Want to fire your outsourcer? Think twice
If you’re a CIO managing an unsatisfactory outsourcing relationship, chances are you are frustrated on a consistent basis. At times, you might be tempted to conclude that another provider – or your in-house team – could certainly do a better job than the clueless lot currently in place.
Take a deep breath and reconsider.
Even buy-side executives with extensive outsourcing experience consistently underestimate the cost, risk and disruption associated with transitioning services. Fact is, a number of risks and considerations are involved when moving from one service provider to another, or repatriating services from a third party to an internally managed approach. If you’re responsible for managing these transitions, you need to be aware of what you’re in for.
First off, consider the types of risk that accompany a sourcing transition. There’s operational risk, and a successful transition must address myriad details and questions and account for a wide range of activities and moving parts, including tower-specific plans for changeover, knowledge transfer, physical location of teams, hiring and training, lead times for connectivity and acquisition of tools. As a client, you typically lack visibility into all of the specific functions carried out by your provider team. As a result, you’re susceptible to underestimating the scope of operational activity involved. This risk is particularly pronounced if you’re repatriating services to in-house delivery.
Financial risk is another factor – what are the costs and potential disruption associated with assets? What if a change in providers means moving from a data centre in one city to a co-located facility somewhere else? Terms and conditions around termination can be an issue. Switching fees can be exorbitant, and – somewhat ironically – being fired can be lucrative for the exiting provider.
Finally, you need to consider the potential risk to the overall organisation, specifically with regard to governance teams and service integration, and particularly if you are working in a multi-supplier environment. Before embarking on a change, you should be confident that the new provider will be seamlessly integrated into the existing team. This requires understanding the distribution of functions and touch-points between providers and the retained function.
In addition to understanding types of risk, you should be aware of potential causes of transition failure. Lack of planning is perhaps the biggest culprit. This can result from, as noted, simply underestimating the time required to implement a successful transition strategy – which, by the way, can take 18 months to two years. It’s essential to consider the specific tasks and roles and responsibilities for both client and provider. We often see clients take a hands-off “the provider will manage it” approach, which leaves the provider operating in a vacuum.
A hasty decision to switch to a new provider or to in-house delivery based on frustration is invariably a bad idea, and a major cause of transition failure. For one thing, the problems in the relationship could be your responsibility as much as the provider’s. If so, bringing in a new supplier will only repeat the established pattern of misery. Moreover, if you rush in, you likely won’t have taken the time to plan the transition (see above). Finally, you can assume that the fired incumbent will not exactly bend over backwards to put their top people on your account during the transition period.
Management discipline is another typical point of failure. Service providers often don’t adhere to their own transition processes and lack the dedicated and experienced transition organisation needed to capture and store transition artefacts and manage complex cross-tower hand-offs. For example, a smooth transition requires that agreement sign-off is synchronised with completed work. But without a clear process in place, these contractual and functional sign-offs can fall out of alignment, leading to confusion and disputes.
All this is not to say that you should never change providers or take services back in-house because it’s too complicated. Change can allow you to take advantage of a new provider’s capabilities or to end a truly dysfunctional relationship. Moreover, with fierce competition driving down prices and new innovations continually coming on-line, switching providers or delivery models is often necessary to stay ahead of the competitive curve.
And while the transition process is a challenge, the good news is that proper planning, consistent focus and project management discipline can ensure a smooth changeover. One key to success is a robust transition methodology, one characterised by a conscious planning effort and a disciplined approach to manage the complexity of transition. Similarly, a well-designed transition governance model enables both client and provider to build on the relationships already created and to manage the myriad details, questions and issues that arise during the process. Governance also plays a central role in ensuring thorough evaluation of multiple risks across operational, contractual, financial and organisational categories.
Another imperative is to focus on rapid resolution of issues and early identification of risks. This helps you build momentum and consistency during the transition. Don’t allow issues and risks to fester without resolution, as this is sure to sap motivation. Frequent and clear communication to the transition team, client and provider organization, meanwhile, can mitigate the flow of rumours and ease the tension of a transition.
It can also be helpful to acknowledge what you don’t know. Many clients engage a third party to manage the transition for them, and find that an impartial and unbiased perspective from an advisor specialising in outsourcing can identify risks and challenges and outline roles and responsibilities while minimising conflict.
CIOs have always had to make difficult decisions at the end of an outsourcing contract. The renew/renegotiate/repatriate quandary is all the more challenging given today’s dynamic marketplace and technology landscape. While change is often necessary, a thorough and realistic assessment of risks associated with that change, along with a rigorous plan to manage the transition process, is imperative.
Bottom line: whether you’re bringing in a new provider or taking services back in-house, be sure you’re making the change for the right reasons, don’t underestimate the task at hand and develop a thorough plan for the entire process. If you’re not prepared, the problems you’ll encounter will – at best – make for a very short honeymoon with the fresh approach, and at worst doom the new operating model from the outset.
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