CHARACTERISTICS OF A MATURING OUTSOURCING MARKET

By M H AHSAN

Recent market surveys show that almost 80 percent of companies expect to increase their investment in outsourcing both IT operations and business processes. Considering the myriad problems that have plagued sourcing relationships in recent years, that trend might seem problematic. But evidence suggests that the outsourcing marketplace is maturing, and that both clients and vendors are becoming increasingly adept at addressing the fundamentals needed to develop a lasting relationship.

One thing that's changing is that buyers of outsourcing services are more knowledgeable and savvy in scoping and negotiating their deals. They have learned from experience that simply signing up for the lowest cost is a losing proposition. Although cost remains the single most important factor in most deals, clients are looking beyond the bottom line price tag and targeting the best price/performance combination. Clients are negotiating hard - but fair - with vendors.
Vendors are getting smarter too. They have learned the hard way that "buying the business" is not a good business practice. This strategy - characterized by undercutting the pricing of the competition to the point that the deal became unprofitable - is rationalized by the belief that wonderful things will happen over the life of the agreement to compensate for lost (or low) margins incurred early on to win the contract. What typically happens instead, though, is that the lack of profit prevents the vendor from investing in the relationship. As a result, the vendor doesn't meet the client's expectations, the relationship degenerates, and the agreement is renegotiated or terminated. In short, everyone loses.

Mutual BenefitsThe most important lesson learned from the past decade is that an outsourcing deal can only be successful if both client and vendor benefit. Effective negotiations and outcomes result not from the negotiating prowess of one party or the other, but rather from a fact-based and objective appraisal of individual and mutual goals of the parties involved.

On a related point, it's becoming increasingly clear that the ideal approach to outsourcing negotiations is to take the time needed to get it right the first time - by understanding what is to be outsourced, and by specifically defining expectations from the outset.

Sounds simple enough. But what does that really mean? A thorough pre-outsourcing assessment of an existing environment typically takes about three months to complete, and includes the following (all done in extensive detail):
· identify existing services and supporting processes
understand who does what and how functions would change in an outsourced environment
define current and anticipated service levels
document current and anticipated service volumes
carve out current and projected costs

The bottom line: Understand your current world! This is essential to success going forward, and will establish the foundation for every other outsourcing building block.

Identifying the Outsourcing OpportunityThe difference between a client organization's existing environment and what the service provider can deliver constitutes the outsourcing "opportunity." To make an informed decision regarding this opportunity, the client must consider the cost of the transition, along with the impact and the risks. Is there value in proceeding? Is this the right choice at this time? Are the services under consideration the right services to outsource - and why? And to what extent will successful outsourcing of these services contribute to corporate business goals and objectives?

Having gauged that the opportunity is in fact viable and that investment is warranted, the next step is to consider the market. Who is an appropriate partner to address the defined requirements and expectations? How will the two parties work together and how will the deal be structured? A variety of options exist.

To ensure that the outsourcing deal is fair to both client and vendor, the client organization must communicate its requirements - in what may seem at times to be excruciating detail. Expectations (which often go beyond current requirements to the heart of the "spirit and intent" of the desired deal) must also be communicated. The client organization must then listen very carefully to how vendors respond to what becomes in fact an offer on the table to the vendor community.

A client organization that has done its homework knows its requirements (in detail), understands its objectives (specifically), and has defined its expectations (realistically) before even seeing vendor responses. A well-prepared client, moreover, can review a vendor proposal and determine whether prices are exorbitant, unrealistically low, or reasonable.

In other words, the client organization will ideally consider its existing environment in sufficient detail to know what is achievable, what is possible at a stretch, and how movement will be made on the continuum of efficiency and effectiveness, and how outsourcing will translate into definitive and measurable business value and cost reductions.

But what's in it for the vendor? Whether an outsourcing relationship focuses on commodity services or a strategic business partnership, success is possible only if the interests of both parties are being addressed. Put differently, the best way for a client organization to protect its interests is to ensure that the vendor's interests are protected. There can be no success of one party at the expense of the other. While hard-fought (and often unreasonable) wins at the negotiating table at the vendor's expense may be initially gratifying, they often turn into major losses very early on in the life of the agreement. And when this happens, and when mistakes are realized, it's often too late to recover the squandered good will.

Successful relationships that result in shared successes are built on trust and shared investments. Relationships built on win/lose negotiating battles leave little room for sharing and caring. If one party leaves the negotiation table feeling victorious at the expense of the other, the feeling won't last.

Monitoring MechanismsA successful relationship requires that mechanisms be in place to monitor and measure the success of the agreement. This includes defining focused goals and priorities on an ongoing basis; assessing that service performance meets defined requirements and expectations; ensuring that price/performance expectations are being consistently met; and assessing the attainment of overall outsourcing goals and objectives - including specified and sustained cost reductions over the life of the agreement.

A client organization should negotiate an agreement on the basis of a realistic and attainable win/win scenario with the vendor. The vendor should make a healthy and sustainable profit (key to business success) and the client should achieve negotiated cost reductions and quality service delivery (key to business success).

Both sides win - this simple formula is the key to success in outsourcing relationships.