by Stephanie Overby

Vendor Management: Recession Strains Outsourcing Partnerships

Jun 24, 20095 mins

Recessions take their toll on even the best outsourcing relationships. Here are ten signs that indicate your deal may be in danger and eight remedies for repairing the rifts in your IT services union.

Troubled economic times tend to take their toll on relationships. That’s no less true in outsourcing partnerships than it is in your personal life. Financial straits have a not-so-subtle way of bringing the flaws in any union to the fore.

That’s exactly why so many outsourcing customers are miserable right now, say outsourcing attorneys and consultants.

In many cases, customers are unhappy because they’re waking up to substandard conditions that existed all along in the relationship. “All purchases are under more scrutiny today, and IT leaders are looking for more value for dollars spent,” says David Rutchik, a partner with outsourcing consultancy Pace Harmon. “To the extent that outsourcers are not meeting expectations—which is actually the case all of the time—customers have less patience for suboptimal performance and other issues that they may [otherwise] take with a grain of salt in better times.”

Consequently, some customers have begun to question why they ever outsourced in the first place, leading to “increased benchmarking, increased renegotiation, and increased angst,” says Adam Strichman, a Mechanicsville, Va.-based independent outsourcing consultant. Those measures strain both parties in the partnership.

Sometimes the strain is simply a matter of perception. “The buyer may presume that the vendor is trying to cut corners, and the provider may presume that the buyer will begin to try to squeeze them on prices,” says Ben Trowbridge, CEO of outsourcing consultancy Alsbridge.

In other cases, vendors may, in fact, be cutting corners to preserve their own profit margins during the recession, says Daniel A. Masur, a partner in the Washington, D.C. office of law firm Mayer Brown. Customers may notice the outsourcer reducing staffing levels, ignoring contract obligations, or generally underperforming in order to extract additional dollars from existing clients.

Some unsatisfied customers can’t articulate exactly what’s gone wrong with their outsourcing deal. They just know something’s not right. “Most companies are fairly immature in governance. There is little or inadequate attention placed on it by customers,” explains Rutchik. “A lot of times they may not be able to get to the root cause of why they’re dissatisfied. And even once they understand why, they may not have the mechanisms in place to address it.”

Whatever the underlying reasons for the discord, outsourcing customers must address it with dispatch. “Once the relationship goes bad, it only gets worse,” says Trowbridge. “If the relationships go south in one area, it will quickly bleed over into another. Before you know it, the whole operation begins to unravel.”

[ For more information, see How to Improve Outsourcer Relationships and Outsourcing Incentives and Penalties that Work. ]

Though the initial tendency may be to call in the lawyers, the problems are rarely legal in nature. They’re usually about communication—or lack thereof. “People tend to forget that even big relationships between big players are still people-based,” says Edward Hansen, a partner in law firm Morgan Lewis Brockius’s Business and Finance Practice. “The longer the people with bad relationships on both sides stay entrenched, the more likely it is that the damage will become institutional.”

In other words, if you don’t address problems with your outsourcing provider, your whole relationship will grow increasingly toxic over time.

Here are 10 universal signs that an outsourcing deal is in distress:

  1. Lack of responsiveness from the outsourcer.
  2. Complaints about IT from business customers.
  3. New or unusual charges on the vendor’s bill to the client.
  4. Frequent performance issues with unsatisfactory explanations from the vendor.
  5. Increased bickering between client and vendor about small contractual issues.
  6. Demands from the vendor for additional charges to cover the cost of minor contract changes.
  7. Resistance to customer requests involving additional provider effort.
  8. Increased service level slip-ups, particularly those accompanied by arguments over responsibility.
  9. Distinct change in tone in governance meetings with the vendor.
  10. Increased turnover on the outsourcing team.

The natural tendency for parties in an outsourcing relationship on the rocks is to withdraw or to stop communicating with each other, says Hansen. But that is the worst possible tack to take.

“When economic times are tough, it’s not time to build walls and lob darts at each other,” says Trowbridge. “It’s time to build bridges and strengthen the outsourcing relationship, to understand each other’s pain points, and to work together to make it through the hard times.”

Mercifully, the remedies for outsourcing relationship rifts—while neither quick, easy, or cheap—are well-established:

  1. Put out any immediate fires at the operational level.
  2. Don’t call in the lawyers. Instead reassemble the negotiation team that put the deal together and have that team trace problems to root causes and suggest solutions.
  3. Use provisions in the contract to compel performance, such as benchmarking or audit rights.
  4. Consider switching out key management personnel on either side of the deal who may be carrying too much emotional baggage.
  5. Increase governance and adjust the frequency and attendance lists for meetings while working through issues with the vendor.
  6. Review SLA and fee structures to see if adjustments should be made. Consider renegotiating scope, duration or pricing to make the deal financially satisfactory for both parties.
  7. Forge an agreement at the highest levels of both organizations on a way forward.
  8. If all else fails, start openly looking for a new vendor. That should bring the right people to the table, or failing that, put you on the path to setting up a new, healthier relationship.

Once the partnership is back on track, forward-thinking customers will build such solutions into their governance mechanisms for current and future outsourcing relationships. They’ll also engage in proactive, periodic health checks on the deal from a contractual, operational and relationship standpoint, rather than wait for deals to go sour.