Outsourcing 2010: repairing of crisis contracts, part 1

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).

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 substantial 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 IT infrastructure services 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 discussion related to ‘hidden services’ and the ‘sweep clause’ within six months after signing the deal related to the financial institution mentioned before.

Besides advisors basing their sales pitch more on their own short term revenue instead of what was best for the client (it is also made easy for advisors as they leave after signing and have rarely a financial incentive tied to the success of the deal), are also vendors hitting 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 breaking.

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 a large 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, value 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). Last but not least is the impact of the short term financial gain by standardizing the services to the model of the vendor on the agility and flexibility of the business. This topic is covered in the second part of this post.