Even highly successful outsourcing relationships encounter hurdles. Despite their best efforts in planning, due diligence, contract negotiation, and other pre-signing activities, buyers of outsourced services can experience situations that fall short of their hopes and fail to fulfill their expectations. While these disappointments may not cause an already-successful relationship to fail, they can lead to frustration, reduced confidence, and sometimes to costly renegotiations.
Outsourcing Center studied the findings around relationship disappointments among the buyers in the relationships nominated for the 2009 Outsourcing Excellence Awards. Our study asked buyers about their "biggest disappointment" in the relationship. Though many buyers stated they had no disappointments or only small disappointments from time to time, 36 referred to factors that did, or could, lead to significant issues for both parties.
Areas of disappointment
The 36 buyers' descriptions of their biggest relationship disappointments focus on three primary areas: mistaken contractual assumptions, the service provider's over-promotion of its capabilities or technology, and communications post contact signing. They also cited six other areas of disappointment that, together, comprise the "miscellaneous" slice in the chart in Figure 1.
Figure 1: Areas of major disappointment cited by 36 buyers in otherwise successful relationships
Interestingly, four of the six miscellaneous areas are factors around which only the buyers could influence a change. The six areas include:
- Lack of adequate communication to buyers' internal users and executives about the value that the outsourced services generate
- Lack of engagement of buyers' senior executives post contract signing
- Ability of the buyer to change its internal processes at the same pace as the service provider's process improvements
- Length of time it took for the relationship to mature and the buyer to determine how to move it to the next level
- Provider's inflexibility after it completed the transition/migration phase
- Attrition among the provider's resources
Disappointments because of mistaken contractual assumptions
As Figure 1 displays, mistaken contractual assumptions caused 19 percent of the buyers' disappointments. Primarily, the buyers describe the challenges or friction their relationships encountered in this area as follows:
- Lack of specificity around "intent" of one or both parties
- Areas where the contract is "ambiguous" or even "silent"
- Too much contract negotiation time was spent on how the parties would actually work together without considering the practical implications of those negotiations when it comes to actually conducting business
- Certain contractual terms were not specific enough to eliminate both parties interpreting a term as having a different meaning than the other party
- Baseline contractual conditions and pricing were based on the assumption that the process would run in an identical manner as the buyer ran the process internally
- The buyer was unaware that several components of the scope (such as training the buyer's end users on new technology) were not actually negotiated into the contract
A significant finding of the study is that 80 percent of the buyers that encountered relationship disappointments due to mistaken contractual assumptions did not use any external advisory services as they planned and negotiated their deals. (See Figure 2)
Figure 2: Advisory services relied on by buyers that had mistaken contractual assumptions
The recurring theme in these cases is that the buyers had prior experience with outsourcing and believed they had enough knowledge to structure their deals without external advisory services, thus accelerating the time involved in pre-signing activities and the associated cost of such services.
However, as one buyer stated, "We thought we knew more than we did. The reality is that understanding what's going on in the market and in the industry is important and something a consultant can actually help with."
Several buyers discussed the strategies they put in place in their relationships to handle challenges that arose from mistaken contractual assumptions. In most cases, the buyer and supplier agree that, when something arises in the contract that is ambiguous, or that was a mistaken assumption, they will sit down and talk about their original intent, come to an agreement on the language to memorialize it, and move on.
One buyer explained the importance of understanding that such discussions mean that sometimes the buyer will win and sometimes it will lose. This executive says he believes companies should address the contract's shortcomings in renewal negotiations. Continually addressing overages and underages in pricing each month, for instance, is not productive, the buyer's exec points out.
Several buyers stated that both parties being open with each other and willing to learn lessons together as they go along is key to building a strong relationship and avoiding friction. "Everyone needs to learn from mistakes" to make sure they don't happen again, says one buyer.
The remedy for such situations: retain the services of an outsourcing advisory firm when renegotiating the relationship at contract renewal. One of the buyers in the study did this and reports that its second-generation contract not only eliminated troublesome terms in the contract but also created a better balance between building the relationship and governing it.
Outsourcing advisory firms possess the market and industry insights that buyers -- and their external and internal attorneys -- lack, and which can be critical to developing greater value through outsourcing. Market data is essential, for instance, in determining fair pricing, establishing solid process scope, evaluating the provider's true capabilities and technology, and closing expectations gaps -- areas that several of the 36 buyers cited as their biggest disappointments (as displayed in the "miscellaneous" portion of Figure 1). Such data can help the parties in an outsourcing relationship avoid making decisions from incorrect assumptions and avoid escalated problems that can result from those decisions.
Today, there are solutions in advisory services that streamline the time and cost associated with the services. Some advisory firms, such as Everest Group, recently enhanced their services to provide a "menu" of proven tools, templates, frameworks, and market data that companies can purchase and leverage as they negotiate their renewals or their first-generation deals for greater success and deeper value.
Disappointment with communications post contract signing
As Figure 1 displays, communications post contract signing were the area of biggest disappointment for 30 percent of the 36 buyers in the study. Aside from contractual disputes, they cited such communication challenges as the following:
- 36% - lack of access to the provider's senior executives
- 27% - challenges in mutual discussion of opportunities for process improvement and how to prioritize them
- 27% - the service provider's communication was not proactive enough
- 10% - miscellaneous matters such as managing expectations, being transparent around pricing, and offshore providers not saying "no"
Unanimously, the buyers that mentioned their disappointment around not having access to the provider's senior executives explained that the provider's account exec or on-site exec is a mid-level person who often agrees with the buyer about how to work through some issues or opportunities but then does not push those discussions up the chain of command to the provider's senior-level executives who can make the actual decisions.
The remedy for addressing each of the types of communication problems cited by the buyers as their biggest disappointments in their relationships is a more effective governance agreement that clearly outlines expectations, frequency, proactiveness, and other agreements as to how the parties will communicate with each other.
The starting point
Finally, the study revealed that the parties could have addressed and, in most cases, would have prevented 100 percent of the big disappointments that the 36 buyers experienced in their otherwise successful relationships up front. The starting point for eliminating these challenges in any outsourcing relationship is during the planning, due diligence, negotiation, and other pre-contract signing phase.
Lessons from the Outsourcing Journal:
- Two outsourcing relationship areas that frequently turn out to be disappointments as far as buyer's failed expectations are mistaken contractual assumptions and the parties' communications post contract signing.
- Outsourcing advisory firms possess the market and industry insights that buyers lack, and that are critical to developing greater value through outsourcing. Market data is essential, for instance, in eliminating ambiguous or "silent" terminology in the contract, determining fair pricing, establishing solid process scope, evaluating the provider's true capabilities and technology, and closing expectations gaps.
- An effective governance agreement that clearly outlines mutual expectations, frequency, proactiveness, and other agreements regarding how the parties will communicate with each other will help to avoid many challenges and disappointments in the ongoing relationship.