Organisations that develop their firm’s outsourcing relationships based upon mutual trust rather than relying on punitive service level agreements and penalties will benefit from a “trust dividend” worth as much as 40% of the total value of a contract, according to research by the Warwick Business School.
Ignoring the value of properly managed outsourced relationships is, according to Professor Leslie Willcocks, who conducted the research, “tantamount to corporate negligence.”
The study, supported by LogicaCMG, analysed 1,200 outsourcing contracts from across the world since 1990.
Firms need to agree a “relationship charter” with their outsourcing partner that sets a behaviour benchmark and includes regular health checks, balanced scorecards and senior executive dashboards for the customer to help monitor success levels, according to Willcocks.
“We found that contracts with well-managed relationships based on trust – rather than stringent SLAs and penalties – are more likely to lead to a ‘trust dividend’ for both parties,” he said.
“Real trust is not naïve. It comes from planning, is steered by the right people, structures, processes and measurement, and is earned from performance.
“Ignoring the value of properly managed outsourcing relationships is tantamount to corporate negligence – simply because it has such a huge impact on return on investment and the potential value gained from outsourcing.”
Willcocks and co-author Sara Cullen said that for all but short-term arrangements, power-based relationships are poor substitutes for cooperation and trust building processes.
The alternative is to face the high transaction costs of monitoring and of imposing sanctions, the negative orientations and behaviours adopted, and the limited goals that can be pursued by the parties.
Willcocks and Cullen said that the contract was a necessary but not sufficient governance tool for outsourcing, but added that poorly constructed contracts, based on faulty cost service analyses, and containing ambiguities, loopholes and incomplete terms, can seriously damage outsourcing health.