Researchers at the University of Tennessee have studied a variety of outsourcing deals—from IT and back-office work to manufacturing and logistics—and identified the most common mistakes organizations make when partnering with an external provider.
The research reveals that outsourcing customers commit a variety of sins, and the most pervasive missteps can be traced to one simple fact: You get what you pay for, says UT lead researcher and supply chain consultant Kate Vitasek. Or more accurately, in the context of outsourcing, you get what you contract for.
"One of the common mistakes companies make is that their business model and the outsourcing contract are not aligned," Vitasek says. "Economist Steven Levitt states it best—one of the most powerful laws of the universe is the law of unintended consequences. And a key reason for unintended consequences is that people do what they are paid to do."
In other words, service providers will do only what's absolutely necessary to get paid per your legal agreement, and nothing more.
This cause of outsourcing strife may seem obvious, yet outsourcing customers set themselves up for failed relationships time and again, says Vitasek, co-author of the book, Vested Outsourcing: Five Rules That Will Transform Outsourcing, to be released in February.
She and her research team identified the following ten miscalculations that plague traditional outsourcing deals.
1. Penny Wise and Pound Foolish Many outsourcing customers, particularly during the economic recession, have viewed outsourcing as nothing more than a cost reduction tactic. That narrow perspective opens up the deal to two potentially devastating outcomes. Either "providers will get tired of constant bidding exercises and will decline to compete for the contract," says Vitasek. Or "a low-cost bidder will encounter serious operating losses that curtail services and eventually force termination of the contract."
Either way, the customer loses.
2. Precise to a Fault Executives or managers charged with setting up an outsourcing contract often try to develop the perfect statement of work with rigidly defined requirements. They do this in an effort to be clear with the service provide and to try to get the precise level of service they need, but the tactic has a downside, says Vitasek. "The result is an agreement that stifles creativity and results in waste because the statement of work is not realistic."
[ Outsourcing advisors can help you avoid these mistakes. Learn how to select a good one. ]
3. The Hangers-On When employees suspect that outsourcing is on the table, they stake their claim to work that's likely to stay in-house, like managing the IT service provider. "The result is an inefficient and overbuilt infrastructure," says Vitasek.
4. The Transaction Trap When an outsourcing arrangement is solely transactional in nature, with little incentive for improvement, the vendor will ignore opportunities for increased efficiency.
5. Counterproductive Incentives Smart buyers establish incentives for providers to achieve certain levels of performance. However, warns Vitasek, "this can create a perverse effect, whereby the [vendor] achieves only a small amount of improvement in order to earn the incentive," she says. "Rather than establish the highest level of savings achievable, the provider will offer up savings in small increments over time."
6. The Honeymoon Effect When an organization first enters into a relationship with an outsourcing vendor, both parties work hard to impress each other. But after a few years, customers experience the equivalent of the "seven-year itch," says Vitasek, though much sooner into the deal. (See Offshore Outsourcing: The Three or Four Year Itch.)
"The outsourcing provider fails to invest in new technology, and productivity levels begin to decline," says Vitasek. Disenchantment can lead many buyers to seek out a new partner but "switching is both expensive and risky," she adds.
7. The Ruthless Negotiator Unfortunately, some outsourcing buyers and procurement professionals presume what's good for the service provider is bad for the customer. "The first step in overcoming this ailment is to realize that an outsourcing relationship can and should seek win-win solutions," Vitasek says.
8. The Rudderless Deal Lacking mature processes for accurately monitoring provider performance is a pervasive problem among outsourcing customers. "The typical blind driver tracks costs, but does not measure performance," Vitasek says. "Eventually the relationship fails because of unclear definitions of success."
9. Measurement Minutiae The opposite, but equally damaging, outsourcing customer course of action is to try to measure everything. While the intent may be good, "few companies have the diligence to actively manage all of the metrics that they have created," explains Vitasek.
10. Hands-Off Management Everyone's familiar with the old business adage "you can't manage what you don't measure." But what happens when you measure but don't manage? A failed outsourcing deal. "If you don't use the measures you have to make improvements, you should not expect [positive] results," says Vitasek.