Beware the commoditization of IT outsourcing

By Stephanie Overby, CIO |  IT Management, outsourcing

But one could argue that the real value of doing a capital "O" outsourcing is not in the ability to get the commodity work done, but rather in having a relationship with a strategic partner who is involved in your day-to-day activities. That's what this client was really after, and that's what the provider was really after. But the contract and pricing model did not support that type of relationship.

The governance structure needed to be reworked to allow the provider to learn about solutioning opportunities based on corporate strategy. The pricing schedule also needed to be reworked so that the economics of the deal supported delivering innovation. Without that rework, the pricing of the deal actually penalized the provider for innovation and efficiency.

Interestingly, even in a long-term relationship where the parties were serious about solving this problem, the first reaction from both the customer and the provider was to develop contract clauses and SLAs to drive the desired behavior. Yet, what this really required was an economic and governance solution, coupled with some contract changes, to keep it out of the way of the desired behaviors.

CIO.com: What are the opportunity costs associated with too much commoditization in outsourcing deals?

Hansen: The opportunity costs can be huge. There are some experts who believe that two-thirds of the value of the outsourcing market is currently not being realized by either side.

Just something as simple as poor vendor selection has a huge impact. On the surface poor vendor selection requires the parties to use the contract to power through an unnatural relationship. This results in inordinate amounts of contract management energy and frequent failure.

Additionally, this situation is often the result of a buyer who over-reaches in requirements during the vendor selection process, putting the vendor into a must-fail situation that usually starts to surface during transition.

A failed transition will have a multiplier effect on organizational change that is almost immeasurable. Most TCO analyses make assumptions on adoption, but to realize those adoption assumptions users will typically require something predictable to change to - - and that is where transition failure exacts a huge toll.

You can build all of the monetary incentives you want into the contract, but it's the quality of the team that emerges from the contract negotiations that will determine whether the outsourcing gets through transition in one piece.

Once transition is a mess, any other internal change that needs to happen becomes very difficult because the change enabler (the outsourcing provider or the outsourcing itself) will lack credibility with the business. Forget about innovation, transformation, or even realizing your original adoption schedule.


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