Exiting from a big deal mid-term
(This article was co-written with Mike Henley, an expert in shared services and outsourcing at PA Consulting Group.)
When IT outsourcing arrangements are underperforming, the impact on client organisations can be significant. Users can be prevented from doing their jobs, customers and goodwill can be lost and, in the most serious cases, the disruption to trading can lead to a fall in shareholder confidence.
For IT/IS functions, the stakes are high. Few organisations are prepared to accept poor service and leaders in those functions are under increasing pressure to deliver substantial improvements in short timeframes. However, while the IT/IS function may recognise that it needs to take urgent action to improve its outsourcing arrangements, many struggle to work out what exactly they should do.
The key questions they should be asking are: what are we dealing with? What needs to change? And how do we make the change happen?
What are we dealing with?
To resolve outsourcing issues, the first question should be: ‘What do we need to consider?’ This will largely be determined by the scale of the issues at hand, and in particular the size of their impact on the business. Focussing purely on service level compliance and contractual remedies may suffice when issues are minor, but they will not be enough when the issues are more serious. In fact, in these circumstances, a narrow legal/commercial focus would be counter-productive, since it will separate and divide the parties and divert them from those things which can make a difference to services. Among things to consider are technology, services, service management, service integration, sourcing, the contract and commercials, the relationship and people. In the most serious of cases, all these things need to be looked at.
As well as asking what should be looked at, another consideration is who should be looked at. Often the focus is on the supplier or suppliers, but frequently we find that outsourcing issues are as much to do with the client organisation and the way services are configured and managed across suppliers. Accepting that fact demands a significant change in mindset on the part of the client because it is far easier to blame the supplier. However, the most successful turnarounds we have seen are those where client organisations take a mature view of their own contribution to the problems.
Another question to ask at the outset is ‘what are the underlying causes?’ Determining the right response and solution depends on establishing the facts. It is essential to find out what is really happening across the entire landscape. Objectivity is critical if a robust and solid foundation for remedial action is to be created and the business is to be assured that services will be turned around satisfactorily.
What needs to change?
When the scale of the issues have been established, the IT/IS function needs to ask whether they need to reshape the services. At the point at which a client is dealing with distress it is likely that its service requirements have changed from the point at which it signed the contract. In most cases, simply enforcing compliance with the current contract terms, or lifting and shifting those terms to a new supplier, will not meet the business’s needs. Clients should take the opportunity to revisit their sourcing strategy, looking again at service-bundling, insource/outsource questions, supplier offerings and commercial mechanisms. This is critical in making sure the turnaround activity results in service arrangements which are closely aligned to business needs.
Changing suppliers in mid-contract carries significantly more risk and presents more substantial challenges than transitioning services to a new supplier on the expiry of the contract. Most suppliers are adept at dealing with forced exits, in minimising commercial/legal risks to them and in maximising their revenues and profits as they head out the door. In contrast, most clients have little or no experience in this area. Client organisations which successfully change suppliers are those where the service issues are having a serious business impact, the prospects of the current supplier turning the services around are low, and the client organisation has the necessary management resolve and fire power to drive the change through.
Outsourcing involves the transfer of risk and responsibility from the client organisation to a supplier. However, ultimate accountability always remains with the client. In many cases the client has not retained the capability it needs to manage suppliers and ensure service is properly managed and integrated, and this gap can often be exposed where services are failing. Often the basic building blocks (structures, capabilities, processes, tools) are simply not there, or are not good enough. Re-shaping services or changing suppliers will not be sufficient to turn services around unless these issues are addressed at the same time.
How do we make the changes happen?
To make the changes required, the IT/IS function needs to agree the right team. In our experience, clients who turn services around the most successfully lead the change themselves, but supplement their team with specialist support for added firepower. The skills required are technical, service integration and management, sourcing, exit/transition, legal and programme management. Critically, the team needs to operate as one, since the supplier’s team will be operating in this way (which is a little ironic because most tend not to be joined up when delivering services).
If there is consensus on changing supplier, there will be a number of important streams of activity which need to be managed. As a result a formal programme is needed to ensure focus is maintained on the objectives of the business, the complexity and dependencies between streams are managed effectively, there is proper and timely communication across the streams, and that progress is made at the required pace.
Finally, here are some general points to bear in mind:
- Move at your own pace and time of choosing – control the agenda and the timetable and make sure that these are not controlled by the supplier.
- Do not assume the supplier will want to turn the service around.
- Negotiating leverage and therefore negotiating strategy is critical. Lateral thinking is required across all the hard and soft influencers of individual and corporate behaviour.
- Contingency planning should start early. Even if your plan is to retain the supplier and work with them to turn service around, that plan might not work.
- Don’t assume ‘your dad is bigger than their dad’. The bigger suppliers are far more experienced in dealing with dissatisfied customers than customers are in dealing well with failing suppliers. Get the help you need to give you the firepower you need.
- Make sure legal issues are addressed early
- Finally, mindset is critical. Courage and resolve are the key ingredients to success.