Nine ways to make bad outsourcing deals good

It’s Gartner’s annual outsourcing conference in London next month so Gartner is getting itself ready with a few comments.

Below is one from William Maurer, vice president and research director at Gartner, talking about why outsourcing contracts fail and how the can be made better.

Given I have been working on a feature about renegotiating IT outsourcing contracts this week it comes at an appropriate time.

By William Mauer

“Many organisations, vendor and sourcing managers tell Gartner that they have substantial challenges with their outsourcing deals. A common theme is that the service levels are being met, but customer satisfaction is low and senior management is disgruntled. Other problems start as far back as the transition stage, when service providers begin delaying implementation of their services for various reasons — resulting in frustrating delays for consumers.

Complaints about understaffed vendor and relationship management functions and inefficient governance processes by the client organisation are also frequently raised. Unsurprisingly, the service provider is then not aligned with the organisations’ goals — causing constant disruption to the deal. A further contributing factor is when organisations that have been in outsourcing deals for two years or more realise that pricing is no longer cost competitive, yet the service provider refuses to make price reductions. Additionally, organisations frequently state that service providers promise to bring innovative deals, but fail to even provide continuous improvement. Other challenges include poor communication, missed expectations and a lack of flexibility.

What many managers fail to grasp is that outsourcing deals are generally long-term relationships and that deals signed today may not be the deal that they require in the future. Like any relationship, the one between the organisation and the service provider needs to be managed, reviewed and evolved over time to ensure that all parties are 100 per cent engaged.

Nevertheless, even good outsourcing relationships can go bad, so Gartner has developed nine steps to assess and fix the deal issues that are in danger of wrecking these relationships:

1. Assess the Situation

It is essential to identify the impact of the deal, determining the investment required to fix the issues and prioritising the solutions by aligning them with business requirements. Key questions need to address the services, relationship, finance and commercial aspects of the engagement with the strategic vendor – as the foundation for achieving the nine steps in the this process.

2. Identify Goals for the Improvement Process

Take the answers to the previous questions and determine the goals: in terms of the business requirements supported by the deal; the financial requirements required to fix the problems; other necessary resource commitments necessary to fix the problems; the appropriate behaviour drivers and change processes necessary to change the governance; services to be delivered; scope of work; and relevant service levels and pricing mechanisms Once the goals are identified, a revised set of processes and relationship structures, and the terms and conditions necessary to achieve the objectives, are then defined.

3. Achieve Agreement on Critical Goals

Utilising the goals and a revised set of processes, relationship structures and terms and conditions, the organisation must next prioritise its goals. Priorities will change, so each party must understand the other’s ability to identify priority changes — as well as the means by which this reprioritisation must occur.

4. Escalation Plan

Utilising the prioritised goals, an escalation plan should then be developed by determining who should be involved in each goal. As part of the escalation process organisations must ensure that they seek approvals at the right level on both sides of the deal, because aiming too high often does not get the required action or support and aiming too low rarely gets the issue fixed at all.

5. Escalation Executive

It is essential that the plan is lead by a client executive who is assigned the responsibility of ensuring that the changes are implemented. This executive should be in place as early in the process as possible: ideally during the identification and prioritisation procedure, but certainly no later than prior to escalating and seeking approval of an investment in the plan by both parties’ key stakeholders.

6. Review Meetings

The organisation and its provider must continuously review and change the plan. Meeting on a monthly basis with updated plans communicated to all stakeholders is the objective of the review process. New issues will arise and other issues will change. Changes often occur at random, so continuous review and change must be a long-term commitment from all stakeholders.

7. Issue List Update

Once the updated list has been approved it must be communicated to the appropriate stakeholders with the right level of detail and at the right time. Like the review meetings process, the updated list process is one that must take place regularly.

8. Implement Behaviour Drivers

Implementing the required changes must be founded on an ability to drive the provider’s behaviour. While this can be a tough step, if the plan has been followed to this point the organisation and provider should have resolved any issues or differences along the way — making it much more manageable.

9. Identify and Manage Risk

Organisations must understand the risks associated with all changes made to the relationship. This is achieved by defining and implementing a comprehensive risk management plan.”

Also see a blog I wrote: Advice for companies that want to renegotiate outsourcing contracts