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An Ounce of Prevention: Guarding Against IT Outsourcing Failure

A three-part approach to maximizing the value of an IT outsourcing deal.

By Mark Robinson and Peter Iannone, EquaTerra

June 19, 2007 — CIO — How often do IT outsourcing deals fail? The numbers vary depending on which study is cited and what definition of failure is used. But executives initiating or tending to an IT outsourcing relationship must be constantly sobered by the fact that, from a purely statistical viewpoint, their deal stands about as much chance of failing as of succeeding.

Millions of dollars are often in play in an IT outsourcing deal, along with the hopes of management and investors in the business transformation that outsourcing can deliver. So it is to everyone’s benefit to have the means in place to deal with the problems which, perhaps inevitably, will occur.

However, what IT decision makers really need is not just better triage but better preventive medicine along the entire lifecycle of their outsourcing deals. Issues and challenges can appear quite different depending on where they occur in the course of a relationship. What might be a catastrophic problem in year two or three of a deal might have been only a small issue when the seeds of the problem were sown at the contract or transition stage.

Based on our experience and research, we recommend that IT outsourcing buyers take a three-part approach to maximizing the value of their IT outsourcing deal:

Prevention. Focus on the risk mitigation capabilities and governance structures that anticipate problems before they occur and that keep an outsourcing relationship on track.
Quick response. Develop the diagnostics and "early warning systems" that identify problems quickly and then address them before they mushroom into deal-killing catastrophes.
Retooling. If things go badly wrong, have the mechanisms at the ready to bring the parties together, reexamine the original deal intent and retool or refresh the relationship where possible.

Contracting Phase Issues
When we conduct our realignment and remediation services for IT outsourcing relationships, our diagnostics frequently find that the root cause of the problem goes back to the deal itself. Outsourcing selection processes tend to focus both the company and the service provider primarily on financial terms, obscuring the fact that the real work comes only after the signatures on the contract are dry.

And the contract itself may be the root cause of the problem. If getting to the signature stage is a battle, forcing a provider to negotiate away its margin and reasonable operational assumptions, outsourcing buyers may win the pricing battle only to lose the delivery war. Under water from day one, the service provider may have little choice but to focus on margin recovery behaviors—trying to get back to a break-even point on the deal, rather than focusing on generating value from the outsourcing relationship. Performance, quality and flexibility inevitably suffer. More intangibly, the outsourcing buyer loses out on important opportunities for innovation and continuous improvement, as the provider pulls back from any activities beyond the bare essentials. When we evaluate the situation of companies that are either vaguely or overtly dissatisfied with the collegiality and quality of their outsourcing relationship, we often find that the buyer engaged in aggressive deal-making behavior that created the problem.