The Biggest Problem in Outsourcing Engagements

TPI gave its quarterly report to journalists and analysts regarding the scope and breadth of the largest outsourcing endeavors in global companies. I arrived late to the show, but I determined quickly that business is still up, up, up in the outsourcing biz.

The reason I bring the presentation up here is because, during the question portion of the program, TPI team members provided some interesting insights into the biggest problem they’re seeing in outsourcing engagements — particularly, in BPO: Executives are paying more than they expect to.

Here I quote from two TPI executives and the analyst asking the questions:

In our opinion, we’ve seen quite a few problems with BPO contracts and we’re concerned about that, because we believe if you’re going to do this, you ought to do it right and do it to succeed.

The experience that we’ve had is that clients enter these relationships without a full understanding of the implications that these relationships entail — especially to the change in their enterprise… going from an in-source provided service to one that’s paid for by consumption. There’s just a lack of sophistication around what that operating model would look like.

And that just leads to missed expectations on both parties. Some of the missed expectations that we see most commonly is cost surprises — where you may have signed a contract with some haste, because you think you’re getting pricing terms for units of service, maybe paychecks issued, or calls answered or other measures of performance, and you might have benchmarked those services against some industry-wide norms. But then what you find in actuality is the consumption of those services is unregulated and uncontrolled. And you don’t’ have sufficient maturity around managing the fact that now you have a variable relationship. And variable means it can go up as fast as it can go down.

Those surprises are often caught by the financial executives in these firms that say, ‘Wait a minute. We moved from having a lot of predictability about these costs. You may not have liked it, but it was predictable…’ — to one that is unpredictable because the consumption of these services is no longer being regulated.

That for us is the guidance we give our clients. Before you get into a business process outsourcing relationship, know how you’re going to manage it. And make sure that your contract is aligned with your management in tact.

I think there’s some pushing on doing these deals really fast. The reality is, take a little more time on the front end to make sure you have a good deal. But if you don’t, it’s going to increase your probability of problems.

Who eats the cost?

Typically, it results in a renegotiation of some sort. It typically results in some big event that says, ‘Well, we have to reset our expectations here.’

What we’re not seeing is early termination of these relationships. It looks like both parties are able to get to an understanding in how to restructure a relationship.

Usually, both parties are going to share in the costs.

Are both parties getting smarter?

I think there’s the tendency that says, ‘Can’t I just buy this as a service? And can’t I just do this in two months?’ without understanding the downstream implications. Our word of caution to corporate executives is, ‘Take your time and do it right.’ We may still see some challenges in the coming quarters.

It took awhile for the lessons of the IT outsourcing marketplace and industry to bed down in the CIO community across global firms. The decision makers for business process are not the CIO. They’re the functional executives in the financial organization or the HR organization. They need to learn those lessons and apply those practices that have been developed through the years of ITO success.

You can review the slides, which TPI used for its presentation here.