In a recent Dun & Bradstreet report, they noted that “25 percent of all outsourcing fails” completely and more than 50 percent of all outsourcing deals provide no substantial benefit at all. Outsourcing failures are often the result of companies rushing into transactions with unrealistic or unsubstantiated expectations of cost savings and performance improvements that cannot be met because the customer does not clearly communicate their requirements, either internally or to potential suppliers. Outsourcing many business processes in addition to IT also has the same less than stellar results: call center problems are almost a cause celebre. Some people believe that hundreds of pages of detailed specifications as complex as War and Peace are needed to make outsourcing work, binding everything into a strict contract that covers all possibilities is clearly not a practical proposition.
The main causes of failure in an outsourcing are:
- Unclear buyer expectations in terms of your goals: Poorly defined goals and requirements, and lack of outsourcing contract management skills are two of the main reasons for IT outsourcing failures.
- The interests of the parties may be aligned from the outset, but become misaligned as the buyer’s business environment or needs change over time (as they inevitably will).
- The provider’s poor performance against service level agreements, which in some cases is dramatic.
- The parties do not take into account the interests of the other party to ensure that their relationship is mutually beneficial: the naturally conflicting goals and the need for providers to make money are often not really internalized by customers.
- Poor governance structure to manage the ongoing relationship; in some cases, this is left to account management alone.
- Poor cultural compatibility of the parties: asymmetrical sizes between the client and the provider as well.
- Bad communication; parties do not proactively share necessary information with each other; the relationship deteriorates quickly when information is withheld
In other recent work I’ve been involved with, there have been several cases of buyers and subcontractors in direct conflict and not inclined to acknowledge their own influence on subcontracting failures. The blame game starts early on in the relationship. Hidden costs, high staff turnover, and poor cross-cultural communications are also some of the key causes of offshore outsourcing failures. Another big source of outsourcing failure is the way that outsourcing providers tend to “upsell” their projects by pitching their projects to the CEO instead of IT staff and managers who really know how to run the business – this inscription of ‘C’ level managers is often the source of great difficulties when the real discussions take place. They have bought into a process based on high-level aphorisms that have little practical value on the street corner.
If you choose to view global outsourcing as an opportunity, as many companies do, you can quickly realize that making it work requires a carefully planned and orchestrated approach. However, I suggest that the current rate of outsourcing performance improvement failures is only tolerated because it disguises the full magnitude of the failures; Few organizations or people are willing to admit the extent of failure in a major outsourcing contract. Failing in this game can have detrimental consequences for your career.
