The Coalition Concept
Assess outsourcing from three perspectives: yours, ours, and each other's
Outsourcing is an effective way to achieve flexibility, competence, and cost performance—which is why suggestions abound on how companies and their service providers can make the outsourcing relationship work. Some suggest treating outsourcing as a marriage; others say it is a transactional arrangement. In our view, outsourcing is a coalition—an alliance formed for mutual benefit. Both parties align objectives, agree on an operating model, capture business value, and maintain flexibility—while working together to achieve short-term gain and long-term advantage.
"It is change, continuing change, inevitable change, that is the dominant factor in society today. No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be." These words by American author Isaac Asimov, about the world in which we live, certainly ring true for outsourcing. The market for outsourcing services is maturing—and estimated to grow a further 27 percent between 2010 and 2015 (see figure 1). Yet the failure rate is alarming. Research shows that around 30 to 40 percent of outsourcing deals falter every year. This suggests that while deals are being signed, outsourcers and their service providers have, in many cases, failed to manage, meet, or deliver value in line with their strategic objectives.
How is it possible that after decades of outsourcing, companies and their providers still struggle to meet their strategic objectives? One explanation is that the parties fail to establish common objectives at the start of the engagement; another is that although objectives are discussed and even agreed upon, they are not strategic, forward-thinking, or flexible enough to deliver value during the term of the agreement. Objectives often focus on today's environment and fail to account for the ever-changing world that Isaac Asimov describes.
In outsourcing, success depends on the ability to understand the dynamics between the parties (outsourcer, service providers, and the market) and the level of flexibility that is baked into the outsourcing service model.
Coalition: A Better Analogy
For years, we have heard two very different views of handling an outsourcing process—it should be treated either as a marriage or as a strictly transactional arrangement. In our opinion, both views are flawed — they are either too narrow or place too little emphasis on the skills necessary for a business arrangement as complex as outsourcing. Managing outsourcing as a marriage focuses on trust and thus misses the business angle; managing it as a transaction focuses on short-term cost reductions and thus misses the possibilities of building a profitable business relationship.
Outsourcing is a complex process that needs to be well managed from the start. Therefore, we believe that it should be viewed as a coalition—an alliance designed for mutual advantage—in which both parties share common objectives, capture immediate business value, and maintain flexibility to meet future requirements and competitive advantage. As in a coalition, outsourcing is time-bound and built on a service model that can be adapted to meet changing needs.
There are three stages in a successful coalition:
- Laying the groundwork. Understand the need for a coalition model to realize the overriding economic, political, and social objectives
- Formulating the deal. Discuss, negotiate, and agree on the working model for the coalition. The coalition's purpose is communicated once the parties agree on an operating model
- Managing the alliance. Track the effectiveness of the coalition throughout the term of the deal; both parties continually assess the relationship to ensure that their common objectives are still aligned, and make changes and improvements as needed (see sidebar: Four "Cs" Can Make or Break the Coalition)
Put Yourself in the Coalition Concept
In the coalition concept for outsourcing, an engagement is evaluated holistically, from the perspectives of both the outsourcer and the service provider. Within the three stages, there are certain actions to perform (see figure 2):
- Your actions. Activities that you (either outsourcer or service provider) perform independently of your partner to assess the engagement
- Our actions. Activities that both parties perform collectively to meet common strategic objectives
- Each other's actions. Activities that each party "drives" the other to perform to gain maximum value from the outsourcing engagement
Stage 1. Laying the groundwork
Laying the groundwork is the point at which a transparent outsourcing arrangement is defined so both parties capture business value. Here, outsourcers must switch from a "buy" to a "sell" mindset in order to attract the right service providers—those with whom they can achieve shared business objectives.
Your actions: define objectives. For out-sourcers, this first stage is an opportunity to treat the arrangement as a vehicle for executing the business strategy, rather than just another procurement initiative. Outsourcers define their objectives, form the right teams, set clear expectations, and develop a consistent internal communications strategy. Key questions to ask are: Why are we outsourcing? What value do we want our service provider to deliver? For service providers, this is a time for introspection to determine if this deal is a good match: What value do we bring today and will we bring in the next five years? For both parties, it is essential to choose the most competent people to communicate their value propositions.
Our actions: align objectives. At the same time that you lay the groundwork, establish the right communications channels for understanding and aligning objectives and priorities between the parties. This sets the right expectations for the deal early and avoids any surprises later in the process. But aligning objectives is only part of it. Developing a common language— a way of communicating—helps build trust and a foundation for future dialogue.
Each other's actions: make a match. During the early selection process, outsourcers identify a service provider that is closely aligned with their own objectives and vice versa. Determining alignment begins in the early meetings and in planning the due diligence where cultural discrepancies and underlying behaviors are bound to show up.
Stage 2. Formulating the deal
During deal discussions, all efforts are focused on defining and agreeing on the future operating model for the engagement. Both parties agree on change management principles and how their goals will be met in practice through efforts from each side. This stage requires collaboration and openness to avoid disagreements later as services are delivered.
In a coalition, the outsourcing engagement is evaluated holistically, from the perspectives of both the outsourcer and the service provider.
