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Outsource magazine: thought-leadership and outsourcing strategy | August 24, 2017

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Outsourcing Nightmares: the horror, the horror…

Outsourcing Nightmares: the horror, the horror…
Outsource Magazine

So what sorts of things happen that really create problems?
1. Believing the outsourcer is your very best friend that will put your interest ahead of his own.
2. After a round of golf with the outsourcer’s sales team, you believe they completely understand your problems and will fix them all, so you sign a letter of intent that allows the outsourcer to spend what he needs to immediately; and then ask your legal department to create a formal contract.
3. Knowing it would be a waste of money and a huge time delay to check any references and go see the outsourcer’s people perform similar work.
4. Agreeing to pay for the work via time and materials while believing the outsourcer has agreed to deliver a high-quality output and will warrant any defects.
5. Assigning the executive/manager whose department is being outsourced and who is opposed to doing the project to oversee the project.

When you hear or read about a horror story, most likely one of the above items happened. Perhaps a real case will help to bring out the issues.

Over 30 years ago, I was working for a major outsourcer and was dispatched to fix a problem with an outsourcing contract. To summarise: the firm I was working for had signed a contract with a government agency to develop, install, and then operate a loan system for all government employees in a third-world country. The system had to be developed, the hardware procured, the data centre built, and the system got up and running for a government holiday when the President of this country would present the first loans to some lucky employees. These loans were very low interest, and viewed by the government as a major fringe benefit for government employees.

The government had decided to utilise an outsourcing provider due to an extremely tight timeline. Not only did the system have to be created, but the data centre set up and filled with hardware. In those days there were multi-month waiting lists for hardware, the data centre had some requirements for environmental controls that resembled a clean room, and – since this was outside the US – export licenses for the technology had to be obtained. My firm was extremely proud of the work that we had done to what was an incredibly tight deadline. The checks were calculated and the leader of the country gave out the first loans on the scheduled day without a hitch.

However the customer was extremely upset. Apparently my firm’s project team hadn’t built the necessary interfaces to 128 payroll systems to provide the information to deduct and receive the payment. The project leader was in disgrace. Executive management couldn’t understand how we had missed such a basic requirement. After all, it seemed like taking payments was something that even a beginner would know a loan system needed to be capable of doing.

After several days of meeting with all concerned it became apparent that the customer had told us that they never actually got repayments for the loans, but always forgave them. We had translated this as not needing to build the system to take the payments. As it turned out, these loans were always forgiven, but political capital was generated for the Minister by having the details by department and individual of how much was forgiven. Providing details of how much money was owed by department and individual on a report was a much simpler problem than building interfaces to 128 different payroll systems. We generated the required reports rather quickly and the problem went away.

I think this story is a great illustration of the reason most outsourcing deals have problems: that there isn’t a clear understanding of the requirements and objectives that all levels of the customer and vendor share. I would be willing to wager that if you think about the deals you were associated with that went bad, you’d be able to remember that the customer and the supplier just weren’t working toward the same end.

This normally starts when the sale is being made and the contract is written. What drives this problem?

Several things come to mind:
1. The most common one is where there are time constraints that cause an acceleration of the contracting process and the deal is signed before both sides have a mutual understanding. Almost always both sides think this is OK because they are sure they are on the same page.
2. The objectives are misaligned. The executives in the customer organisation may not have communicated clearly the objectives of the outsourcing. The people selecting the supplier are actively working toward one objective (such as lowest cost), when the actual objective is to transfer performance risk to the supplier. The deal is done; the supplier is doing what he thinks is required; and senior management is disappointed. Conversely, there may be a preferred supplier that is used for many things by the customer organisation. This supplier may have a business model that only allows for time and material (T&M) contracts requiring the customer to assume all the performance risk. This particular outsourcing may be attempting to offload that risk. Because of the relationship the preferred supplier is given the work on a T&M basis and when they fail to perform, the customer is very upset.
3. There can be mid-level customer managers that feel insulted by the decision to outsource and allow (or possibly require) a misunderstanding to be put in the contract. Often this results in impossible-to-meet performance standards or the use of T&M when the client was looking to offload some risk.
4. Insufficient due diligence is done on the supplier, and the supplier does not have the expertise that it has sold – or isn’t assigning the appropriate personnel to the contract. Outsourcing suppliers’ sales departments are notorious for teaching all their sales people that the answer to any question is “yes, of course!” The unspoken caveat is always “with enough time and money”. Without understanding a supplier’s capability you can sign a deal with a firm whose only capability is to produce slideware.

Making outsourcing work requires both parties to be working toward the same end goal. It also requires a common understanding of the responsibilities of each party. This is often left for the contract – and unfortunately then the only people who understand the relationship are the lawyers.

Always remember that the first mistake in communicating requirements is that: “What you said is what the listener heard”. And the second is similar: “What you heard is what the speaker said.”

Developing a good outsourcing relationship takes time – sufficient time for several levels to communicate clearly with each other. Both sides must understand the deal and be committed to delivering it.

To read more of our lead feature on ‘Outsourcing Nightmares’ from the Autumn 2014 issue of Outsource, see the article index here.

About the Author

Mike Atwood has 35 years in the outsourcing industry, and is now CEO of advisory firm Mike Atwood & Associates, assisting clients in all aspects of outsourcing.

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