10 “Ailments” that afflict outsourcing deals — and how to counter them

10 “Ailments” that afflict outsourcing deals ..and how to counter them

By: Kate Vitasek and Karl ManrodtPosted on ssonetwork.com

Article link: http://www.ssonetwork.com/10-ailments-that-afflict-outsourcing-deals-%E2%80%94-and-how/14914-6-A

Ailment 1 - Penny Wise and Pound Foolish

This occurs when a company outsources based purely on costs. Too many companies profess to have an outsource “partnership” but, behind the scenes, focus solely on beating up their service providers to get the lowest price. Organizations with this ailment give outsourcing a bad name — and probably should not be outsourcing in the first place. Their myopic focus might pay off in the short term, but time and time again it is proved that when cost and “lowest price” is the only incentive for a deal, there’s probably trouble ahead.

10 “Ailments” that afflict outsourcing deals - and how to counter them

Ailment 2 – The Outsourcing Paradox

The Outsourcing Paradox occurs when a buyer hires a service provider as the “expert” and then proceeds to tell the provider exactly how to do the work. If you are outsourcing for more than simple labor arbitrage and want the supplier to bring their expertise and best practices to the table — then resist the urge to handcuff the supplier with a detailed and prescriptive Statement of Work. In fact, the first symptom manifested by sufferers of the Outsourcing Paradox is the development of the “perfect” set of tasks, frequencies, and measures. The goal of the “experts” is to tightly define activities via Service Level Agreements. The result is an impressive document containing all the possible details on how the work is to be done — a perfect system! But this “perfect system” is often the first reason a company fails in its outsourcing effort — because it is the company’s perfect system, not one designed by the service provider.


Ailment 3 – Activity Trap

Many companies that suffer from the Outsourcing Paradox often also suffer from a related malady, the Activity Trap. Traditionally, companies that purchase outsourced services use a transaction-based model. Under that model, the service provider is paid for every transaction—whether needed or not. The more transactions performed, the more money the service provider makes. There is no incentive to reduce the number of non–value-added transactions, because such a reduction results in lower revenue.

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The Activity Trap manifests itself in a variety of transaction-based outsource arrangements. When the contract structure is based on FTE, cost-reimbursement or transaction-based, the outsource provider has no incentive to reduce costs because profit is typically a percentage of direct costs. In a nutshell, the more inefficient the entire support process, the more money the service provider can make. [A classic example of the Activity Trap’s perverse incentive occurred when nineteenth century paleontologists traveling to China would pay peasants for each fragment of dinosaur bone (dinosaur fossils) that they produced. They later discovered that peasants dug up the bones and then smashed them to maximize their payments.]

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- and how to counter them


To counter the inherent disincentive of the Activity Trap, service providers are promoting “managed service” agreements. The concept is solid, but the downside is that most of these deals are structured so that service providers reap all the rewards of efficiencies versus sharing benefits with the buying organization. Simply put, a “win” for the service provider is often a “lose” for the buyer. Even if service providers sign up for a “3 percent year over year cost reduction,” in our experience it is likely unfair for the buyer. A better approach is a transparent, incentive-based pricing model, which we will discuss in our next article [Vested Outsourcing Part 2, ssonetwork.com ].


Ailment 4 –The Junkyard Dog Factor

When the decision to outsource is made, it usually means jobs will be lost as work and jobs transition to the outsource provider. Thus employees often will go to great lengths to hunker down and stake territorial claims to certain processes that simply “must” stay in-house. I call this the “Junkyard Dog” factor. Even if the majority of the jobs are outsourced, many companies will have their “best” employees stay on board to manage the new service provider. These same “best” employees are often the ones who were asked to help write the Statement of Work. Is it any wonder that SOWs are generally rigid documents based on less-than-optimal ways of performing tasks that are now being outsourced?

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Ailment 4 –The Junkyard Dog Factor

A classic example of “Junkyard Dog” behavior occurs when a service provider brings forward ideas — but these fall of deaf ears because the Junkyard Dogs proclaim, “We’ve not done things that way before,” OR “We can’t get XX function to change their process, so you can’t change your process.”


Ailment 5 –The Honeymoon Effect

At the beginning of any relationship, the parties go through the honeymoon stage. The Stamford, CT research firm Gartner studied the Honeymoon Effect and found that overall attitudes toward an outsourcing contract tend to be positive at the outset, but satisfaction levels decline over time. Outsource providers often jump through hoops as they ramp up and begin to collect revenue for their new client. Buyers often find the “A” team that sold the deal has moved on to sell the next deal, leaving the “C” team behind the business.


