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

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Is there a Better Way to Outsource? 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

  1. 1. 10 “Ailments” that afflictoutsourcing deals..and how to counter themBy: Kate Vitasek and Karl ManrodtPosted on ssonetwork.comArticle link:http://www.ssonetwork.com/10-ailments-that-afflict-outsourcing-deals-%E2%80%94-an
  2. 2. Ailment 1 - Penny Wise and PoundFoolishThis occurs when a company outsources based purelyon costs. Too many companies profess to have anoutsource “partnership” but, behind the scenes, focussolely on beating up their service providers to get thelowest price. Organizations with this ailment giveoutsourcing a bad name — and probably should not beoutsourcing in the first place. Their myopic focus mightpay off in the short term, but time and time again it isproved that when cost and “lowest price” is the onlyincentive for a deal, there’s probably trouble ahead. 10 “Ailments” that afflict outsourcing deals - and how to counter them
  3. 3. Ailment 2 – The Outsourcing ParadoxThe Outsourcing Paradox occurs when a buyer hires a service provideras the “expert” and then proceeds to tell the provider exactly how todo the work. If you are outsourcing for more than simple laborarbitrage and want the supplier to bring their expertise and bestpractices to the table — then resist the urge to handcuff the supplierwith a detailed and prescriptive Statement of Work. In fact, the firstsymptom manifested by sufferers of the Outsourcing Paradox is thedevelopment of the “perfect” set of tasks, frequencies, and measures.The goal of the “experts” is to tightly define activities via Service LevelAgreements. The result is an impressive document containing all thepossible details on how the work is to be done — a perfect system! Butthis “perfect system” is often the first reason a company fails in itsoutsourcing effort — because it is the company’s perfect system, notone designed by the service provider. 10 “Ailments” that afflict outsourcing deals - and how to counter them
  4. 4. Ailment 3 – Activity TrapMany companies that suffer from the Outsourcing Paradox oftenalso suffer from a related malady, the Activity Trap.Traditionally, companies that purchase outsourced services usea transaction-based model. Under that model, the serviceprovider is paid for every transaction—whether needed or not.The more transactions performed, the more money the serviceprovider makes. There is no incentive to reduce the number ofnon–value-added transactions, because such a reduction resultsin lower revenue.(..continues in next slide) 10 “Ailments” that afflict outsourcing deals - and how to counter them
  5. 5. Ailment 3 – Activity TrapThe Activity Trap manifests itself in a variety of transaction-basedoutsource arrangements. When the contract structure is based on FTE,cost-reimbursement or transaction-based, the outsource provider hasno incentive to reduce costs because profit is typically a percentage ofdirect costs. In a nutshell, the more inefficient the entire supportprocess, the more money the service provider can make. [A classicexample of the Activity Trap’s perverse incentive occurred whennineteenth century paleontologists traveling to China would paypeasants for each fragment of dinosaur bone (dinosaur fossils) thatthey produced. They later discovered that peasants dug up the bonesand then smashed them to maximize their payments.](..continues in next slide) 10 “Ailments” that afflict outsourcing deals - and how to counter them
  6. 6. Ailment 3 – Activity TrapTo counter the inherent disincentive of the Activity Trap, serviceproviders are promoting “managed service” agreements. Theconcept is solid, but the downside is that most of these deals arestructured so that service providers reap all the rewards ofefficiencies versus sharing benefits with the buying organization.Simply put, a “win” for the service provider is often a “lose” forthe buyer. Even if service providers sign up for a “3 percent yearover year cost reduction,” in our experience it is likely unfair forthe buyer. A better approach is a transparent, incentive-basedpricing model, which we will discuss in our next article [VestedOutsourcing Part 2, ssonetwork.com ]. 10 “Ailments” that afflict outsourcing deals - and how to counter them
  7. 7. Ailment 4 –The Junkyard Dog FactorWhen the decision to outsource is made, it usually means jobs will belost as work and jobs transition to the outsource provider. Thusemployees often will go to great lengths to hunker down and staketerritorial claims to certain processes that simply “must” stay in-house.I call this the “Junkyard Dog” factor. Even if the majority of the jobs areoutsourced, many companies will have their “best” employees stay onboard to manage the new service provider. These same “best”employees are often the ones who were asked to help write theStatement of Work. Is it any wonder that SOWs are generally rigiddocuments based on less-than-optimal ways of performing tasks thatare now being outsourced?(..continues in the next slide) 10 “Ailments” that afflict outsourcing deals - and how to counter them
  8. 8. Ailment 4 –The Junkyard Dog FactorA classic example of “Junkyard Dog” behavior occurs when aservice provider brings forward ideas — but these fall of deafears because the Junkyard Dogs proclaim, “We’ve not donethings that way before,” OR “We can’t get XX function tochange their process, so you can’t change your process.” 10 “Ailments” that afflict outsourcing deals - and how to counter them
  9. 9. Ailment 5 –The Honeymoon EffectAt the beginning of any relationship, the parties go through thehoneymoon stage. The Stamford, CT research firm Gartnerstudied the Honeymoon Effect and found that overall attitudestoward an outsourcing contract tend to be positive at the outset,but satisfaction levels decline over time. Outsource providersoften jump through hoops as they ramp up and begin to collectrevenue for their new client. Buyers often find the “A” team thatsold the deal has moved on to sell the next deal, leaving the “C”team behind the business. 10 “Ailments” that afflict outsourcing deals - and how to counter them
