Almost nothing is more emotive than the topic of outsourcing. Its proponents point to the strategic benefits that well guided outsourcing arrangements can yield whilst the dissenters and gloom mongers cite cases of poor delivery and bitter relationships. But a new research based report launched last week by the Warwick Business School highlights the increasing importance of good governance in securing successful outsourcing outcomes. FSN talked to Professor Leslie Willcocks, the report's co-author and others to understand the issues at the heart of the report's findings.
The headline conclusion of the report, "The power of relationships" is strikingly forthright. It says that CEOs who fail to actively manage outsourcing relationships miss out on a 'trust dividend' worth up to 40 per cent of contract value. On the other hand, well managed outsourcing arrangements based on mutual trust, can create a 20 per cent to 40 per cent difference on service, quality, cost and other performance indicators compared to outdated power-based relationships.
But aren't all outsourcing contracts based on mutual trust? Apparently this is not the case. Willcocks explains, "Our research analysed 1200 case studies of outsourcing contracts from across the world since 1990. We found that contracts with well-managed relationships based on trust - rather than stringent SLAs (Service Level Agreements) and penalties - are more likely to lead to a 'trust dividend' for both parties."
Andrew de Cleyn, senior vice president, global service delivery at LogicaCMG, which commissioned the report and is itself an outsourcing provider agrees that one of the problems of researching outsourcing arrangements is the highly variable nature of the beast. He told FSN, "There are definitely different sorts of outsourcing arrangement. If it is a straightforward supply of technical capability, such as a desktop service contract then it may be more appropriate to manage it on the basis of a service level agreement." However the outsourcing market has matured beyond the provision of mere technical capability. Modern day business process outsourcing is much more likely to have strategic impact. "For me, the report highlights an internal quandary between an emphasis on cost management which tends to promote a transaction oriented style of management and the necessity to get more value from an outsourcing arrangement which needs a different approach," he added.
Nick Jarman, head of the financial management practice at Atos Consulting agrees that there is a real tension between cost management and strategic intent. "These outsourcing deals start with a highly competitive Invitation to Tender Process and the value of the deal is decided at the time that the deal is struck. The supplier's profits are driven down and they seek to redress the balance during the life of the arrangement through contract changes." Jarman believes it is this unstable foundation which sets the tone for the rest of the contract's life but agrees that relationship management, as in all IT contracts, could help.
Andrew de Cleyn adds, "The SLA is not the sole remedy when things go wrong. It is about managing the relationship and it's incumbent on both sides to manage the relationship more pro-actively and to build the levels of trust throughout the contract."
How much a good relationship is worth to the contract is perhaps the most controversial part of the Warwick Business School findings. Atos Consulting's Jarman told FSN, "There are so many factors that impact on the outcome of an outsourcing contract how could they possibly conclude that it delivers a 20% to 40% trust dividend? How did they do this? What is the baseline and how do you measure value, particularly when the underlying business is itself changing shape during the life of the contract?"
Willcocks defends the reports findings. "We have examined a very wide body of case studies and examined how relationships have affected the results using their own metrics. We looked at factors such as cost savings, levels of service and levels of satisfaction. In good relationships, we correlated performance outcomes that were 20% to 40% better. Conversely, where the relationship had become adversarial we noted that the only benefit was limited to cost reduction - there wasn't much else."
He continued, "Real trust is not naïve. It comes from planning, is steered by the right people, structures, processes and measurement, and is earned from performance. It is clear that relationships are now themselves strategic assets and demand on-going senior executive investment and attention commensurate with their importance. 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."
One of the problems highlighted by Logica's de Cleyn is that management does not always recognise the strategic importance of outsourcing so the rough rule of thumb offered by the report that, "Outsourcing relationships accounting for 20% or more of the IT or business processing outsourcing budget are themselves strategic assets and demand on-going senior executive investment and attention", is particularly welcome. Atos Consulting's Jarman agrees, "It's a useful marker."
The key point is that successful relationships do not happen by accident, says Professor Willcocks. Overall strategic business intention must determine the nature of the relationship and the contract. A detailed design is essential to build effective relationships throughout the lifecycle of the deal. This determines the key underlying drivers of behaviour and whether power-based or trust-based relationships emerge.
An important element of successful outsourcing relationships is to ensure that the right people are in place to make them work, finds the study. It identifies a series of personality types on the client and supplier side, who can make or break a contract.
Professor Willcocks concludes: "Our study found a number of outsourcing contracts where adversarial behaviour, inexperience or lack of confidence led to the demise of a relationship. Again, it is the responsibility of the client senior management team to ensure that the right people are managing the relationship. It is also vital that pre-planning work outlines the scope of engagement and that everyone is clear on roles, responsibilities and ownership of tasks."
