This is shaping up to be the year of the poor outsourcing deal, says Roger Cox, European vice-president for strategic sourcing at analyst firm Gartner Group. The reason for this, he says, is twofold. Current business pressures, primarily the need to reduce costs, means that everyone is focused on outsourcing at the moment. But in searching for a remedy to a short-term problem companies are tying themselves into long-term outsourcing contracts. "Companies think they are buying a service but they are actually buying a relationship," says Cox.
This juxtaposition, he says, means that the majority of the outsourcing contracts signed today do not have the built-in flexibility to accommodate the inevitable changes to the business that will occur over the next seven to 10 years. "In today's climate the pace of business change is such that contracts are out of date quicker than it takes for them to be negotiated," says Cox. "One defence firm I worked with recently calculated there was a critical change to its business every 15 seconds."
Many of today's outsourcing deals are also doomed to failure, says Cox, because of a dearth of skills within the strategic sourcing department of the average company. This is the part of the organisation that Cox describes as the "corporate glue" - the part that sits between and co-ordinates the business units within a company and external service providers. "The strategic department is not functioning and there is an inability to link services," says Cox. "People working in this area need to have a whole range of skills be it business, commercial, legal or technical expertise. There is no natural career path for people in this function."
These two failings are related, says Cox, and there is an obvious need for a change in the way outsourcing contracts are created. This new type of contract relies on a strong strategic sourcing department to constantly manage and nurse the relationship between the business and the service provider.
He says, "One of the emerging trends in contract innovation is the development of long-term service agreements that are built for continuous change. Traditionally, long-term, good old-fashioned outsourcing agreements have a service solution, determined at the start of a deal, built into the fabric of the contract.
"In contrast, we are starting to see what we call co-management contracts. This is an agreement based on governance processes rather than a service solution, allowing the solution to change without having to undergo a major contract re-structure."
Cox has spent the past 10 years analysing some of the biggest outsourcing contracts in the world both in terms of cost and length. This is no mean feat when you consider that some contracts stretch to almost 3,000 pages.
He says that usually 20% to 30% of what is required is buried somewhere in these contracts while another 20% to 30% is achieved "by good people getting together behind the scenes and making things happen". But what happens when these people leave the company or change roles? There is, Cox says, a real need to clean these contracts up and organise all the good stuff.
The co-management contract model has come out of Gartner research, which has revealed four key factors associated with the success of long-term deals in fast changing or uncertain environments:
- Most major deal failures were due to a break down in the overall relationship between the stakeholders in the outsourcing agreement
- Successful deals were dependent on a range of interfaces, between the service recipients and the service providers
- Six interfaces, that operate above day-to-day service delivery, emerged as critical
- These interfaces were usually informal, often vested in individuals, and frequently collapsed when these individuals changed jobs etc. These interfaces, which are in addition to day-to-day service delivery, are strategy, membership, integration, equity, audit and feedback.
The key to success, says Cox, lies in a combination of relationship management through the six co-management processes linked with effective day-to-day service management.
All this, he concludes, will change the roles and responsibilities of the strategic sourcing department. Whereas in traditional outsourcing agreements a great deal of time is spent choosing a supplier and developing the contract, Cox says new deals will look more closely at sourcing strategies and relationship management. The former encompasses business requirements, core competencies, business case and buy-in from stakeholders. The latter involves the six co-management processes mentioned above.
Cox says, "As organisations come under increasing pressure to rapidly establish viable, flexible, long-term deals with a portfolio of strategic suppliers, they will need to maintain an effective sourcing strategy and an effective relationship management strategy. Without these supplier selection and contract development are pointless exercises."
What's more, with the average good, old-fashioned outsourcing deal currently taking nine months to complete, Cox claims this new methodology can halve the time it takes to emerge with a successful deal.
The new-look IS department
Gartner says companies are moving towards a slimmed-down, high-value adding variant of information services, by which most of the work associated with the supplying and supporting infrastructure will be outsourced to external service providers.
Five key roles will remain in the new IS function:
- Strategic sourcing - management of the strategic sourcing lifecycle that interfaces with service providers on the supply side, and the business on the demand side
- Technology advancement - this straddles supply and demand and focuses on proactive change and keeping ahead of new technologies
- Business improvement - involvement with users on the demand side
- Architecture development - a strategic level poised between supply and demand
- IT leadership - a strategic level role directed at the fusion of IT and business strategies.
Gartner's white paper, Strategic Sourcing 2002-2003: Change and Uncertainty, will be presented by Adrian Quayle, lead consultant at Gartner's Consulting Strategic Sourcing Practice at Outsourceworld, London Arena, 24-25 April. For details go to www.outsourceworld.org/
This was first published in March 2002