One of the biggest dilemmas involved in an outsourcing initiative is how to mitigate the risk of failure. Both buyers and providers face vulnerabilities and significant odds of either (a) parting amicably but without having achieved their objectives, (b) encountering difficulties that result in contract renegotiation (or even remediation), or (c) prematurely ending their arrangement.
Well-documented History of Outsourcing Failures
The odds of being involved in an outsourcing failure, in fact, appear not to have diminished as outsourcing has matured. Despite the abundance of educational resources and advice from industry experts and outsourcing relationship participants proclaiming keys to success and warning of pitfalls, failures continue.
Outsourcing Center has recently conducted several studies on outsourcing failures; this article is the first in a five-part series (accompanied by several research papers) discussing the studies’ findings and conclusions on root causes of failure as well as best-practice tips. This comprehensive compilation of information will assist buyers and providers in better anticipating potential trouble spots and will shed light on several fronts that need rethinking in the way outsourcing initiatives are often approached.
In a May 2004 study (“Leading Causes of Outsourcing Failures”) to assess participants’ experiences and opinions about outsourcing failures, we surveyed 305 buyers and providers in North America, Europe, Asia and India (one-third of respondents were buyers, two-thirds were providers).
In addition to attitudes and behaviors at the root of failures, the study surprisingly revealed a significant finding we did not anticipate.
The study focused primarily on nine of the prominent causes of outsourcing failures:
- The buyer’s unclear expectations up front as to its objectives
- The parties’ interests are aligned up front but become misaligned as the buyer’s business environment or needs change
- The provider’s poor performance against service level agreements
- The parties do not consider each other’s interests to ensure their relationship is mutually beneficial
- Poor governance structure for managing the ongoing relationship
- Poor cultural fit compatibility of the parties
- Poor communication; the parties do not proactively share necessary information with each other
- Challenges arising because of the buyer’s multi-supplier environment
Finding 1: Most frequent cause of failure
Prompted by this list of nine causes, survey respondents were asked to indicate-from their personal experience-the most frequent cause of failure. Figure 1 displays the rank-ordered, pooled-buyer/provider responses.
Among the notable causes of failure detailed by respondents selecting “Other” as the number one factor are:
- The tendency of the buyer to back away from the solution it bought as the relationship builds. Buyers that are not committed to the full change management effort necessary for success end up wanting the provider to adjust the solution rather than pushing forward through the changes. (buyer response)
- Some failures result not because interests fall out of alignment but, rather, because they were never aligned to begin with. Then when the parties manage the relationship and contract to the achievement of those interests, the relationship is doomed. A clouded focus on a hoped-for expectation can also cause the parties to overlook the inherent risks. (provider response)
- Continually creating scope creep will cause an unsatisfactory relationship with little or no future. (buyer response)
Finding 2: Least frequent cause of failure
Respondents were then asked to indicate (again, from their personal experience) the least frequent cause of failure among the same nine factors. The rank-ordered responses to this question are shown in Figure 2.
Finding 3: Difference of opinion
By pooling responses, the survey found (see Figure 1) that almost one-fourth of respondents agree that “buyer’s unclear expectations up front” is the number one cause of failure. Although buyers and providers are in agreement about this, the providers are more emphatic about it; “unclear expectations” as the prime cause of failure netted 14% of total buyer opinions and 29% of total provider opinions.
Separating the buyer responses from provider responses throughout the survey, reveals, for some factors, a completely divergent opinion among the parties:
Responses for Most Frequent Cause of Failure
21% of total buyer votes
The provider’s poor performance against agreed-upon service level agreements.
Responses for Least Frequent Cause of Failure
17% of total supplier votes
The parties do not consider each other’s interests to ensure their relationship is mutually beneficial.
The survey found several instances of buyers and providers in direct conflict and not inclined to acknowledge their own influence on outsourcing failures.
Finding 4: Their own worst enemies
In tracking individual respondents’ answers, we noted evidence of several self-defeating patterns among both buyers and providers. For example, the 18% of buyers and providers who chose “poor communication” as the least common cause of failure also chose “interests become unaligned” and “the parties don’t consider each other’s interests” as the most frequent causes of failure. Similarly, two respondents selected “interests becoming unaligned over time” as the least common cause of failure; but “poor governance” (which helps to keep interests aligned) was their choice for most frequent cause of failure. Both groups of respondents often displayed disconnects in linked behaviors and outcomes.
Finding 5: Failure points are evenly distributed
The results of the study are surprising and somewhat contrary to our expectations in that the respondents’ opinions are evenly distributed among the causes of failure. As shown in Figure 3, representing a composite view of all the survey responses, all nine causes have some level — in fact, an almost equal level — of support among respondents.
Among the areas where these surveyed failure risks can be mitigated or handled (in due diligence, SLAs and descriptions of scope of services, contract negotiation, governance, etc.), the even distribution of survey responses indicates no area is more or less important than another in efforts to avoid a preponderance of failure risks. Failure causes are spread across the landscape. Taken together, we believe these nine causes may be a symptom of a much deeper problem. This is one of the points explored in a separate Outsourcing Center study on failed relationships.
Finding 6: Up-front Matters
In addition to opinions on what triggers outsourcing failures, respondents in the May 2004 survey were asked for best-practice tips in avoiding failure.
One buyer stated, “Buyers should plan for the unexpected in their business. Make sure the contract and the selected provider can handle the worst-case scenario.” A provider’s tip was “to take a mutual analytical approach to manage the expectations and deliverables. This shared understanding should be built at the beginning of the relationship.” Both buyers and providers advised: “Don’t underestimate the need for teamwork and collaboration up front to build a strong relationship.”
Many other best-practice tips and insights from the study are included in the remaining three articles in this series as well as a downloadable research paper.
The dominant theme recurrent in the tips provided, whether from buyers or providers, is that those who spend more time and effort up front ensure predictable results and less chance of failure in their outsourcing initiatives.