Beware the commoditization of IT outsourcing

By Stephanie Overby, CIO |  IT Management, outsourcing

So in a competitive process you may see complex scoring models on such things as costs, time to transition or service levels. Once the negotiations are complete, a scorecard can be generated that purports to weigh the individual terms, producing leading and trailing bidders. If the process is taken further, you may even have parallel contract negotiations designed to leverage the terms from one negotiation against another.

This is appealing since it breaks the deal into manageable chunks and provides what appears to be a solid foundation for decision making. So in the end, a "savvy" buyer can look at the cost, review the scorecard, and make a decision.

CIO.com: What's wrong with that?

Hansen: Deals have been done this way for decades and we know that it just doesn't lead to a high level of either customer or vendor satisfaction. Yet, in many cases, the parties often have contracts that adequately describe the requirements and resulting solution and contain all the service levels required for that solution to function as agreed, and the parties are complying with the contract.

The problem is that a deal that requires internal change to succeed is not easily evaluated by looking at a simple sum of its parts. In outsourcing, the unit of exchange is often not tangible. Value, as opposed to a unit of product, doesn't lend itself to a unit per dollar spent without getting into economics that take into account other units of exchange that may work in academic settings, but are rarely if ever applied in the real world. To complicate this a little further, requirements in outsourcing are often more elusive than the parties may realize.

Over the years we see several common causes for this, including these:

The presence of shadow requirements that are unspoken or poorly understood and are never meaningfully vetted during the buy process--think innovation, partnership, proactivity

A pricing model that supports the stated requirements, but stops the vendor from satisfying those shadow requirements

Overly complex or self-defeating services levels that lead to unintended consequences http://www.cio.com/article/520663/Outsourcing_10_Crippling_Mistakes_IT_Departments_Make>

Reliance on a contract to overcome bad deal economics

Failure to form the high-performing teams necessary to carry the deal through transition

Poor governance that fails to encourage the parties to remain aligned

Choosing the wrong partner


Originally published on CIO |  Click here to read the original story.
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