  10. 10. Ailment 6 –SandbaggingTo prevent the Honeymoon Effect, some companies adopt approachesto encourage outsource providers to perform better over time, eg, byestablishing bonus payments or penalties based on achieving certaintargets. This can work, but unfortunately, all too often, it createsperverse incentives for the outsource provider, whereby the companyachieves just the amount of improvement needed to pocket theincentive or avoid the penalty.Consider Ukrainian Sergey Bubka, who was a world-class pole-vaulterearning $50,000 every time he set a new world record. From 1983 to1998 he set world records 35 times…but never by more than onecentimeter! Or what about the service providers who are suddenly“innovative” when their contract is expiring and about to go out tobid? 10 “Ailments” that afflict outsourcing deals - and how to counter them
  11. 11. Ailment 7 –The Zero-Sum GameThe Zero-Sum Game is one of the most common ailmentsafflicting outsourcing deals. Companies play this game whenthey believe, mistakenly, that if something is good for theservice provider, then it is automatically bad for them. Ofcourse, service providers also play this game. Players on eachside do not understand that the sum of the parts can actually bebetter when they are combined effectively — which was provenby John Nash’s Nobel Prize research in the area of game theory.The basic premise of game theory is that when individuals ororganizations play a game together and work together to solve aproblem, the results are always better than if they had workedseparately or played against each other. 10 “Ailments” that afflict outsourcing deals - and how to counter them
  12. 12. Ailment 8 –Driving Blind DiseaseThe Driving Blind Disease occurs when there a formalgovernance process to monitor the performance of therelationship is lacking. When we started working with companiesmore than 20 years ago, most outsourcing arrangements fellinto this trap. Arrangements would be developed, but there wasno agreement regarding how to measure success. Typically,companies would track costs but not measure different aspectsof performance. As a result, early outsourcing agreements oftenfailed because of an unclear definition of success.Today, on the other hand, too many companies have goneoverboard and are falling victim to Measurement Minutiae (seenext slide). 10 “Ailments” that afflict outsourcing deals - and how to counter them
  13. 13. Ailment 9 –Measurement MinutiaeMost of us probably remember Mom’s warning that “too muchof a good thing can be bad for you” — perhaps while you werewolfing down Halloween candy or Thanksgiving Dinner. Thesame applies to measuring service providers. The hallmark ofMeasurement Minutiae is trying to measure everything. Actuallythe 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 thecompany could outsource the management of this scorecard tothem.(..continues in the next slide) 10 “Ailments” that afflict outsourcing deals - and how to counter them
  14. 14. Ailment 9 –Measurement MinutiaeMeasurement Minutiae is often associated with companies thatalso suffer from the “Junkyard Dog Factor” and agreementstypified by the Activity Trap. In our experience, few companieshave the diligence to actively manage all of the metrics theycreate, all of the time. Our research has shown a positivecorrelation where successful relationships reduce the number ofmetrics to between 5-10 critical or key performance indicators,allowing them to focus on what matters, versus on everythingthat moves. 10 “Ailments” that afflict outsourcing deals - and how to counter them
  15. 15. Ailment 10 –The Power of Not DoingThis is the saddest of all the ailments. We observed a case of this ailment ata Fortune 50 company. A senior manager was demonstrating what a greatjob her company had done on establishing measures. The company hadsigned 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 anautomated scorecard solution to capture and graph performance. Each of thesupplier scorecards was posted on an internal Web site. One could quicklyclick through to look at the current measures and performance. Theproblem? There was no discussion or follow-through!This is not unusual; many companies fall into the trap of establishingmeasures for the sake of measures but have not thought through how to usethem to manage the business. We’ve all heard the old adage, “You can’tmanage what you don’t measure,” but if the metrics compiled are not usedto make adjustments and improvements, don’t expect results. 10 “Ailments” that afflict outsourcing deals - and how to counter them
  16. 16. Ailment 10 –The Power of Not DoingThis is the saddest of all the ailments. We observed a case of this ailment ata Fortune 50 company. A senior manager was demonstrating what a greatjob her company had done on establishing measures. The company hadsigned 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 anautomated scorecard solution to capture and graph performance. Each of thesupplier scorecards was posted on an internal Web site. One could quicklyclick through to look at the current measures and performance. Theproblem? There was no discussion or follow-through!This is not unusual; many companies fall into the trap of establishingmeasures for the sake of measures but have not thought through how to usethem to manage the business. We’ve all heard the old adage, “You can’tmanage what you don’t measure,” but if the metrics compiled are not usedto make adjustments and improvements, don’t expect results. 10 “Ailments” that afflict outsourcing deals - and how to counter them
  17. 17. 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 10 “Ailments” that afflict outsourcing deals - and how to counter them :

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