by CIO Staff

Where Outsourcing Goes Wrong

Oct 21, 20054 mins

Outsourcing deals have historically been marred by poor communications between the buyer and the supplier and failures by the customer to adequately manage the relationship and measure performance metrics. While those issues remain, outsourcing customers now face a new set of challenges, including regulatory compliance requirements and shortages of experienced outsourcing relationship and contract managers, according to users and other industry experts in New York at this week’s OutsourceWorld.

“Ninety percent of outsourcing deals fail because customers don’t measure the results of the work being done,” said Keith W. Fiveson, managing consultant at ITESA, a New York-based consulting firm. He added that customers are having a “tough time” finding people in the market who have experience managing outsourcing contracts or relationships with outsourcing providers.

These are just some of the reasons outsourcing customers are increasingly dissatisfied with how their deals have worked out. According to a study of 210 outsourcing customers and 242 providers published by DiamondCluster International in June, the number of customers that prematurely ended both domestic and offshore outsourcing contracts within a one-year span jumped from 21 percent in 2004 to 51 percent this year.

Tom Weakland, a managing partner at the Chicago-based management consulting firm, said the chief drivers for customer dissatisfaction are heightened competition for resources between suppliers. That has led to increased staff turnover “with more issues and more delays” cropping up with projects, he said.

Burnout is another problem. Managers who oversee offshore outsourcing deals often wake up before dawn to connect with members of the offshore team before they’ve concluded their workday. A few hours later, the manager goes into the office and then puts in a full workday, noted Tarun Mehta, a managing director at NeoIT Inc., a San Ramon, Calif.-based consultancy. “That might work for a week or two weeks but after six months, the project begins to slip.”

Mehta believes that sponsorship and ownership of outsourcing deals will have to take place “at a higher level in the organization than it does today” to succeed.

Joann Martin, vice president and director of solutions marketing at Pitney Bowes, said foreign and domestic regulatory compliance requirements are among the biggest challenges outsourcing customers and providers face. These include the need for outsourcing providers to provide customers with SAS 70 reports to attest to the internal controls in place for customer firms to comply with the Sarbanes-Oxley Act of 2002 and other regulations.

Sometimes, the SAS 70 reports are completed months before being submitted to outsourcing customers, thus raising questions about whether they are valid and up to date, said Michael F. Corbett, executive director of the International Association of Outsourcing Professionals, a membership organization in Lagrangeville, N.Y., that’s aimed at improving outsourcing outcomes.

In other instances, regulations can be beneficial. For instance, India recently passed new regulations on patent protection that has led Pitney Bowes “to change our stance” on the idea of outsourcing new product development to companies in the region, said Martin. Pitney Bowes acts as both a provider of document management outsourcing and as an outsourcing customer, having redirected 75 percent of its IT activities, said Martin.

Still, Martin said the most significant barrier to successful outsourcing outcomes “is the perception that it’s all about reducing costs.” Too many customers fail to recognize other business value that can be derived from the relationship, she said.

For instance, Nokia Corp. has an effort under way to outsource a substantial portion of its research and development in an effort to reduce R&D costs to less than 10 percent of revenue, said Corbett. But beyond the cost savings target, Nokia is also looking to outsource much of its extraneous R&D work in order to free up internal R&D workers “to focus more on those areas that differentiate their products,” Corbett said.

By Thomas Hoffman, Computerworld