When Outsourcing Goes Wrong

Unless you’ve been living on the moon for 20 years, the subject of outsourcing shouldn’t be new to you. It isn’t a new phenomenon but it has grown, as a business practice, to meteroric proportions over the last 10 years. The Indian economy owes much to the practice. And China has been a location of outsourced manufacturing for decades.  But does it always work?

Well it must work, in general, or else it wouldn’t have exploded would it now. Companies who outsource do so for a number of reasons, such as:

• ‘Labor arbitrage’, i.e. cheaper labor
• Other economical benefits
• Access to skills at scale that the company cannot build itself
• Access to unique technologies or methods that not economical to build internally
• A service is in demand for a short timeframe (not core to business operations)
• Services outsourced are provided at lower risk than if provided internally
• Reduction of capital requirement (big buck investments)
• Or whatever the reason, maybe foriegn travel by Execs was it

There are many successes of outsourcing, but there are high-profile failures. Here are a few:

• The UK’s National Health Service terminated a contract with EDS after a £7.6bn (that’s about $11bn USD!) overrun on a nationwide computer system.
• Shop Direct, a UK-based retailer, pulled it’s call center in 2002 out of Bangalore, India, due to poor service and infrastructure and moved the jobs back to its UK operation.
• In 2003, Dell had to pull technical support operations out of Bangalore, due to a very high degree of complaints.
• Also in 2003, the defunct Lehman Brothers stopped it’s contract with Wipro Spectramind, another Indian provider, who provided it’s internal IT helpdesk.

Outsourcing is a big gamble for an organization, whatever governance and management is put in place. As soon as you put business operations into some other organization, you inevitably lose control. So a lot rests on the quality of the relationship between outsourcer and vendor.

Like marriages, business relationships can be rocky at times. Expectations aren’t always aligned, governance can be overbearing, cultures can create misunderstanding, and misinterpretation is commonplace.

Ah yes, but there is the contract . Yes the contract! The savior of all business. Surely we can go back to the contract? Well, no. Get real. I’m rather flippantly saying that contracts covering outsourcing are not the Lord Protector of an outsourcing arrangement. In fact for many outsource vendors, it’s just the start of an arrangement. I find this particularly true of Indian vendors. The contract is the means to engage and develop operation agreements (often known as Operating Level Agreements , or OLAs), not the final product.Too many organizations rely too heavily on the contract!

So what should you do if you think you have a contract that isn’t going to work?

Diane Frank of CIO.COM has recently published an article which shares three interventions we can put in place, should we find ourselves in this situation. In summary, they are:

• Realign Expectations – outsourcers and their vendors should go back to the reasons why they engaged in the first place, and check that both parties agree on what services should be provided. It’s possible that over the lifetime of a relationship, one or both sides begin to seek different objectives that the contract and OLA aren’t designed for
• Implement Neutral Governance – get someone who isn’t so close to the deal to work out how to govern the contract and any changes you’ll need to make, to avoid over-zeal and over-emotion. An external agent will be ‘fair’ and unbiased. Both sides will need to agree to this upfront
• Put Staff Skin In The Game – give staff extreme motivation to make the updated contract work within the new governance framework. Let staff be advocates rather than critics

Diane’s advice is really saying ‘get over it’, work out how to make it work, and then get everyone involved. Good advice.

There is one scenario though which isn’t quite this simple. When interviewing IT professionals who work in organizations that outsource, I discovered a number of instances where the management inside the outsourcer behave as advocates of the vendor. To put it another way, managers in the customer organization protect the vendor, often beyond the stipulations of the contract. Why? You may ask… but does this happen in your organization?

This happens because managers who are responsible for the success of outsourced services, on the customer side, invest significantly in the relationship. The investment might be time, people, tools, travel and goodwill in order to build it up. Moreover, reputations and careers often depend upon it. Failure of a deal could mean disaster for individuals. I think the percieved difference between cost to individuals and the cost to their organization can lead to over-protective behaviors.

This was true for Bill Goodman (last name adapted for anonymity), based out of Perth in Australia. Until last year, his organization outsourced IT development to a vendor in the Phillipines and Bill was charged with developing the whole deal from cradle to grave; after 18 months of a five-year deal, the relationship soured, yet Bill did his utmost to defend the vendor internally so to keep his colleagues from requesting a formal review. He managed to keep the wolves at bay for another six months until all hell broke loose and the contract was terminated. So was Bill .

Douglas Brown and Scott Wilson in their book The Black Book of Outsourcing: How to Manage the Changes, Challenges, and Opportunities discuss the challenges of outsourcing and offers great advice for avoiding internal politics, as well as the politics between customer and supplier. There are many books on how-to-do outsourcing well, but I found this book also has an honest account of both sides of the practice. Anyone building a career in outsourcing really benefits by tapping into the experiences of others who have made mistakes!

I think Diane gave sound advice in her article, but I add that don’t assume that everyone in your organization is an adversary of the other as it is sometimes quite the opposite!