By Ben Trowbridge
A recent Dun & Bradstreet study shows 20% of all BPO deals fail within the first two years. Trust me; the blame is not solely on the supplier.
Why are so many high-value BPO deals not able to deliver on their promises? By and large, these deals fail not because the outsourcing suppliers are not capable of delivering but because there is often a misalignment of expectations and economics, coupled with a relationship which is unable to cope with change. These failings stem from the way the deal was originally set up in the contract.
According to Alsbridge’s experience, there are two main patterns of behavior which are the root cause of this failure. The first is the “blank check” syndrome. In this scenario deals are done at a high level with little definition about what the services are, who does what and how it will change over time. Fortunately, fewer deals are done like this these days as the market has matured at least to that extent. But the other behavior pattern, the reaction to the “blank check,” is almost worse.
We can call this the “nail it down” approach. It focuses on a tight and detailed pre-designed specification of requirements, arms-length dealings with multiple potential suppliers and old-fashioned adversarial contract negotiations with a focus on squeezing out the lowest price for the services.
Sounds good, right? So, what could be the problem, setting up the contract in this way assigns clear responsibilities, removes any vagueness, and gets the best price out of the supplier – in essence, it gets the “best deal.” Right? WRONG! Deals done this way DO NOT WORK for these three reasons:
1. Suppliers are not asked to design the solution – The “nail it down approach” starts from the premise that a client needs to define their required solution in detail and get suppliers to bid against the specification. This may be fine (if a bit old-fashioned) when buying certain types of commodity product, but cannot work when buying complex services which will be delivered over a period of years to a changing client in an ever-changing world. If the client (or more frequently their advisor) does not specify the solution in a BPO scenario, the following happens:
A. The solution is sub-optimal – the wider knowledge and expertise of the market is not exploited.
B. Supplier offerings are commoditized – all solutions are the same, so suppliers can only differentiate themselves on price and risk.
C. Suppliers don’t “own” the solution, and may indeed need to re-design it if they win the right to deliver.
Linked to this is the tendency to spend inordinate effort on defining the services to spurious levels of detail (Note: a clue to whether this is going to happen lies in the size of any IT documents - more than an inch thick and trouble probably looms). The problem here is two-fold. Firstly, details change all the time, so by the time the deal is done it is already different. Secondly, not all the detail is important – in general, outputs are what need to be defined, not processes.
Better by far for the client to define their current state, objectives, what the results should look like, list any constraints or complications and let the market propose the best solution – the market has the expertise to do this best. Also, you should spend time co-developing scenarios of change so that both parties know what the output of change will be. This will build the deal on solid foundations.
Of course, this makes direct cost comparisons between proposals more difficult because the solutions proposed might be different, but that is a small price to pay for getting the best solution to the client’s needs.
2. Deals are based on false economics – The “nail it down” approach seeks to get the lowest possible price (and quite right too, you may be thinking), but if a deal is negotiated for the client where the pricing does not reflect the real, underlying economics of the work involved, the client appears to be getting “something for nothing.” Then it becomes uneconomic for the supplier and therefore unsustainable.
At this point, only two things can happen. Either the supplier will find ways to increase its prices, generally through change control, to make up the shortfall, in which case the client will pay more than they expected. Or the supplier will cut back on the services it delivers for the price to save costs, in which case the client gets less for its money than it expected. In either case the deal is failing, and it has to fail – no supplier can afford to keep delivering on a loss-making contract.
Further, the cost of continuous re-negotiation (or in the worse, termination), is likely to far outweigh the benefits of the “low price” negotiated up front.
3. Adversarial negotiations – There is a consistent pattern of adversarial negotiations in the history of BPO, driven by distrust of suppliers and the “nail it down” approach. In a destructive cycle, this both leads to, and is born out of, over-selling by suppliers and unrealistic expectations by clients. It results in positional negotiation and loss of trust. Huge amounts of time (not to mention legal fees) are wasted negotiating common clauses and terms or trying to shift risk to the side where it does not reasonably lie.
And, in the worst case, the adversarial negotiations are carried out by an advisor on the client’s behalf. Far from protecting the relationship, this combination can result in a deal done by intermediaries where the principals have failed to establish a strong working relationship through the period of their courtship and engagement – then when the marriage hits a difficult patch, the whole thing breaks down.
But how much better if the energy had been spent on co-developing the solution and the contract (including change scenarios) and building a working relationship which could withstand change?
BPO deals are not like acquisitions or divestments, where the buyer’s interests are to get the lowest price and the most warranties and the seller’s interests are the opposite and once the deal is done they go their separate ways. BPO deals really are partnerships in the sense that the client and supplier will be bound together for years and the deal they negotiate needs to work for both parties if it is going to be sustainable.
Partnership is the Answer
Addressing the issues above, i.e. allowing suppliers to shape what they think the best solution is, allowing them to make sensible profits and collaborating constructively in the negotiation process, would benefit everyone in the market, clients and suppliers alike, by removing the causes of misaligned expectations and improving the efficiency of the market as a whole.
So if the outsourcing deal doesn’t work, it’s probably because of the way the contract we originally set-up. The ways to improve the process, as outlined above, are hardly revolutionary or new. The idea of partnering with suppliers to improve efficiency has been commonplace since the early-nineties. The problem lies in putting these ideas into practice and overcoming the ingrained behavior patterns of both buyers and suppliers, which are often only exacerbated by poor advisors. BPO can work well, but making it work requires a fundamental change in the buying process.
Ben Trowbridge is CEO of Alsbridge, Inc.
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