Ailment 6 –Sandbagging

To prevent the Honeymoon Effect, some companies adopt approaches to encourage outsource providers to perform better over time, eg, by establishing bonus payments or penalties based on achieving certain targets. This can work, but unfortunately, all too often, it creates perverse incentives for the outsource provider, whereby the company achieves just the amount of improvement needed to pocket the incentive or avoid the penalty. Consider Ukrainian Sergey Bubka, who was a world-class pole-vaulter earning $50,000 every time he set a new world record. From 1983 to 1998 he set world records 35 times…but never by more than one centimeter! Or what about the service providers who are suddenly “innovative” when their contract is expiring and about to go out to bid?


Ailment 7 –The Zero-Sum Game

The Zero-Sum Game is one of the most common ailments afflicting outsourcing deals. Companies play this game when they believe, mistakenly, that if something is good for the service provider, then it is automatically bad for them. Of course, service providers also play this game. Players on each side do not understand that the sum of the parts can actually be better when they are combined effectively — which was proven by John Nash’s Nobel Prize research in the area of game theory. The basic premise of game theory is that when individuals or organizations play a game together and work together to solve a problem, the results are always better than if they had worked separately or played against each other.


Ailment 8 –Driving Blind Disease

The Driving Blind Disease occurs when there a formal governance process to monitor the performance of the relationship is lacking. When we started working with companies more than 20 years ago, most outsourcing arrangements fell into this trap. Arrangements would be developed, but there was no agreement regarding how to measure success. Typically, companies would track costs but not measure different aspects of performance. As a result, early outsourcing agreements often failed because of an unclear definition of success. Today, on the other hand, too many companies have gone overboard and are falling victim to Measurement Minutiae (see next slide).


Ailment 9 –Measurement Minutiae

Most of us probably remember Mom’s warning that “too much of a good thing can be bad for you” — perhaps while you were wolfing down Halloween candy or Thanksgiving Dinner. The same applies to measuring service providers. The hallmark of Measurement Minutiae is trying to measure everything. Actually the minutia that some organizations create is quite remarkable: we have found spreadsheets with 50 to 100 metrics on them. One advisory firm touted a “robust scorecard of 550 metrics” and proceeded to offer a consulting service whereby the company could outsource the management of this scorecard to them. (..continues in the next slide)


Ailment 9 –Measurement Minutiae

Measurement Minutiae is often associated with companies that also suffer from the “Junkyard Dog Factor” and agreements typified by the Activity Trap. In our experience, few companies have the diligence to actively manage all of the metrics they create, all of the time. Our research has shown a positive correlation where successful relationships reduce the number of metrics to between 5-10 critical or key performance indicators, allowing them to focus on what matters, versus on everything that moves.


Ailment 10 –The Power of Not Doing

This is the saddest of all the ailments. We observed a case of this ailment at a Fortune 50 company. A senior manager was demonstrating what a great job her company had done on establishing measures. The company had signed up for a seminar and bought fancy software to help it create a world-class scorecard. The company had invested more than $1 million in an automated scorecard solution to capture and graph performance. Each of the supplier scorecards was posted on an internal Web site. One could quickly click through to look at the current measures and performance. The problem? There was no discussion or follow-through! This is not unusual; many companies fall into the trap of establishing measures for the sake of measures but have not thought through how to use them to manage the business. We’ve all heard the old adage, “You can’t manage what you don’t measure,” but if the metrics compiled are not used to make adjustments and improvements, don’t expect results.


Ailment 10 –The Power of Not Doing

This is the saddest of all the ailments. We observed a case of this ailment at a Fortune 50 company. A senior manager was demonstrating what a great job her company had done on establishing measures. The company had signed up for a seminar and bought fancy software to help it create a world-class scorecard. The company had invested more than $1 million in an automated scorecard solution to capture and graph performance. Each of the supplier scorecards was posted on an internal Web site. One could quickly click through to look at the current measures and performance. The problem? There was no discussion or follow-through! This is not unusual; many companies fall into the trap of establishing measures for the sake of measures but have not thought through how to use them to manage the business. We’ve all heard the old adage, “You can’t manage what you don’t measure,” but if the metrics compiled are not used to make adjustments and improvements, don’t expect results.


IT IS TIME FOR CHANGE!Read the rest of the article at ssonetwork.com: http://www.ssonetwork.com/10-ailments-that-afflict-outsourcing-deals-%E2%80%94-and-how/14914-6-A

10 “Ailments” that afflict outsourcing deals - and how to counter them :

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10 “Ailments” that afflict outsourcing deals — and how to counter them