October 01, 2013, 3:30 PM — "Happy families are all alike;" Leo Tolstoy wrote in Anna Karenina, "every unhappy family is unhappy in its own way."
One might be inclined to think the same is true for outsourcing -- the successful relationships share the same best practices while the failed arrangements are uniquely flawed. But, in fact, the most disappointing deals do share common characteristics.
Diane Carco, president of IT consultancy Swingtide, has been studying the facets of flawed deals for nearly two decades. Even as the state of IT outsourcing has matured, the same issues come up again and again in failing IT services relationships. "Mistakes are often repeated," says Carco, who had to terminate a $2 billion outsourcing deal when she was CIO of CNA Insurance in 1999. "Awareness of why things failed is not necessarily propagated into the next generation of management and the next deal."
Carco, who now specializes in troubled deals and serves as an expert witness in outsourcing disputes, has identified the 10 sources of problems she sees repeatedly -- a virtual how-to if you want your deal to fail. But these 10 steps to avoid also serve as guideposts in how to avert outsourcing catastrophe. "A forensics review of deals gone bad helps you figure out how to do better in the future," she says.
1. Don't define transformation. The majority of companies enter into outsourcing arrangement to get better IT service at a lower cost. Of course they know that will require change, but they usually haven't figured out how that change is going to happen. "It's the cornerstone of most problems," says Carco. The typical outsourcing contract contains a paragraph committing the parties to develop a plan for transformation -- and that's it. Better than a promise to make a plan is an actual plan developed pre-contract. "It extends the time of contracting but it gets you to the end state faster," says Carco.
2. Assume billing and SLAs begin on day one. Unsatisfied outsourcing customers mistakenly assume that prices and SLAs written for the end state are effective in the first month, says Carco. "They don't have transition service levels or billing. The relationship starts in a very big hole."
3. Ignore retained costs in the business case. Cost savings are a big outsourcing driver. But many customers fail to conduct a fully loaded economic analysis when making their business case -- and end up disappointed when the deal fails to deliver financially. "People forget the cost of the retained organization -- or they forget to have a retained organization," Carco says. "There's also a lot of confusion about who pays for things like connectivity or the cost of disposing certain assets."
4. Start governance two months after the deal is signed. Most outsourcing contracts have robust governance amendments today. But when it comes time for transition, there's no one to fill the governance roles and executives required to participate don't have the time. "There's a lot of excitement and coffee cups and balloons. And they're focused on moving people over," says Carco. Setting up the governance process takes a few months and by then a deal can be in real trouble. "Those first few months are most fragile," says Carco, who advises clients start governance meetings in the months before signing the contract. "Then you have an operational group of people who have gotten over those awkward first meetings and have some practice solving issues."
5. Sign a change order for an existing contract commitment. When a really unhappy outsourcing customer walks in the door chances are Carco will find thousands -- or tens of thousands -- of change orders have been signed. A customer should only sign a change order when adding a new service or making a material change. "What happens is a provider may be asked to do something that may not be explicit in the service commitment or that they may not be prepared to do yet. So they start writing change orders that say if you want us to do this we'll charge you x," says Carco. "And the client, who wants to get the work done, signs it." Thus begins the "death by change order" process common in troubled deals.
6. Don't fund testing and change functions. In infrastructure deals, where the focus is on standardization and consolidation, the changes made by an outsourcing provider will require testing by applications folks and end users. There may be remediation done to applications. The service provider is prepared to make the changes in the environment, says Carco, but the client will suddenly put on the brakes because they don't have the resources to handle the transformation or they don't want to put projects on hold. That leads to delays and frustration for both parties.
7. Rely solely on termination rights should things go wrong. Most outsourcing contracts adequately address small problems (customer gets a service-level credit) and huge problems (the customer can end the deal for cause). But there's no middle ground. "Particularly nowadays when deals are smaller and shorter, there's a huge cost to get out of them, and the service provider knows that," says Carco. "It's not the appropriate incentive to get the service provider to deliver." There's no best practice for figuring out those mid-range solutions to growing conflict. But Carco encourages clients to map out their options during negotiations, like partial terminations by tower or additional mediation provisions.
8. Confuse people transfer with knowledge transfer. When outsourcing customers are transferring staff to the provider, they assume that knowledge transfer is taken care of. But the provider has the right to move those employees to any client they choose. Instead, Carco says, outsourcing customers should approach knowledge transfer the way they do when there is no transfer of staff (as in offshoring), going through detailed questions and answers and documentation.
9. Trust the vendor's SLA reports. Around 80% of outsourcing bills are inaccurate, according to Carco. SLA reporting, while not quite as bad, is more likely to be wrong than right. That stems from some of the previous issues mentioned like delays in transformation or understanding of the agreement, says Carco. Early on in deals, an SLA may apply only to certain production servers or some types of trouble tickets. But provider data may not be that granular. "I did a renegotiation recently where, four years into the deal, the provider had no way to capture the information needed to report the SLAs, so they reported as close as they could get," Carco says. "But that's not what the client was paying for."
10. Assume technical managers will become vendor management professionals overnight. "IT values the hero -- the guy that knows all the details that aren't documented, works all night and can fix any problem," says Carco. So when it comes time to outsource, the client wants to keeps those folks internal. But they're not hard-wired to take on the vendor management role required. "These are not people that want to sit down and read a 300-page contract," says Carco. "What you need is someone who has a sourcing background in order to understand the contract, a financial background to figure out the details economics, and a technical understanding of the services levels to direct the work."
Read more about outsourcing in CIO's Outsourcing Drilldown.