to the users.” Perhaps the level of satisfaction changes, for instance, at the end of a month when transaction volume is much higher.Anderson adds that outsourcing consultants, attorneys, and third-party advisors need to change their methodologies too, as they “currently run many of the deals to a large extent and help shape the SLAs.”
  2. More than lip service. A covenant approach — focused on value creation and each party’s happiness — is a two-way street. Anderson points out that it requires more than what many outsourcing relationships have seen to date, where there is “lip service to partnering, and then they grind each other to the ground.”Both the buyer and provider must embrace change in the way they are doing business in order for a value-creation approach to work. Anderson says both parties have to accept that, for instance, there are 10 things that must happen to implement the core processes within ITIL or to implement some other aspect of transformation, and the buyer owns four of those and the provider owns six. “The buyer must be willing to not just put it all on the service provider,” he advises.Providers need to change in their willingness to invest in aspects that bring value to their clients. It goes beyond standardization and end-to-end solutions and verticalized services and focuses on what the buyer values, rather than the short-term view of the provider’s margins.

    Anderson cites desktop virtualization as an example of an area of high interest to buyers these days as a way to reduce their costs. A provider that stays with the current contractual approach may want to block a client’s request for desktop virtualization because it will decrease the provider’s revenue. But in a covenant approach, the provider would help the client achieve that objective even though it reduces revenue.

    “From a covenant approach, the provider would want to help its clients be happy, so it would take that calculated risk in providing desktop virtualization because it demonstrates partnering,” Anderson explains. “When the client sees that its outsourcer is more concerned about the value of the relationship and is taking the client’s best interests to heart, the client will consider expanding the scope of services, thus demonstrating a covenant approach by caring about the provider’s health and happiness.”

  3. Service providers must listen better. There is already a lot of provider churn in the outsourcing marketplace, and it isn’t all because of new providers with innovative, disruptive technologies taking business away from incumbent providers.”A lot of companies died because they didn’t continually listen to clients and provide solutions to the pain they were having,” says Anderson. In fact, a recent study of outsourcing relationships (as reported in the 2009 white paper, Four Communication Best Practices Often Overlooked in Outsourcing Relationships) revealed that a top complaint of buyers is the provider’s level of “really listening” to the buyers’ needs and also paying attention to the “noise” of buyers’ users’ regarding their dissatisfaction with services.”It’s not unfair to say there is a lot of turmoil in the market today. And judging from the level of dissatisfaction that buyers are now expressing, there will be more turmoil and provider churn in the next five years,” Anderson predicts.

Selecting a provider for the future

Buyers that want an outsourcing relationship that works more from a value-creation, covenant type of approach rather than a contract approach should determine whether their provider meets the following qualifications.

In planning and negotiating a new relationship –

  1. Understand the provider’s culture, which will be as important in change and innovation objectives as the provider’s capabilities. Select an outsourcer with a culture that embraces change.
  2. Understand how the provider wants to work with the buyer on an ongoing partnering basis and how it will reflect that in contractual terms (ease in moving services in and out of the cloud, for example).
  3. Understand the provider’s ability and willingness to be agile in aligning with the buyer’s evolving needs.
  4. Understand the provider’s ability to innovate.

In an existing relationship — Does the provider listen to the buyer organization and demonstrate — by its actions, flexibility, collaboration, and innovation — that it values the relationship and cares about the buyer’s needs and happiness?

Lessons from the Outsourcing Journal:

  • The service providers’ trusted advisor role will take on more importance as cloud-delivered services become more and more prevalent and change the opportunities for benefits through outsourcing. This role of advisor will be a key aspect in successful outsourcing over the next five years.
  • The process of changing buyers’ satisfaction with the way outsourcing relationships work will start by overhauling the contracting methodologies so that the resulting contract enables more flexibility for meeting evolving needs and more freedom for innovation.
  • Service level agreements that ensure the buyer’s satisfaction with services need to focus on the value that the buyers’ users receive, rather than the mechanics of delivering it; this requires understanding the critical leverage points that are important to the users.
  • Cloud-delivered services will add urgency to the need for embracing change together in relationships, as the public cloud provides buyers with quick alternatives if their service providers don’t embrace change or if contracts are too complex to enable quick change.
  • The next five years will see an increase in marketplace turmoil and provider churn.
  • Buyers that want an outsourcing relationship that works more from a value-creation, covenant type of approach rather than a contract approach should determine whether their provider’s culture embraces change and how the provider describes in contractual terms how it will use a partnering approach to deliver services as needs and opportunities evolve.

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