CIO Specialist Advisory LLP                                                Leveraging excellence and value through collaboration
DD Mishra, Partner, CIO Specialist Advisory LLP, captures some of the experiences he thinks are necessary to understand in strategic outsourcing relationships to avoid expensive pitfalls. As per Mr Mishra, quite often a strategic souring relationship is driven in a tactical manner. This article is quite informative for all those who are either planning to go for such a relationship or are already managing it. 

I thought of capturing some of my experiences on strategic outsourcing for the purpose of healthy debate. I may be right or wrong but will not shy away from expressing what I felt and experienced with a hope that it can prevent some of the expensive mistakes. The points mentioned below are not related to any particular case but is a result of discussions, experiences and studies on variety of cases. 

I am not sure whether strategic outsourcing is understood by many as I see “outsourcing” and “strategic outsourcing” being used interchangeably. Strategic outsourcing is long-term partnership and not about meeting tactical objectives of performance through service level agreements; it is an arrangement between provider and consumer for attaining long term value creation and competitive advantage and gaining competitive position in market place by leveraging each other’s strengths. It is beyond cost and performance and based on shared value and vision of the provider and consumer. This makes strategic outsourcing a different ball game altogether and you will not find many examples for the same or even if you find, many will call it as strategic sourcing but drive it like a long-term tactical outsourcing based on IT SLAs. I have captured some of the secrets, which are necessary to visit in case you are going for a strategic outsourcing deal.

1. Partnership: If you have always dealt with vendors, it may be one of the most difficult transitions to treat your vendor as a partner. It takes years to change as you have to unlearn and relearn. This could be very expensive learning and considerable damage happens in the beginning. Based on my experience of going through it and knowing from my counterparts, this is inevitable and one will go through the learning curve. Eventually, as a consumer you will become more interested in “what” rather than “why” and as a supplier, you will feel the pain from customer’s side. The sooner this happens, better it is. Rather than having “vendor management” teams, one should have “strategic partnership” teams and competencies for the same are different.

2. Governance: Initially, during early days of strategic outsourcing, concept of governance is mostly not taken up seriously especially as you go higher. Lack of relationship at the top level increases the gap at the operational level. This continues till the gap is so wide open that it forces everyone to sit down and conduct retrospection. Eventually people understand the relevance of proper governance. Setting up a meeting at the top level and executing it religiously even if there is nothing much to discuss helps in keeping things under control. Initially people are tempted to escalate upwards which should be discouraged and much of the time at the top should be invested on discussion of value creation, collaboration, leveraging potential and creating win-win. If governance below works fine, this can happen automatically. The strategic relationship and personal chemistry at the top most level defines success of a SO deal. Most often we also see that we have a tendency to measure IT performance and not business performance. While we can start with business performance, we should quickly change gears to discuss business outcome and celebrate small little successes.

3. Trust: Initially, this has to be watched out as trust deficit, which mostly comes from the result of the failures to govern at the strategic level resulting in frustration, anguish and rage at the operational level. The habit of customer will be to blame the supplier/partner for failures without realizing customer is equally responsible to business for deliveries in strategic outsourcing deals. This also results in a negative perception building against the supplier/partner at the leadership levels and business which could counterproductive. In my view, this should be avoided. By the time the corrections happen, the damage is done. Differences aggravate when you take out empowerment at the local or grassroots level to make decisions. Maturity & honesty of individuals at important positions from both sides plays an important role towards maintaining trust and hence during the early days, it requires lot of care to nurture the culture and alignment of cohesive partnership and calls for a different kind of leadership to manage the show.

4. Alignment: Most strategic outsourcing deals are long term. Most often we fail to realize that strategic outsourcing is long-term arrangement and it lives beyond our existing business cycles. During tenure in a strategic outsourcing, our business will go through changes and the agreement must have flexibility to accommodate those changes. But most often this is an afterthought. Ideally one should have provision for renegotiation every two years and commit flexibility to discuss framework rather than being hostage to it to have an alignment. If this is not done, forced renegotiation becomes inevitable but this will not be without casualties.

5. Flexibility: Quite often this is missing in the beginning. Contracts are referred too early and people who are responsible for managing relationship show enough immaturity. Sometimes large providers have lengthy bureaucratic structures which eats flexibility and cycle time. In any deal, if contracts are being read too often and clauses are being pointed, this is not a good sign for its success. Having complete knowledge of the contract, its core principles and what it does not talk about is very good but that should be used as framework to guide discussions. In my experience, I had discussed most difficult topics over dinner to get breakthrough results for win-win. When you expect flexibility, you should also demonstrate it first and never forget to take the first step towards generosity. This is contrary to views of many experts who would suggest playing hard ball negotiations and I agree to disagree.

6. Innovation: Most strategic outsourcing providers talk about this in great length before contract is signed but focus on keeping the lights on during early part of the relationship. This creates the problems for them as well as the customer who does not see value. Let us not forget that Strategic Outsourcing is not for keeping the lights on for operations, but for generating the value for customer, bringing deeper engagement and providing customer’s customer strategic depth. We miss the big picture quite often and I know many insourcing happen because of this. Quite often from provider’s side, those who signed the deal leave once the deal is signed with their hefty cuts leaving behind the opportunities of transferring the whole ethos to the new team. The pain is felt in the 2nd and 3rd year where only operational parameters show signs of improvement at a huge overhead and investment. Once the realization happens, rather than thinking deeply, a knee jerk reaction happen which sets stage for another round of mistakes. Usually, Innovation is most important and least focused item in many strategic outsourcing deals. Many a times, strategic outsourcing deals happen between two large entities who themselves lack innovation because of their size as well! Thinking wisely can solve this problem as setting a culture of innovation is a different animal in itself.

7. Transparency: I have observed that while we intend to create partnership, we shy away from discussing our strategies with each other or create openness and transparency. Transparency is closely linked to trust and when one goes missing, the other is automatically lost. Ideally the whole purpose of a strategic outsourcing deal is to create strategic depth. In my view, eventually if the relationship has to succeed, the strategy should be discussed between consumer’s business, consumer’s IT team and provider’s team together and the information should be transparent. I also advocate a common knowledge portal for all. In any strategic outsourcing deal, one should also notice that the retained team should never be too large as it may defeat the purpose of strategic outsourcing as people would tend to micro manage the partner.

In conclusion, in my view, a true strategic outsourcing takes a long time to evolve. By the time it evolves, much of the opportunity to leverage the benefits is already gone. By that time consumer also runs out of patience. Theoretically it looks perfect and it is a good thing if organizations have culture, knowledge, experience and desire to make it successful within first year of outsourcing. In my view, Strategic Outsourcing should be preceded with performance based services outsourcing with 2-3 suppliers for large enterprise for first 3 years. Knowledge and experience from multivendor outsourcing should allow us to graduate towards strategic outsourcing partnership with one of them after a proper due diligence has been done. 

This article was first published in InformationWeek India by the same author.

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