Secrets for Building Outsourcing Vendor-IT Trust

By Eric K. Clemons and Elizabeth T. Gray Jr.
Mon, October 15, 2001

CIO — AT THEIR BEST, outsourcing relationships can go beyond just reducing costs to create real value. But achieving both requires careful management. Effective outsourcing demands that client and vendor tightly coordinate activities and share information to ensure that unanticipated future needs can be met. For that to happen, the two parties must trust each other, even when the stakes are high and information is incomplete.

For a discussion of the risks of outsourcing, see "The Build/Buy Battle," Dec. 1, 2000. Here, we focus on the rewards that can be obtained through trust and a sense of shared history.

Renegotiate or Die

The ideal outsourcing contract is long-term, unambiguous and binding on both parties. Yet it must also address strategic uncertainty, permitting ongoing adaptation over time. And herein lies the central dilemma of outsourcing IT: Those sets of characteristics tend to be mutually exclusive. So if the contract has the first three attributes, it is going to require renegotiation at some time. Unless this is fully understood at the outset and managed well, the result will often be failed renegotiations, leading in turn to a failure of the contract?sometimes at catastrophic cost to both client and vendor.

Renegotiating is rarely easy, thanks largely to four factors.

  • The negotiations are usually "forced" in that they don’t occur until they must occur?when one or both of the parties have come to find the existing situation unacceptable. They may feel not just vulnerable but exploited; one party may feel it is receiving too little service and paying too much, while the other may feel that it is working harder than agreed for too little compensation.
  • Negotiations take place in an adversarial environment. One party’s loss (overpaying or receiving poorly tested products) may be the other party’s gain (overbilling or skimping on product testing).
  • Renegotiations take place under conditions of uncertainty about actions and objectives. How hard is the vendor really working? What does the client really need?
  • Interpretation is ambiguous: Each party will view specific, individual actions differently, according to its particular risks and fears. This will color interpretations of future events and interfere with future negotiations in subtle ways that may have catastrophic effects on the renegotiation.

Differing Perceptions of History

The more perceptions of events diverge, the more each side will view the other’s behavior as abusive. In such situations, most of us have no tolerance for uncertainty. We unconsciously act to eliminate it in a way that is consistent with our expectations and, too often, our fears. We find a pattern that seems to explain most of what happened, give the event a name (for example, "the Great Betrayal of the Y2K agreement"), stick our recollection of the event in its pigeonhole (vendor betrayal) and respond accordingly. No event ever fits perfectly within a pigeonhole, but once we have made our classification, we tend to ignore evidence that’s inconsistent.

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