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POOR CONTRACT MANAGEMENT DRIVES OUTSOURCING DISSATISFACTION
New report reveals why so many outsourcing deals are being renegotiated
Monday 19th March 2007 - A new report shows that poor contract management on behalf of clients is a major reason for dissatisfaction with outsourcing – according to the very people buying and managing outsourcing agreements.
The report from TPI, the largest global outsourcing advisory firm, found that 61% of outsourcing buyers admitted to placing more emphasis on setting up their outsourcing contract than on managing it, making it a major factor for dissatisfaction. With the benefit of hindsight, 52% of respondents stated that their own unrealistic expectations were often another key barrier to the success of the arrangement. The report found that outsourcing contracts typically deliver 28 percent less value than originally anticipated, with many companies restructuring their agreements within as little as 18 months.
Stuart Harris, Partner at TPI, commented:
“Contrary to popular belief, many companies blame themselves at least as much as the service providers for their own dissatisfaction with outsourcing relationships. Moreover, problems encountered with outsourcing contracts prior to renegotiations often stem from a lack of clarity between the client and the service provider about the scope of the services to be provided – not the quality of the services themselves.
“As buyers become more skilled both in fully understanding what outsourcing can deliver and in proactively managing their agreements, we can expect them to realise the benefits of outsourcing more fully. It is also critical for buyers to recognise that the manner in which an outsourcing relationship is managed is as important as forging the relationship at the outset – if not more so.”
Almost half (49%) of the international companies surveyed by TPI said their inexperience in managing outsourcing had hindered their success to date. 46% had failed to fully implement a proper governance structure and 35% had neglected to convene for regular meetings of governance boards.
In line with buyers recognising the impact of their own failings on outsourcing success, few choose to sever the relationships with their existing providers when they encounter problems. While 42% said they considered soliciting bids from other service providers as part of the renegotiation process, only 18% actually did so. Similarly, 41% said they considered bringing some of their outsourced work back in-house, but only 13% followed through.
Stuart Harris continued:
“Most clients conclude that the industry’s service providers are generally adept at delivering on contractual commitments, and that courses of remedy must necessarily involve changes to service management and governance processes in the first instance. Moreover, while alternatives to the incumbent often appear attractive, TPI has found that the friction typically involved in making the switch can be quite considerable.”
An indication that buyers are maintaining faith in their outsourcing providers is the prevalence of both longer and broader deals post renegotiation. 46% of those surveyed increased the contract term at renegotiation, and 59% reported that their revised contract entailed a broader scope than the original, with 13% describing this increase as significant.
Unfortunately for buyers, recognition of the role their own weaknesses play in outsourcing failure is not limited to their self-knowledge. Service providers also recognise buyers’ failings and often try to turn them to their advantage when renegotiating contracts. TPI sees this as the principal explanation why nearly one in three (29%) of the buyers surveyed said they found their bargaining position weakened at renegotiation, compared with when the original deal was struck.
Stuart Harris commented:
“This is a difficulty buyers must be alive to and actively seek to manage. In order to maintain the leverage they held at the original bargaining table, they must have a genuinely viable alternative to simply continuing with the existing relationship. They must therefore build on what they have learned to ensure a high degree of commercial realism in whatever they propose, and thereby ensure that a large number of service providers will be interested in securing their business.”
Among those surveyed, 56% indicated that renegotiating their contracts had proved effective; a further 21% said it was too early to tell.
Stuart Harris concluded:
“TPI witnessed a record number of renegotiations last year representing almost a quarter of all commercial contract awards made during 2006, and this trend shows no sign of abating. Renegotiations are an intrinsic part of the outsourcing process and it is therefore critical that outsourcing buyers become more skilled at handling them, or employ an advisor to help. The danger otherwise is that companies lose leverage and waste this opportunity to critically reassess their outsourcing strategy.”
The Report
A full copy of the report, “Restructuring Outsourcing Agreements: An Indication of Failure, or a Tool to Increase Value?”, can be found on the TPI website on the link below:
http://www.tpi.net/pdf/researchreports/Restructuring_ResearchReport Jan_24_07.pdf.
In the summer of 2006, TPI surveyed 40 major international companies across diverse industries in Europe and North America gathering feedback on the enterprises’ experiences in restructuring and renegotiating outsourcing contracts. Original contract-signing dates ranged from 1995 to 2006, with 56 percent signed between 2000 and 2003, inclusive. Original contract terms ranged from one to 10 years, with 64 percent ranging from three to seven years and 25 percent signed for 10 years.
About TPI
TPI is the founder and innovator for the sourcing advisory industry, and the largest sourcing advisory firm in the world. We are expert at a broad range of business support functions and related research methodologies. Utilising deep functional domain expertise of accomplished industry experts who possess extensive practical experience, TPI collaboratively works with organisations to help them optimise their business operations through the best combination of insourcing, offshoring, shared services and outsourcing. For additional information, visit www.tpi.net.