I had another one of those CIO conversations today – you know the ones:
We’ve spent the best part of the last year trying to unwind from an outsourcing deal gone bad!”
I think it is a terrible indictment of the outsourcing industry that I hear many more such outsourcing horror stories than I do success stories. To be sure, the success stories are out there, and inevitably garner less attention that the disaster stories, but I get really tired of hearing from CIO after CIO about some good outsourcing decision, often to a supposedly reputable global outsourcing provider, gone bad.
Let me open by saying I’m a believer in outsourcing – performed intelligently and selectively. What do I mean by that?
- I don’t think you should outsource all your IT. I can’t think of a great analogy, but to me that would feel like outsourcing your nervous system – brain included! You might argue that as long as someone else does that for you, and does it well and cost-effectively, that’s ok – you have bigger things to focus on! That might have been a valid argument 10 or 15 years ago for some industries, or some companies, but today, information and IT are so pervasive and critical to business, you just can’t outsource your brain!
- I do think you should outsource what you can – stuff that you understand well enough to be able to manage and control your external sourcing relationships. This is not just a question of economics (it’s not always clear that the economic benefits are truly there, though they often are – at least, for a while). It’s a question of management bandwidth. I do think there are high value IT activities that you need to focus on (such as opportunity discovery, business innovation) so if you can take the lower value (but critical) activities (such as basic IT infrastructure, data center operations) “off the table”, then you open up management bandwidth to the higher value stuff.
So, Why the Volume of Outsourcing Horror Stories?
There’s a wealth of good advice out there on how to “do outsourcing right” and consultants who specialize in helping you select the right vendor, negotiate the right deal, and manage your vendor relationships effectively, so I won’t try to second guess those sources. But let me tell you what I see in the horror stories I come across.
- Vendors often oversell their abilities in the rush to win a deal. “We really want to focus on your industry, and we need a flagship customer, so we’ll make you a deal you can’t refuse!” Sounds good, and, perhaps, an offer made with sincerity. But I’ve seen several such situations, where the vendor sold the deal, and maybe one or two others, but failed to really break into the focused industry. After a couple of years, they exit the industry, and the stranded customers shift from favored reference account, to an unfortunate legacy – with service quality levels to boot!
- Vendors sell their expertise – people who have “been there and done that!” Sounds good, but after the deal is done, the vendor is scrambling to find qualified people, and you find yourself training people who don’t even have the skills you’d have hired!
- Vendors sell their processes – CMMI Level 5 and ITILv3. And yet, once the deal is signed, they seem to be making it up as they go along!
- Vendors sell you ‘the power of their firm!’ “You will have access to the thousands of IT professionals who are at the cutting edge of global IT practice – we will be your IT innovation engine!” In reality, I’ve never seen that work effectively. Yes, they have the experts, but somehow, once the deal is done, you don’t get sufficient access to them, beyond the occasional “fly-in” to do a presentation.
- Vendors sell you ‘knowledge transfer.’ “You will learn from our leading practices and CMMI Level 5 capabilities.” While this sounds good in theory, I’ve rarely seen it work in practice.
What’s been your experience with outsourcing? What has exceed your expectations? Where have deals fallen short?
(Image courtesy of Intelligence interculturelle)
Filed under: IT Management | Tagged: Outsourcing, vendor management
[...] Original post: Why Is Outsourcing So Proble… [...]
Vaughan, you are absolutley correct in that the failures of outsourcing are an indictment of the industry. Which other industry can grow at a clip of 10-20% per year for 20+ years even as two thirds of their deals fail to meet expectations?
That said, it seems hardly fair that all five of your reasons start with the word “Vendors”. I am sure that, if you had conversations with account execs instead of CIOs, you would arrive at a list of five cardinal sins of “clients” just as easily.
Now, let me be clear–money is flowing to the provider from the client, so the burden of performance is on the provider. I believe this–and I beat up the provider as much as the next sourcing advisor over it.
But I would argue that the some of the same same CIOs who tell you about their outsourcing horror stories are the same ones who ignored the advice I might have given them at the outset:
1. Worry about the relationship, not the deal
2. Pick the team you can work with the best, not the one with the best price
3. All the hard work comes AFTER you signed the contract–you haven’t delivered a penny of shareholder value by signing a sheet of paper attached to 300 pages of legalese! Be prepared to invest–a lot–in the management and governance of the relationship.
4. Accept that operating in an outsourced environment is different, and thus your retained processes and organization must also change when you outsource
5. Use an advisor–no matter how good you think you are at buidling an outsourcing transaction, chances are that in industry you might see four or five in a career. Good advisors see adozen or more each year. Considering the failure rate, why take the chance?
I have been on both ends of very good relationships, and on both ends of very bad ones. I’ve also been in the middle of them for several years. My advice to CIOs is that if they are not willing to invest in creating the conditions for a successful long-term relationship, they might as well forgo the initiative and save themselves the pain and suffering!
Thanks Esteban for bringing some valid balance to my post – you are correct – the buyer is also culpable. But, I have a hard time thinking of other “professional” vendor-customer relationships that require such a massive dose of caveat emptor.
And, because I believe that to get to the highest levels of business-IT maturity and value realized through IT almost mandates some level of alternate sourcing, I think it’s a shame that the vendors have not conducted themselves towards a higher proportion of success stories. It’s also an opportunity for vendors to step into a leadership position by creating a new, consistently positive “we do what we say we will do” customer relationship.
We definitely agree on the bulk of culpability being on the vendor–after all, the cash ss flowing in their direction! Simply put, vendors need to deliver on their commitments.
But top quality services will always have a price premium to mediocre services, and the vast majority of buyers aren’t willing to pay it. An almost equal number fail to invest in “everything that comes after” the deal is signed.
I have seen few brave vendor teams step up and say as much, and then go on to lose the deal, resulting in a selection process that is akin to trying to teach your dog to sit by kicking it when it complies. Not only does it not work, it isn’t right!
I think your quip about “a few brave vendor teams step up and say as much, and then go on to lose the deal” is a great point!
On the other hand, there’s an old saying, “Don’t take bad business!” and I think the vendor team that does tell it like it is, and fails to win the deal, probably did not want that deal anyway!
I know it sounds as if I’m still taking the buyer side to a fault, and perhaps I am, but I do think the vendor community has to help educate the naive buyer, and help them establish the context and the infrastructure that positions a winning, sustainable deal for all parties.
[...] friend Vaughan and I recently engaged in a lively discussion on his blog about outsourcing failures. There are a lot of them. When I researched the failure rate in 2004, it [...]
It came to me late, but you and I had a conversation probably back in 2004 or 05 in which I remember you telling me in your best sarcastic british entonnation…”and we both know that professional services never, ever, ever take bad business, right?”
I forgot the context (I am pretty sure it wasnt this one), but I rememeber the quote!