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When will outsourcing be based on service not contracts? January 30, 2011

Posted by Mark Hillary in IT Services, Outsourcing.
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In the wake of the Enron and Andersen Consulting scandals in the USA, the previous Bush administration created the Sarbanes-Oxley legislation that threatened jail time and personal shame for executives who misrepresent their company books to investors and the public in general.

The public were assured that the days of huge corporate collapse were over. Then we saw the collapse of several huge financial services firms as the global economic meltdown took hold at around the end of 2007 and grew stronger into 2008. The key learning anyone can take from this is that for every law that exists; there is always a loophole. There is always a new way of doing things that sits one step ahead of the regulator.

And so this is what we still see in the outsourcing market of 2010 and now into 2011. Not that there are collapses on the scale of the Lehman Brothers apocalypse taking place in the sourcing market, but huge contracts involving tens and hundreds of millions of dollars are still being written based on contractual clauses – clauses that can always be bent out of shape by loopholes. When will the suppliers of sourcing services, and those who buy the services, look around at the wider business community, see the disasters created by trying to regulate the impossible and start contracting based on behaviour instead?

It may seem utopian to talk of service contracts based on trust, but it’s not utopian to suggest that what the client wants may be different six months down the line. It’s just not acceptable to keep delivering based on what ‘the contract’ says if the business has changed focus or area of demand.

How can contracts be created that remain enforceable, but also flexible enough to change as entire business models shift focus as companies change?

Is becoming outcome-based the answer for outsourcing? January 10, 2011

Posted by Mark Hillary in Government, IT Services, Outsourcing.
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One of the key trends in outsourcing that has been led by the public sector – rather than the super-fast and advanced private sector – is the move towards outcome-based-agreements. But as contracts are increasingly written with payment tied to outcomes, the suppliers need to be more open about their real abilities from the start, not once the contract has been won.

The latest research from analyst firm Gartner on sales in the outsourcing sector did show that sales to the big suppliers are actually down. After the last couple of lean years, no matter how much outsourcing firms do to cut costs, they can’t avoid their own sales being down when compared to the boom years. Therefore, many of the big mega-contracts for outsourcing suppliers have remained on hold until very recently.

But suppliers offering their services based on payment for outcomes have noticed that business is better than average.
Both suppliers and buyers have a lot to gain from more outcome-based agreements and the reasons are obvious in the current climate – you can share the gain when times are good and share the pain when times are hard.
But outcomes and causation can be hard to agree on. There have been examples of companies using share price performance as a desired outcome. It sounds logical, if the share price is performing well then the supplier must be doing a good job for the client, but in many cases the supplier might have no influence over their client’s share price at all – a company running your IT helpdesk for example. Why would they be rewarded or penalised based on your share price if their actions don’t directly influence that measure?

Outcome based agreements work well where the supplier can take over an entire process and then price that process, rather than the component parts – the headcount and infrastructure required to deliver the service.
It does make contract negotiation a lot harder, as a period of parallel running may be required to calibrate the supplier prices, and it does need a greater sense of respect and trust between the client and supplier.

Whether this will become common practice in the private sector is anyone’s guess. What will be really interesting though will be to see how much the contracts rely on trust between parties and how much can actually be documented about expected future outcomes.