If you share the risks you will share the rewards
Business transformation has always been outsourcing’s big lie. In a commoditised market where any half-decent service provider can do things cheaper and faster, canny vendors have promised a second wave of benefits that will improve the client’s business outcomes.
They’ll enable the client to innovate better, they’ll make it more flexible and able to react more quickly to market changes, they’ll capture fuller and more accurate data to enable better decisions, etc.
And it works. “Clients always use the service provider’s ability to achieve transformation as a key selection criterion,” says Vinay Couto, head of the outsourcing practice at management consultants Booz & Company. “It’s always in the top three and sometimes number one.”
Promising the earth
However, says Couto, “the grand promise of transformation hasn’t really materialised in many deals, and the blame for this must be shared between the vendors and their clients.”
Often vendors have promised transformation on the basis of wider domain expertise that they didn’t really have, says Couto. And they have been reluctant to assign teams of their top brains to dreaming up bright ideas that the client was under no obligation to pay for.
Clients have been chary of giving vendors the business insight necessary to identify transformational changes.
“Relationships between clients and vendors are still very transactional and arm’s-length,” says Couto. “The management consultant/client relationship hasn’t penetrated into outsourcing yet, and clients are very reluctant to let suppliers learn the dark arts of the way they do business.”
Better insight
Also, says Couto, “You don’t get transformational outsourcing for free, but most clients refuse to pay for something that may never materialise.” Nor are many clients, especially multinationals, prepared to make the process standardisations and cultural shifts that would be necessary before transformational changes could take effect.
In the last few years the capability of outsourcing to deliver transformational change has increased significantly, says Couto. Vendors have become more focused on specific sectors and processes, finally giving them the depth of insight that they always professed but seldom possessed.
Ironically, however, this has come at precisely the time when nobody wants it anymore. “The recession is deemphasising transformational outsourcing as clients seek quick and simple benefits in order to stay alive,” says Couto.
Stay flexible
This is understandable, but may be short-sighted, he argues. Once business picks up again, clients may want precisely the kind of flexibility and innovations on which they are closing the door today, either by signing too-rigid contracts tied to specific processes and costs, or by getting into bed with cutprice vendors with little or no transformational capability.
With vendors increasingly desperate for business, now could be the ideal time to sign a transformational deal with “circuit-breakers” that allow the client to get out after a couple of years if the supplier doesn’t deliver, says Couto.
There’s already evidence of vendors’ willingness to offer transformation without the traditional cost premiums, but few clients are taking the bait.
In the longer term, transformational outsourcing works best as a partnership, says Couto. “Both sides need to feel they have some skin in the game, and some kind of risk and reward sharing is very desirable.” The client also needs to share its business vision with the supplier so that the latter has something to aim at.
“You need an aspiration of the kind of transformation you want, and to set some metrics and outcomes that define it,” says Couto.
“But if you don’t aspire to it, you’ll never get it.”
by Paul Bray
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