April 05, 2013, 3:29 PM — Wondering why your IT outsourcing deals fail to deliver more than standard cost cutting or basic service-level metrics? It's the talent, stupid.
That's the conclusion made by HfS Research CEO Phil Fersht, based on the results of the outsourcing analyst firm's survey of 282 outsourcing customers and providers. Just 32% of enterprise customers said that their current governance talent--those people that manage their outsourcing relationships--can drive innovation, are capable of defining business outcomes, or have above-average analytical skills. Yet only 23% were making formal investments in training and developing their outsourcing management staff in areas that are strategic to their business, according to the survey.
"Too many of these engagements are geared up to meet tactical goals in the early stages, and the customers staff their teams largely with procurement and contract management skills, such as transition management, and managing [service-level] performance metrics," says Fersht. "It's not until a contract reaches a functioning operational phase--usually after 18 to 24 months--that some of customers quickly realize they do not possess a lot of skills to move beyond functional."
IT outsourcing providers do a little better in the talent development department. It is their core business after all. Yet just under half of service providers said they had formal training programs in place to develop industry expertise and skills in analytics and relationship management, according to the survey. And just 60% of providers said they invest in core capabilities such as transition management and continuous improvement.
"Too many of the providers have only really focused on helping their customers with the tactical operation work to ensure they don't mess up the operations," Fersht says.
Some Service Providers Stuck on the Bottom Line
Many providers are focused on their bottom lines as they deal with shrinking margins and intense competitions for new deals. "Many providers are so blinkered by keeping their pricing competitive--and clients are often not thinking too far beyond the contract at point of sale--that the focus on actual execution and investing in skills beyond operational areas are sorely lacking,"Fersht says.
"One thing we are picking up in our research is how ignorant some provider leaders really have become with the quality of their delivery. As long as it doesn't hurt them financially, they assume the world is rosy," Fersht says.
That leads to what Fersht calls a "good enough" IT deal: It meets cost-reduction goals and standard levels of performance. And "good enough" is good enough for some IT shops, but not for those who are seeking more from their IT services deals. "It's proving a major challenge for many to get access to increased training budgets, bring in some external management, et cetera," says Fersht.
HfS Research found that 85% of the 400 outsourcing engagements they looked at were meeting their cost targets and standard delivery metrics, "which is a ringing endorsement for both the customer and provider in achieving the basic fundamentals of outsourcing," says Fersht. "The crux of the issue is when ambitious clients want to move beyond ordinary."
To find new value from outsourcing, customers and providers must work together to justify business outcomes, but may not have the right skills to do so. And, interestingly, they may blame each other. Qualitative interviews with provider and customer executives show that customers consistently rated their own talent superior to their service providers' talent, says Fersht.
Meanwhile, the service providers rated their talent superior to their clients' talent in every area. That lack of appreciation clients have for their providers' staff and vice versa was surprising to Fersht, but indicative of a lack of collaboration and understanding between the parties.
"From our interviews, it became clear that too many outsourcing customer executives feel they get buried in the minutiae of managing operations and tough transitions," says Fersht. "The blood and tears shed simply to get their outsourcing engagement functioning often permanently scar many executives. In their tunnel vision, they can only see negatives and forget the positives."
In addition, customers who take a cost-focused approach to outsourcing are unlikely to think their provider is doing a better job than they were. "These engagements are structured in a way to keep the lights on as opposed to a long-term strategic agenda to achieve business value," Fersht says.
"As a result, enterprise executives often unreasonably expect that solutions that have cost reduction at the heart will somehow magically provide exponential strategic value to their businesses," Fersht says. "The truth is that their service provider selection traps them into a cycle of limited investment in their business operations, which constrains their future opportunities to create business value."
3 Steps to Better Your IT Outsourcing Services Deals
Fersht says that there things companies need to address in order to better leverage their service providers existing talent and encourage more investment in key areas.
1. Outsourcing customers must make the assessment of strategic talent a top priority in service provider selection. "Operational capabilities are now just table stakes and are not true differentiators anymore when a buyer is choosing a service provider," says Fersht. IT outsourcing buyers who are serious about moving beyond cost-cutting and basic service capabilities should also consider paying a premium for those providers that have the talent they needs.
2. IT organization should rethink the roles that remain in-house. "To move beyond the older talent perspective overly focused on operational skillsets, successful companies have looked for strategic skills by redefining the job competency models of individuals managing service providers," Fersht says. Some more strategic capabilities include analytical skills, influence, and process transformation understanding.
3. IT service buyers should establish shared stretch goals that encourage in-house and outsourced skills to be deployed and reviewed regularly. "It is normal for an outsourcing relationship to plateau at some point over time. Too many such relationships operate on a mentality of, 'If it's not broken, don't tinker with it; if the SLAs are green, service must be good,'" says Fersht. "Our interviews of successful enterprises showed that they pursued major process overhauls with unrelenting tenacity."
Read more about outsourcing in CIO's Outsourcing Drilldown.