Trust cuts outsource cost

Outsourcing built on trust rather than penalties is most successful, says study.

Outsourcing built on trust rather than penalties is most successful, says study.

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.

Leslie Willcocks and his team at the Warwick Business School analysed 1,200 outsourcing contracts agreed around the world since 1990. The results consistently demonstrated how trust relationships brought improved service, quality and cost, which helped to transform the overall efficiency of the contract.

The researchers concluded that firms need to agree a "relationship charter" with their outsourcing partner that sets a behaviour benchmark. It should include regular health checks, balanced scorecards and dashboards for the customer to help monitor success levels.

"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 naive. 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' report said that for all but short-term arrangements, power-based relationships are poor substitutes for co-operation and trust building processes.

Without a trust relationship, firms face the high transaction costs of monitoring and imposing sanctions, and all of the negative associations that brings with it.

The contract is a necessary, but not sufficient, governance tool for outsourcing. Poorly constructed contracts, based on faulty cost service analyses, with ambiguities, loopholes and incomplete terms, can seriously damage outsourcing health, he said.

 

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