Your actions: define requirements. This stage is when outsourcers identify required levels of performance, cost bandwidths, and operational necessities. Also, the appropriate terms and conditions are outlined to avoid contract loopholes. Service providers, at this stage, define the service delivery model in terms of operational, commercial, and contractual requirements. They understand the service level requirements in great detail so as to manage customers' expectations, and devise penalties to allow for some flexibility while delivering the required level of performance.
Our actions: agree on future operating model. Both parties agree on how the outsourcing arrangement will work in practice. This begins with discussions of the various service delivery options to determine which one best meets everyone's business needs. The parties define the governance model, service level agreements (SLAs), performance review mechanism, risk management framework, benefits tracking approach, and ongoing service delivery. In so doing, there is no confusion about how service will actually be delivered and tracked. Also, this ensures that management objectives are aligned and accountability for execution is clear. Overall, the operating model should be a pragmatic one that identifies quick wins and resolves issues on an ongoing basis. Last but not least, both parties agree on the exit requirements in planning for the worst-case scenario.
Each other's actions: explore values and drivers. Robust due diligence is vital for both parties to understand how results are delivered and measured, and to reveal their inner values and behaviors. Rather than a typical due diligence that focuses on the tangible technical elements such as "how many times the service delivery team fails to meet SLAs," a robust due diligence focuses on what a service provider does when an SLA is not met, and how effective their corrective measures are. This provides valuable insights that are used to fine-tune the operating model.
Finally, during deal discussions, both parties must be cognizant of market trends and changes that could have an impact on the service model in the future so that appropriate flexibility is included in the contract.
Stage 3. Managing the alliance
Managing the alliance is living the coalition concept in practice and ensuring that the plans made in earlier stages are followed through. At this stage, the parties track results, review performance, identify improvement areas, embed change, and continue to nurture the relationship. Both parties should also continually reassess their common objectives to ensure they are still aligned; if they are not aligned, the agreement should be either renegotiated or terminated.
Overall, the operating model should be a pragmatic one that identifies quick wins and resolves issues on an ongoing basis.
Your actions: track results. The parties track financial and non-financial performance independently against the planned benefits and the SLAs, and communicate consistently with key stakeholders. Each party holds the other accountable for performance, and an account management team is in place to maintain, manage, and nurture the partnership.
Our actions: drive continuous improvement. Both parties benchmark their performance against the external marketplace in various dimensions—service delivery, operational, technological, commercial, and contractual—and identify ways to improve performance. The outsourcer works closely with internal stakeholders to identify business changes that might require contract adjustments. Both parties should undertake open and frank discussions regularly to incorporate and embed changes at every level of the organization.
Each other's actions: treat with fairness. Neither party can afford to take the other for granted; hence managing the relationship and treating each other with fairness are well worth the investment in time and energy.
As part of an outsourcing coalition, always keep in mind the 4Cs—conditions, commitments, contributions, and competence—discussed in the sidebar. Each is vital to a successful engagement.
Finally, as the marketplace evolves, both parties should regularly examine the service model against market fluctuations and make any necessary changes to ensure business value is continuously delivered. Also, be aware of the rivalry and innovation forces that exist in the marketplace. Such forces will impact the service model and the relationship in terms of how the parties perceive each other and their ability to deliver value.
Face Reality and Plan for Change
"If knowledge can create problems, it is not through ignorance that we can solve them." — Isaac Asimov
Today's outsourcing engagements often underestimate the breadth of activities that can be performed in the early stages of the deal to pave the way for a longer and more sustainable relationship. Preparing for an outsourcing journey is a top management issue that requires attention and focus from the business and the key functions involved. Time invested early to understand the business context in which your company operates (is the business stable and local, or volatile and global?) will provide a good foundation. Thereafter, doing the necessary work to predict forthcoming business requirements will help design a solution that not only works today but also is future proof. With the design in place, the actual build-or-buy decision is analyzed to identify clusters of non-core or non-strategic areas that can be put into the market. Here, aligning objectives and "matchmaking" activities come into play.
Finally, if an outsourcing arrangement is failing, take a step back to identify what parts of the deal have been overlooked, misunderstood, or under-delivered. Typically, you will find issues in each stage that the parties have either missed individually or collectively.
What's more, it is never too late to mend a failing relationship. We leave you with an example from our recent work for a global leader in industrial products. When the company closed an outsourcing deal with a tier-1 IT service provider, everyone had high hopes for the future. Both the IT provider and our client had a solid relationship and the scope of the agreement covered everything from the service desk and applications to infrastructure and network. However, a year after the deal closed, the relationship was falling apart. The transition had suffered delay after delay and executives were becoming increasingly frustrated. It was clear that both parties had failed to lay the proper groundwork and perform the appropriate activities before signing on the dotted line.
We helped the companies go back to square one and do everything necessary to develop a strong working relationship—align their objectives, match resources, define technicalities of the services and future operating model, and explore each other's values and goals. Once these were done, the contract was renegotiated and the relationship flourished.
This example is not unusual. All parties in an outsourcing deal want to be part of a success story. What we know from our experience is that the chances for success are far greater for companies that view the partnership as a coalition with three unique perspectives —yours, ours, and each other's.
Authors
Ola Engebretsen is a principal in the Stockholm office.
Ramyani Basu is a consultant in the London office.
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