IT executives entering into IT and business process outsourcing arrangements seek a variety of benefits, including cost reductions, variable capacity and reduced management time spent on IT. But outsourcing succeeds only if both the vendor and the client achieve expected benefits. Often client and vendor interests are not aligned. How can clients and vendors settle into a "sweet spot" where their interests coincide? New research from the Massachusetts Institute of Technology’s Center for Information Systems Research (CISR) and CIO examined 90 outsourcing deals in 84 companies to help executives recognize opportunities for long-term benefits from outsourcing relationships.

We found that the outsourcing sweet spot depends on the nature of the client-vendor relationship. We distinguish among three types of outsourcing relationships: 1. a transaction relationship, in which an outsourcer executes a well-defined, repeatable process for a client; 2. a co-sourcing alliance, in which client and vendor share management responsibility for a project’s success; and 3. a strategic partnership, in which an outsourcer takes on responsibilities for a bundle of its client’s operational services.

This article focuses on transaction relationships, describing the kinds of services outsourced, the metrics that enable executives to assess the success of the outsourcing arrangement, and the risks to both client and vendor. In Parts 2 and 3 of this series, we will address co-sourcing alliances and strategic partnerships.

How to Make Transaction Relationships Work

Transaction relationships are appropriate for activities guided by clear business rules that are common across many organizations. These activities include commodity services—necessary but nondistinctive services—such as accounts payable processing, expense reporting, desktop provisioning, backup and disaster recovery, and mainframe processing, as well as more specialized, repeatable processes such as credit checks, online gift registry services or unique technology services.

Our study found statistically significantly greater satisfaction with transaction relationships than with either of the other types of relationship and 90 percent success rates for both clients and vendors. We attribute that satisfaction to a large overlap between what clients want from their vendors and what vendors are able to deliver.

Clients have three key objectives in their transaction relationships: access to best practices, variable capacity and the ability to redirect management attention to core competencies. Vendors address those needs by developing best practices, solid, scalable technical platforms and other valuable assets that allow them to improve service and lower costs. For example, eFunds has built a large database of debit information that is the key to its credit-checking process. This distinctive asset—which clients either cannot or would not replicate—helps to protect the vendor’s margins.