By Ben Trowbridge
Unfortunately, many client organizations do not understand the complexities involved in setting up and managing a business process outsourcing (BPO) deal. The intricacies of a BPO deal require focused management attention from both the client and provider in order to be successful.
Alsbridge consultants who specialize in advising clients on their sourcing strategies have encountered three common mistakes clients make when setting up a BPO deal. These common pitfalls could all be avoided if properly addressed in the deal planning and construction phase. Too often these fundamentals are missed in the rush to get the deal done. Let’s take a look at each one.
Failure to Get Key Stakeholders on Board
These deals are not just rational and cost-effective; they are political and emotional too. Those clients effected by taking a function out of your organization and giving it to a third party to run may find it difficult to accept. Especially when the inference is that the in-house team wasn’t doing a good job, or when it comes with job losses and the attendant publicity. The key is to identify who the key internal and external stakeholders are and ensure they are properly involved in the decision.
If key stakeholders are not involved, it is likely the deal will not even be signed. Dissatisfied stakeholders can easily derail a complex and sensitive deal. Deciding who the key stakeholders are is very crucial and requires careful consideration. In one instance a major corporation on the verge of a multi-national finance and accounting outsourcing deal aborted the entire deal just before contract signature. Even though the CEO and FD had approved the deal, the Chief Accountant raised a last-minute concern about confidentiality which resulted in the deal being canceled despite many months of work and considerable expense on both sides.
Failure to Understand the Economics of the Deal
The sustainability of all deals rests on their economic viability for both parties. If the deal doesn’t work for one party, it puts intolerable strain on the deal as whole. The only way for a client to know whether a deal is sustainable is to understand how the provider makes their money. If the provider is taking over a function and doing it better for less, the client needs to understand how it is done.
Whether the provider plans to deliver results through re-engineering, automation, or offshoring, they must be able to deliver the services, charge a lower fee, and still make a profit. Otherwise the deal will either collapse or be renegotiated which can be costly for both sides.
With outsourcing, Alsbridge is always stressing to clients that there is no “secret sauce” available to providers. Providers may change the way services are delivered, they may even be fundamentally better at it, but a deal that will work for both sides need to be understood by both sides. This is a collaborative approach, rather than one side always giving or taking away. There is simply no point in negotiating such a tough deal that the provider is unable to make money. The only long-term result in that case will be that either the client will not get the service it needs, or the provider will out of business.
Failure to Anticipate Future Change
A deal may be reasonably structured for the circumstances in place when the contracts are signed, but how will the deal handle future changes? Will a deal that is state-of-the-art in 2011 still be good in 2015? Will it still meet the needs of your organization in four years time when new products, new geographies or acquisitions, and divestments have changed the face of the organization? Anticipating change is just as important, if not more important than other aspects of the deal to be made.
Surprisingly, it is a minimum requirement to have a structured change control process, but that in itself this isn’t good enough. There was a case at the height of the dotcom boom when a major telecom player signed a deal to help handle its thriving growth only for the bottom to fall out of the telecom market. When transaction volumes collapsed, neither the provider nor the client had thought to plan for such a circumstance.
Net result – the contract had to be terminated through negotiation, which was time consuming and expensive, and a new delivery model established by the client. Any extreme change in a situation will be difficult to adjust to, but both sides should know what they would do in such a situation.
We now advise clients to include cost scenarios in the contract before they sign. That way everyone goes in with their eyes open – who pays for what, who takes what risk? No one can control the future, but the hint is to make sure you have anticipated the likely scenarios and planned accordingly.
Outsourcing can act as a catalyst to drive change and provide access to skills, resources and systems that may not be available to clients through any other means. But it is not a panacea for management to hide behind. It is better prepare up front to structure a deal which is sustainable for both sides and all stakeholders, than to potentially spend years sorting out the mess caused by not simply avoiding these issues in the first place.
Ben Trowbridge is CEO of Alsbridge, Inc.