Researchers at the University of Tennessee have studied a variety of outsourcing deals-from IT and back-office work to manufacturing and logistics-and identified the most common mistakes organisations make when partnering with an external provider.
The research reveals that outsourcing customers commit a variety of sins, and the most pervasive missteps can be traced to one simple fact: You get what you pay for, says UT lead researcher and supply chain consultant Kate Vitasek. Or more accurately, in the context of outsourcing, you get what you contract for.
"One of the common mistakes companies make is that their business model and the outsourcing contract are not aligned," Vitasek says. "Economist Steven Levitt states it best-one of the most powerful laws of the universe is the law of unintended consequences. And a key reason for unintended consequences is that people do what they are paid to do."
In other words, service providers will do only what's absolutely necessary to get paid per your legal agreement, and nothing more.
This cause of outsourcing strife may seem obvious, yet outsourcing customers set themselves up for failed relationships time and again, says Vitasek, co-author of the book, Vested Outsourcing: Five Rules That Will Transform Outsourcing, to be released in February.
She and her research team identified the following ten miscalculations that plague traditional outsourcing deals.
1. Penny Wise and Pound Foolish
Many outsourcing customers, particularly during the economic recession, have viewed outsourcing as nothing more than a cost reduction tactic. That narrow perspective opens up the deal to two potentially devastating outcomes. Either "providers will get tired of constant bidding exercises and will decline to compete for the contract," says Vitasek. Or "a low-cost bidder will encounter serious operating losses that curtail services and eventually force termination of the contract."
Either way, the customer loses.
2. Precise to a Fault
Executives or managers charged with setting up an outsourcing contract often try to develop the perfect statement of work with rigidly defined requirements. They do this in an effort to be clear with the service provide and to try to get the precise level of service they need, but the tactic has a downside, says Vitasek. "The result is an agreement that stifles creativity and results in waste because the statement of work is not realistic."
3. The Hangers-On
When employees suspect that outsourcing is on the table, they stake their claim to work that's likely to stay in-house, like managing the IT service provider. "The result is an inefficient and overbuilt infrastructure," says Vitasek.
4. The Transaction Trap
When an outsourcing arrangement is solely transactional in nature, with little incentive for improvement, the vendor will ignore opportunities for increased efficiency.
5. Counterproductive Incentives
Smart buyers establish incentives for providers to achieve certain levels of performance. However, warns Vitasek, "this can create a perverse effect, whereby the [vendor] achieves only a small amount of improvement in order to earn the incentive," she says. "Rather than establish the highest level of savings achievable, the provider will offer up savings in small increments over time."