Outsourcing is in a period of extraordinary and unprecedented change. The size and nature of current deals reflects an increasing desire for short-term, flexible solutions to increasingly complex business problems during a period of vast economic uncertainty.
This shift is driven by a wide range of factors that challenge modern business and the traditional view of what an outsourcing deal should look like.
The ‘mega-deal’ is becoming increasingly rare and the increased level of technological commoditisation with most business and IT processes available as-a-service’ allows many firms to create multi-sourced environments.
Large numbers of smaller, short-term deals may provide increased specialism, but they also increase complexity.
Service providers may view this as extremely negative, having to respond to a larger number of lower value RFP’s for shorter terms with increased competition.
If successful, the service provider then has to deliver services to a larger number of smaller value clients while being acutely aware of the clients’ ability to contractually walk away in a comparatively short time frame.
This scenario is real: one leading outsourcer recently explained how they have re-engineered their sales processes to accommodate £1m+ deals (previously £20m+) and respond within two weeks (previously six to eight weeks).
From a client perspective, this change could be seen as extremely positive; suppliers offering great prices and great service without the need to contract for long periods means clients shouldn’t have to dig deep into their finances or bet the ranch on a single service provider.
However, experience suggests that just because an organisation could take advantage of smaller, short-term deals, it doesn’t necessarily mean that it should.
- Outsourcing deals should support an organisation’s vision and strategy. Smaller, short-term deals are often reactive by nature, occasionally solving an immediate issue but usually failing to deliver long-term value
- For short-term deals to work well they invariably need to be highly commoditised, primarily because there isn’t enough time or money to develop, implement and embed more tailored solutions. But a clumsy procurement process can cause both parties to fail to grasp the fundamentals of a deal and leaves everyone feeling short-changed.
The real challenge is to the level of risk associated with short-term deals and the complexity of management required to mitigate it.
The importance of properly managed transition and transformation is often overlooked. Without the security of a long-term deal, transition is often undertaken with a fair degree of brute force by a less experienced and under-skilled team, in order to meet the short timescales and achieve the service provider’s lowest cost delivery model.
The quality of information can be another casualty.
Experience suggests that accelerated transition and transformation reduces knowledge transfer and leaves clients struggling for the knowledge required to run the operation.
Costs are a key consideration.
The volume of activity required to undertake a successful sourcing initiative is significant, as is the amount of information required. Gathering, distilling and analysing the operational, volumetric, legal, HR and commercial data requires significant resource and understanding.
There’s also an ethical dilemma. Big business has been increasingly focused on Corporate Social Responsibility (CSR) and how it demonstrates commitment to doing the right thing for shareholders, customers and suppliers.
With this in mind, it seems unlikely that there is any tangible long-term business benefit of creating a large number of short-term, low-value relationships.
While service providers may promise jam tomorrow, canny operators will take a risk averse position and ensure that the significant costs associated with establishing and nurturing a long-term, mutually beneficial relationship are not borne before there is a demonstrable level of commitment from the customer.
Contracting for a two-year term might get some quick wins, but treating a deal as if it was for 20 years generates much more business value. Outsourcing shouldn’t be viewed as a quick fix for a tactical operational problem but as a structural and strategic component of the delivery of true business value.
Phil Bishop is founding partner at specialist sourcing consultancy This Partners