A Relational Approach to Technology Outsourcing
For decades I have been fascinated by the dynamics of large technology outsourcing contracts. Where blue chip organisations put so much on the line by pinning their careers and future operations on a highly integrated relationship with a third party ICT service provider organisation. A relationship which ordinarily levies a very high cost of exit should all not go as expected.
There are an increasing number of reasons to outsource technology however the top persistent reasons for these large agreements failing “in-term” are as follows:
Inadequately specified objectives
Deficient governance of vendor amangement procedure
Cultural/behavioral conflict
Poor internal organisation
Change in buyers needs
You will note that these reasons are softer and more “joint-operational” than the cost savings and technology performance specification justifications that headlined the executive approved business case. Therefore a successful IT outsourcing arrangement can be characterized by the effectiveness of its co-dependency and through its co-dependency its ability to manifest net worth or value over time in evolving environments.
In this respect it is little different to any other intimate relationship. “The guiding force of interpersonal relationships is the advancement of both parties’ self- interest” Michael Roloff (1981). So why does enterprise continue to treat the outsource agreement with such sterility?
To cut through the rhetoric technology outsourcing should not be wholly objectified and needs to be treated as a social as well as a market construct. Not just numbers on a spread sheet, technical specification or a delivery process flow chart. These elements may secure the “first date” but they do little to secure the operating relationship over time.
Let’s assume that for a particular large outsource arrangement the numbers add up. We get the 30% TCO reduction, we get the five nines on performance and the migration plan is agreed. What more do we need? A whole lot more.
1. Information Veracity
Poor data gets senior executive fired. I have witnessed it time and time again on large outsource projects. I have on occasion thought that the larger project the looser the due diligence. The higher in the organisation the project is pushed the greater the paucity of information. A typical senior executive question: “Okay how long do we need to contract and implement? - 12 months. Can we do it in 6? – Yes we can!” Real answer: “Yes we can do it very badly in 6 months and spend the following 12 months picking up the pieces under a new senior management team.”
All nascent relationships require a vast amount of information sharing and information accuracy. Information that has veracity and transparency and that meets the needs of all parties, systems and operators that are co-dependent. This sharing of information should become the on-going operating foundation for the relationship. Information such as:
Intention and outcome(s) day 1 through to end state.
Operating data: assets, services, resource and configurations
Operating practices: formal and informal procedures
Commitments and constraints
Service experience requirements
Individual capabilities
It doesn’t matter if it’s your first date or a billion dollar outsource contract the rudiments are the same. Information clarity delivers trust. Trust enables co-dependency to thrive. A lack of trust creates dissonance, misalignment and adversarial behaviour which exacerbates over time. Information veracity is critical to relationship effectiveness pre and post contract.
2. Balance of Power.
Irrespective to the size of the fish versus the pond uneven relationships do not last and ordinarily both parties will suffer as a result. As a provider you may have locked your customer locked in through exorbitant switching costs or as an enterprise you may have negotiated staggeringly low rates or be winning on a major contractual ambiguity. It will not pay dividends over the long term. If the outcome that has been vested in is being delivered in an unbalanced relationship all parties will ultimately suffer. So how does one set about creating and maintaining balance?
Transparency in transactions. The client should accept that the provider needs to make a surplus to deliver quality and the provider should accept that the client gets a competitive price. The more complex or hidden the pricing arrangement the more effort will be spent on justification and eliminating mistrust.
Freedom to act. Locked-in bespoke designs or services based on closed standards are destined for relationship decay. It may sort out the books this year, but in 18 months the disputes and change controls will significantly outweigh any immediate value. The services need to be integratable and extensible.
3. Facilitation of Change
Relationships evolve it should be what they are designed to do. It is the inevitability of change that requires the outsourcing processes of: due diligence, current state assessment, contracting and operational alignment to be looked at in a different way. As individuals in relationships evolve and develop they continuously renegotiate the terms of exchange. And so must the business. In fact it is unhealthy for all parties not to do so.
A Change or Adaptation Framework must be clearly separated from other areas of the contact yet at the same time its mechanisms should dovetail with the terms and conditions. Ideally the framework should control and govern the following change types:
Transactive: How we do business. This may take the form of legal or commercial changes to the contract such as SLAs, T&Cs and charging mechanisms.
Operative: How the relationship performs. This may take the form of continuous improvement, process development and reward systems.
Adaptive: How the relationship, the technology and the operating environment adapts to the changing requirements of the internal and external environment. This may take the form of technology upgrades or the integration of third party services.
Innovative: How to facilitate unanticipated business and/or technological transformation. Namely the protocol for a “game change” of the contract?
4. Alignment of Behavioural Values
Last and often overlooked is the alignment of values between the parties again before and after the agreement is made operational. If your counterpart is closed, untimely, unaccountable, stand-offish pre-contract then it is highly probably that these behaviors will cultural traits that will not serve the relationship well.
Fairness, innovation, accountability, responsiveness, integrity and accuracy are examples of good professional practice however they vary from organisation to organisation and from agreement to agreement. The values of an organisation that invests in a long term relationship are very different from those just looking to book quota and often a large agreement cut on thin margins will attract the lowest cost provider resource.
Both parties must examine the values that are to underpin the agreement and remedy a value gap either through behavioral incentives or replacing resource. If the gap is endemic to the entire organisation don’t sign!
In Conclusion
I have recently consulted for a blue chip client that was facing $10s of millions in switching costs and an IT service provider that was on the verge of losing £100s of millions in annual revenue simply because the parties had failed to develop a suitable relational operating model.
Each year this story is played out time and time again around the globe due to information inadequacy, contractual imbalance, commercial and operational inflexibility and misaligned values. Unfortunately it is normally only in the final years of the contract when the penny drops by which time the separation of parties has already become costly for all concerned and for the most inevitable.
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