Outsourcing 2010: repairing of crisis contracts?
February 25, 2010
Because of the economic crisis have many companies deployed aggressive scenario’s to cut cost. This resulted among others in stretching the definition of ‘non-core’ activities in order to outsource them to an external party (including selling off offshore captives to cash rich vendors).
When advisor and vendor focus on their own revenue
Balancing the benefits (cash for asset transfer, lower prices) with the risk, most companies opted not to engage in high profile, high value deals. To further reduce the risk, many companies outsourcing focused on contracts which used labor arbitrage and increased economies-of-scale to reduce cost. Complex transformations of business and IT which would increase the risk (and potentially reduce flexibility/agility when the economy picked up again) were often left out. This to the dismay of vendors as the hours related to these programs are an important area of margin for the vendor (and potential value for the client if done well).
The pressure to cut cost thus resulted in a decent volume of small to medium sized deals which were closed in record time. Cost were further reduced by shorting the budget and time lines for the outsourcing project itself. Deals were therefore executed with the speed of an formula 1 (or Indy 500) car. Advisory firms put oil on the fire by pitching ‘speed sourcing’ solutions, implying that IT or other financial processes are standardized to a level that a Rfx of contract template used in one company will fit the bill within any other situation. I recently spoke to a member of a large financial institution which wants to outsource their IT infrastructure and they take two weeks for their Rfx (their advisor told them: no problemo, can do).
Yes I agree that generic services like IT infrastructure management have a large common component, but the devil is in the details. And having some nasty details popping up after signing the contract is ok for a bakery, but for companies which business processes rely fully on the correct functioning of their IT, is speed sourcing tricky. The processes and accompanying assets have grown over decades into a landscape which is not easy to unravel. In other words, I expect some serious discussions related to ‘hidden services’ and the ‘sweep clause’ within six months after signing the deal related to the financial institution mentioned before.
Besides advisors steering their sales pitch in the direction of their own short term revenue, do vendors also hit the accelerator. The sales people from the vendor received only one message from their senior management the last 1½ year: sell sell sell. With both advisors and vendors hitting the accelerator there was nobody to apply some adequate steering and/or breaking.
Adjusting contacts to the new reality
The advantage of a formula 1/ Indy 500 driver over an outsourcing race is the race driver seeing the corners and chicanes in the road, and thus knows when to break. The company desiring to outsource does not and trusts the advise it gets from advisors and vendors. Their incentive is however closing the deal as that means revenue and thus prefer to focus on the straight parts of the circuit instead of the corners.
These corners may catch up with the company that outsourced after the contract has been signed and may appear in the form of the previously mentioned hidden services, valuable knowledge and experience disappearing and additional activities assumed by the client to be part of the standard contract (but assumed by the vendor to be non-standard). And last but certainly not least is there the impact of the contract on the agility and flexibility of the business.
Contracts solely aimed at reducing price/cost are typically very rigid and do not leave a lot of room for flexibility. Flexibility is however something the business needs now the economy is picking up again. The market dynamics are slowly moving back into the fast paste from before the crisis. This means the business will want to move quickly on new opportunities for growth and does not want to be confronted with outsource contracts which limit their maneuverability.
As a result I expect there will be quiet some advisors busy helping clients to revamp their contracts this and next year. Renegotiations which are this time not aimed at lowering prices, but removing the straightjacket which came with the sole focus on cost.
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