Outsourcing:
A Business Relationship Management Challenge
by Sallie J. Sherman and Jill Hultin, S4 Consulting
We believe that successful outsourcing projects depend on managing key relationships. We have spent over 25 years helping establish and manage critical relationships between suppliers and their most critical customers.
Because in writing about outsourcing it is sometimes difficult to distinguish between the two firms in outsourcing, we will be calling the firm offering the outsourcing services as ‘the vendor’ and the firm receiving the outsourcing services ‘the customer.’
Outsourcing vendors are transforming business processes to enhance competitive advantage for their customers. Functions essential to business strategy are retained in-house by the customer, while those that can be done more efficiently by a vendor are outsourced to providers that:
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Demonstrate greater expertise
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Added value
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Lower costs
Competitive pressures drove huge leaps in outsourcing in the 90’s and will continue to do so in the future. In their book, The Relationship Advantage: Information Technologies, Sourcing, and Management, Thomas Kern and Leslie Willcocks analyzed the outsourcing practices of 250 large European and U.S. companies for the years 1990-2001.
They estimated that, on average, 30-35% of corporations’ IT budgets are already outsourced, and that global IT outsourcing would reach $150 billion in 2004. Gartner Research projected that spending on business process outsourcing would reach $234 billion by 2005, and McKinsey predicted that this number will reach $500 billion by 2008. These targets were all hit and, in some cases, exceeded.
IT Outsourcing Risks
While some outsourcing can lower costs or decrease competition, IT outsourcing does contain risks.
Kern and Willcocks found that, in the 250 outsourcing customers they studied, only 15% of those surveyed reported significant cost reductions. When they asked outsourcing customers to list the troubles they had faced during implementation, the list included:
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Vendor doesn’t understand our business (37%)
- (Customer) corporate strategy and IT are no longer aligned (35%)
- Costs for additional services (38%)
- Cost escalation due to contract loopholes (31%)
- Poor (vendor) staff (43%)
- Lack of (vendor) responsiveness (41%)
- Getting vendors and their subcontractors to work together (35%)
- In-house customer staff resistance (26%)
- Customer managerial skills inadequate (28%)
There were many reasons for these problems. Outsourcing customers sometimes underestimated the time required to accurately define the services they needed to select a vendor and manage the relationship. In some cases the vendor did not take the time to truly learn the customer’s business. Some outsourcing customers defined the vendor relationship in adversarial terms.
Other customers, who found they had selected the wrong vendor, lost millions of dollars bringing a new vendor up to speed. In other cases, there was internal resistance at the outsourcing firm or squabbles between the vendor and subcontractors.
There is no shortage of barriers to effective outsourcing. To mitigate risk and maximize value, careful planning must be done, including relationship management planning.
IT Outsourcing Relationship Issues
We have found that many IT outsourcing problems boil down to relationship issues.
All outsourcing relies heavily on contracts, but no contract can capture all the variables and changes that might occur in a fast-moving industry like IT. These vendor-customer relationships, in many cases bound by contract for 1-5 years, require a systematic process to effectively measure progress and manage post-contract relationships.
Both firms need to set up clear processes to measure success and manage relationships. Where should vendor-customer relationships be managed? At almost every level of the project. Executives from both firms should be meeting regularly to evaluate progress and to help hammer out ways to handle the challenges that arise.
Relationship managers at both the vendor and the customer must be named and must be given overall ownership of the entire outsourcing process. So each firm needs a project manager and a relationship manager.
In The Relationship Advantage, Kern and Willcocks mention one contract, for example, that contained a clause requiring the vendor to switch to newer technology if there were a huge technological leap. Had the outsourcing customer required them to honor the letter of the contract, the vendor would have gone bankrupt and the entire project would have crashed and burned.
The most successful outsourcing projects are based on a trust developed by working together. But, as Kern and Willcocks say, “The case studies generally revealed that relational trust only develops in situations where key individuals were able to develop a rapport….[although] not every case achieved a relational level of trust. Most relations tend to operate more at a formal level of trust, based on service performance that had to be reproved every day.” But whatever level of trust achieved, successful outsourcing projects depend not solely on technical expertise but on managing key relationships within the project.
Which is how we arrived at outsourcing—not through deep technical expertise but through our deep experience in relationship management. We‘ve spent 25 years helping establish and manage critical B2B relationships between vendors and their most important customers. We understand the importance of having a single relationship owner, regularly scheduled performance updates, many meetings at multiple levels between the two firms, regular relationship assessments and ongoing conflict management. Unless the vendor and customer have removed potential barriers to an effective relationship, there is too great a likelihood of project failure and lost opportunities.
