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Outsource failure September 13, 2005

Posted by Coolguy in Software Development.
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  • While decisions about outsourcing IT and business processes continue to grow, the contractual side of relationships are failing nearly 60% of the time
  • Of the 58% of outsourcing contracts that do not work, four out of five fail due to poor leadership and control
  • Problems include a lack of initiative and a shortage of management skills by both customer and service provider alike, and these come together to undermine the main objectives and reduce expected returns by as much as 75%.
  • These ‘soft’ intangible issues are all too often overlooked during sourcing and negotiations, yet it is here where the foundations for success or failure are set
  • Companies exhibit five primary personality types in the neighbourhood with only one forming the basis of a strong relationship:
  1. The Curtain Twitcher
  2. The Hedge Builder
  3. The Noisy Neighbour
  4. The Trend Spotter
  5. The Good Neighbour

The Curtain Twitcher
Suppliers will find these companies curious, but not interfering. They will often complain to colleagues about their service providers’ short-comings, but not address the issue head-on. This irritable relationship, based on a sense of mutual suspicion, is often inherited by the company’s internal manager who may feel that there could be better supply options but the decision has been taken to continue with the existing arrangements.
Remedy – A contract review should be implemented annually to ensure objectives are understood on all sides.

The Hedge Builder
Sets up a contract and expects to watch it happen without getting involved. This cuts off the possibility of the service provider advancing with the contract and working hand in hand with the client. There is a tendency for the client to keep ‘the roses well pruned’ on his/her side of the hedge and ignore the mess next door that may well be affecting property values for the whole street. The misguided belief is that outsourcing will cure all ills, once inefficient processes have been chucked over the hedge.
Remedy – Generally a budget of 4-6% of the value of the contract is required to ensure an adequate in-house team to manage the relationship.

The Noisy Neighbour
An over zealous micro-manager prevents the service provider from getting on with the job. An obsession with the minute details can result in ‘analysis paralysis’ and confusion among colleagues. The tendency to escalate every service issue can interfere with the project’s progress and adversely affect the business goals on which the contract was struck.
Remedy – In-house teams need to be reassigned to other tasks while new or different management skills are developed to ensure a proactive rather than interfering approach.

The Trend Spotter
The internal team, led by the ‘trend spotter’, has outsourced because it is the current trend in business service management. They have embraced help desk and IT maintenance outsourcing and currently are hurtling towards off shoring back office services. The pressure is coming from the top – 8 out of 10 IT Directors are pursuing off shore solutions, often fuelled by the perceived belief that outsourcing costs minus previous in-house costs equals cost savings. It doesn’t.
Remedy – Companies should fully quantify the extent of an outsourcing opportunity before embarking on a long, difficult and expensive process that is fraught with risk.

The Good Neighbour
Represents only 20% of deals. Working from a win-win mentality, the time is taken to assess not only technical competency but also the business goals of the provider and ensure there is a cultural fit between both. Service provider personnel receive ongoing training and key staff are given individual incentives related directly to the client’s organisational objectives

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