It can happen to any relationship-one partner falls out of love with the other. While IT service providers and their customers have gotten better at seeking out outsourcing engagements likely to work for both parties over the long haul, sometimes they weren’t built to last.
Some of the biggest IT service providers have programs in place to extract themselves from relationships with the bottom 10 percent of profitability. “Providers today are much less likely to live with bad deals or money-losing accounts,” says Stan Lepeak, KPMG’s director of research for advisory services
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But breaking up is hard to do. The termination clauses of a contract may make it prohibitively expensive for unilateral provider pullout. So the vendor may back away from the account in more subtle ways, either to protect its margins or nudge the customer toward termination–or both.
“When deals become unprofitable–for any number of reasons–the vendor must try to raise the profitability,” says Adam Strichman, founder of sourcing consultancy Sanda Partners. “When they start to take very aggressive actions toward profitability, this is the first–and best–signal that the deal is unprofitable. When their actions become too aggressive, that can also be interpreted as trying to get out.”
“If the client’s only goal is to squeeze the rates as much as they can and they start playing up to get penalty awards for sub-par performance, they quickly become not only unprofitable, but also a risk for spreading a poor image of that provider’s performance into the market,” says Phil Fersht, founder of outsourcing analyst firm HfS Research, who estimates that one in five outsourcing customers falls into that category. “Their providers quickly start to figure out how to either ‘lose’ them at renewal to a competitor or simply churn them via an arbitrator if this bet really bad. [But] there are many more examples where providers are having a terrible time trying to service clients which simply make them no money and they can’t get rid of them”
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So how do you know if you’re one of the “problem” clients? Here are 10 telltale signs your IT outsourcing provider wants to dump you.
1. We Need to Talk. “The one thing that is relatively certain when a customer falls to the bottom 10 percent of a vendor’s portfolio is that the vendors will not be shy about letting them know,” says Steve Martin, partner with outsourcing consultancy Pace Harmon. “In these problem scenarios, a provider’s first course of action is generally to voice their concerns to their customers and attempt to propose remedies through the standard governance process, rather than immediately developing subtle termination plots. They may also attempt to renegotiate the deal or work through critical issues in executive-level meetings.”
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2. Death by Change Order. Watch out for a provider that’s getting hyper-technical about what is included in the scope of the contract, says Edward Hansen, partner with law firm Baker & McKenzie. Even clauses intended to address scope-related issues, like a “sweeps clause”, intended to enable the buyer include within the contract scope additional services that are incidental or inherent to those laid out in the statement of work, “just seem to stop working when the vendor gets into economic trouble,” Hansen says. )
“‘Death by change order’ is a telltale sign that they’ve fallen out of love with their customer,” says Pace Harmon’s Martin, partner with outsourcing consultancy Pace Harmon. A weary vendor might also refuse to respond to new technology requests or other scope expansions, until another portion of the existing deal is “fixed” or “addressed,” says Strichman of Sanda Partners,
3. No Sale. If the outsourcer is making few attempts to sell more work, upsell services or develop a long-term roadmap, chances are the vendor wants out, says KPMG’s Lepeak. “All leading service providers today are focused on growing business in existing accounts,” Lepeak says. “It’s cheaper and more efficient from a sales standpoint, creates a more sticky relationship, and often creates opportunities to get involved with more strategic work.” According to the most recent KPMG Sourcing Pulse survey, 80 percent of IT service providers said that are pushing hard to expand the scope of current accounts.
4. Send in the Lawyers. Provider counsel may chime in occasionally on even the best deal. But when they’re suddenly omnipresent, even on the smallest issues, “you know there’s a problem,” says Strichman of Sanda Partners.
5. Governance Rollbacks. It’s rare that vendor governance costs are separately called out in an outsourcing contract. “This makes governance an easy target for cost cutting,” says Hansen of Baker & McKenzie. Cutbacks in management oversight are an early sign the vendor is backing out of the relationship. An increase in delivery or account team turnover, particularly among more senior members and with little advance notice, is also a bad sign. “While providers will always attempt to roll their best people off to reduce costs, keep them fresh, to pursue other business, providers looking to build and grow long term strategic relationships will do less of this,” says KPMG’s Lepeak
6. More Offshore. If allowed by the contract, a troubled IT outsourcing provider may replace onshore resources with lower-cost offshore staff, says Martin of Pace Harmon. In some cases, they may not even be required to notify the customer of the shift.
7. Dysfunction on the Ground. “When the operational people stop solving problems, and start finding constant fault with each other, this is a sure sign that something may be trickling down,” says Hansen of Baker & McKenzie. “Once you start seeing the operational people showing problematic behavior, you may be going down a road that is very difficult to reverse, even if the management of both companies ultimately decides to continue working together.” If the provider refuses to assign a new project executive, even when interactions with the current project executive have broken down, you’ve probably hit bottom.
“This happens because they can no longer find anyone who will take-on the challenge and because they really don’t want to send the signal that they will bend over backwards to fix it,” says Strichman of Sanda Partners. “I have personally seen a lead vendor executive driven to tears after months of client meetings, finally admitting that nothing could be done to get things back on track. The deal was terminated within six months.”
8. Executive Lockout. If the last time you heard from the provider’s top brass was at the contract signing, the relationship is on the rocks. “Good provider execs spend a lot of time in the field with the best, largest or highest priority accounts,” says KPMG’s Lepeak. “If a client isn’t seeing the provider’s execs, this could be a sign of lessening account interest or priority.”
9. Project Delays. IT project interruptions happen in the best circumstances. But repeated delays-particularly around development projects or new technology rollouts-spell trouble. Severe and repeated delays are “a favorite way to ‘meet the contract’ with half the number of resources required,” says Strichman of Sanda Partners. “[The vendor] can always claim that there are unforeseen technical difficulties when what they are really doing is desperately trying to meet profitability targets by broadly cutting resources.”
10. Low Ranking. Most providers have a classification system for its key accounts-bronze, silver, gold, platinum. “Some of the criteria is based on the amount of currently being done or the [brand-name] status of the account but [the account ranking can also represent] how targeted it is for future growth and investment.” Says KPMG’s Lepeak. “A low or no ranking could be a sign of problems or at least less perceived value in the relationship.”
Stephanie Overby is regular contributor to CIO.com’s IT Outsourcing section. Follow everything from CIO.com on Twitter @CIOonline, on Facebook, and on Google +.