Many executives are attracted to outsourcing, having heard the often-made promises of big benefits.

I’ve spent considerable time with organizations that want an independent outsourcing advisor, or that have already outsourced and need help to correct problems. What I’ve learned is this: outsourcing can be a good move, but it doesn’t automatically deliver the promised benefits. Let’s examine those promises.

Reduced operating costs — Too many people believe there is some magic that automatically delivers outsourcing savings. The truth is savings will only happen if the vendor enjoys a critical pricing advantage. It’s common to find that initial operating costs go up by 10, even as much as 25 per cent. Demand that vendors explain the source of any promised savings.

Frees up management time — There is an element of truth to this, but there is also a critical danger. Yes, the vendor will take over day- to-day management, but it will not automatically align itself with the changing direction of your company. There is a strategic management cost that will be paid, usually five per cent up front or 10 per cent to correct the problems that will develop.

Automatic best practices — Yes, in theory, the outsourcer will automatically apply best practices suited to your industry/solution. In reality, best practices are disruptive for the vendor and you, the client. Unless you specifically demand them, they will not happen.

Most-favoured nation treatment — Outsourcing contracts often promise that the vendor will provide no other comparable client with a better deal. The problem is in the “comparable” part of that promise. This is contract smoke — it may smell sweet, but has no substance.

Benchmarking will correct all problems — Contracts promise that benchmarking will correct any problems that develop. The vendor promises to bring the client’s operation up to the benchmark standard. It works to correct small problems. But big problems require big investments, and that can have a cost unacceptable to the client.

Many outsourcing deals fail to deliver what was expected — estimates put the percentage of unsuccessful contracts above the 50 per cent mark. The problem is if you’re in, and you’re unhappy, your options are limited.

You can invest the resources required to manage the contract, and reputable outsourcers will respond positively. You can also invoke the benchmarking clause. The price may go down somewhat. The big advantage is that dysfunctional contract clauses will be identified, and can then be corrected. The process, and the associated management attention, will lead to some modest improvements.

What to do

If those small changes are insufficient, you can try to buy or litigate your way out. Buying out of a multi-year contract can be expensive. The vendor will want to get its margin on all of the remaining contract fees. Litigation will be expensive and painful. Expect a very rough transition from such an outsourcing contract.

It’s far better to set up the right deal up front. A useful place to start is with a list of the key advantages that an outsourcing vendor can bring to the deal. Build a business model for service delivery. Do a SWOT (strengths, weaknesses, opportunities and threats) analysis for an insourced and an outsourced version of the model.

If you like what that analysis tells you about outsourcing, then it makes sense to proceed. Build the contract in such a way that it forces the vendor to provide the benefits that justified you outsourcing in the first place. Don’t accept contract smoke. Insist on actionable clauses and practical corrective actions. And build in realistic exit clauses.

Neutral third parties can help. But they need to be neutral enough to ask embarrassing questions about the emperor’s new clothes.

Outsourcing contracts wax eloquent about partnership opportunities. But keep in mind that these can be dangerous illusions. The vendor makes money by charging fees, so there is a clear incentive to boost them.

The outsourcer-client relationship is not a partnership, but it can be mutually profitable. You can both win. Just be clear-eyed about expectations and commitments. And give yourself a graceful exit clause.

reprinted from

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