There's no shortage of methodologies and advisories on best practices and risk mitigation strategies for the transition phase of outsourcing relationships. Even so, many buyers encounter situations they didn't foresee when structuring their arrangement, which cause costs to rise and delay time to value. Outsourcing Center studied these types of situations by surveying companies nominated for the 2011 Outsourcing Excellence Awards program and found the following 10 pitfalls.
1. What you don't know will cost you
The Center asked the surveyed buyers this question: "There is a well-known saying that what you don't know will cost you. Please describe something your company didn't know at the outset of the outsourcing relationship, which ended up costing you and led to a change in the outsourcing arrangement."
The situations they described covered the gamut from technology issues to human behavior to lack of knowledge as well as operational structures that were too tight or too loose.
2. Technology connectivity
Challenges arose in the provider's ability to establish timely connectivity to all of its customers' necessary systems because they were not aware of the various groups and business processes that governed connectivity. Remedying this situation involved forming a dedicated connectivity team with both business and network members. The team then built relationships within the customer's technology group, seeking to understand the ownership and flow of information and also to help work through the issues more quickly.
3. Aggressive go-live date
Two different relationships faced the same challenge of having to extend their original planned go-live date, but the causes of the problems differed. In one, the service provider encountered difficulty in recruiting the right talent in a remote area in the short transition time frame. In the other case, the buyer was transitioning from an incumbent provider to a new provider, but the bureaucracy and contractual negotiations in ending the prior relationship delayed the planned transition time line.
In both cases, the aggressive ramp-up was necessary to achieve the desired time to value. Both buyers also had to spend time with their management teams and other stakeholders to lessen the potential negative impression and increased costs from having to extend the go-live date.
4. Service level agreement
In a relationship delivering IT services to the customer's 25+ facilities, the customer made the mistake of including all the facilities in the metrics for downtime. The situations they encountered as a result of these problematic service level measurements led to a contract renegotiation. As the customer stated, "Even if the downtime SLA is 99.9, it leaves a lot of wiggle room when you take that across all the facilities." The renegotiated arrangement now measures the downtime/uptime percentage per facility.
5. Total cost of ownership
A customer shared that, shortly after the outsourcing relationship was established, her company launched an initiative to determine its total cost of ownership (TCO) of various business processes. But the company was unable to determine TCO for the processes in its outsourcing scope because it lacked transparency into the service provider's underlying enabling IT costs that were variable rather than fixed costs.
When they renewed the contract, they renegotiated the pricing arrangement to ensure cost component transparency. This ultimately also enabled the customer to understand whether it was getting the most value for the price at both a service line and transaction level.
6. Software licensing
Unexpected software licensing costs during the transition phase hit a company outsourcing several IT components. The transition involved moving from a standard database to a real application clustering database model (a cluster of servers to eliminate hardware downtime). The licensing cost structured across the CPUs was different than the buyer anticipated. It also encountered another issue around the server license component of a security product.
Root-cause analysis found that these added-cost issues were due to a lack of communication. In some cases, the buyer assumed costs rather than communicating with the provider to determine if its assumption was correct. In other cases, the provider's communication to the buyer was inaccurate because of ineffective communication among the different divisions of the provider's business.
7. Managing the relationship
Several buyers reported they incurred extra costs because they entered into the outsourcing relationship with the wrong mindset. As one buyer stated to Outsourcing Center, "There's a lot of difference between working with an outsourcer and working with a team of people who are subordinate to you." Not understanding that change up front, the buyers had to go through a learning process – and often relationship struggles as well as delayed time to value – to understand how to manage the relationship and the outcomes.
8. Learning curve
Multiple buyers stated their costs increased because the learning curve was more difficult and took longer than they had anticipated. In some cases, the learning curve was for the provider's team to learn the buyer's business and its IT systems; in other cases, it was for the buyer's end users to learn new systems and procedures. In either case, both parties had to step in and "save" the other by making sure they operated the processes and technology correctly and fixed the errors. Both parties lost money because the time to value was extended significantly.
9. Offshore readiness
It's not uncommon for buyers and providers to find out – when in the midst of the transition phase – that a specific component of an entire process scope is not ready for offshoring or, in some cases, is prohibited from being sent offshore. One buyer shared with Outsourcing Center that it encountered issues with the security controls of certain applications that were in the outsourced scope, and those controls prevented managing those applications from offshore locations. The costs in this case included suspending the transition midway through it and working together to redeploy teams and applications.
10. Communication around quality
The transition phase of an outsourcing relationship often erupts in "noise" from the customer's end users around dissatisfaction with the quality of services. Often, an analysis finds that the source of the problem is the buyer's lack of effective communication around quality expectations and needs. At other times, the buyer has no one in house with the in-depth knowledge to effectively oversee the quality of the provider's work. There are also cases where the buyer begins the relationship with a light approach to governance and more of an ad hoc style of communication, which can lead to ineffective communication around specific needs and expectations.
In one of the relationships Outsourcing Center studied, the buyer ended up with unexpected costs around not only resolving the quality issues but also investing in "a few experts" who would be liaisons between the buyer's users and the provider's service team.
Heeding these insights shared by the surveyed buyers will help both customers and service providers avoid unbudgeted costs and delayed time to value.
Additional tips on avoiding pitfalls in the transition phase are described in Outsourcing Center's free white papers: Best Practices for Risk Mitigation in Outsourcing Transitions (2010) and Haste Makes Waste: How to Avoid Outsourcing Problems (2003).