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Table of Contents

Insights
Creating Pressure Valves

Customer Voice
When a Fixed Solution Won't Work...

Supplier Voice
A Blueprint for Success

Analyst Voice
Transcending the Adversarial

BPO Voice
Keeping Relationships Cordial

Legal Voice
Distinguishing Between Dispute and Discussion

Case Study
The Power of Knowledge

Academic Voice
Backsourcing: An Emerging Trend?

As we consider outsourcing, there can be no doubt that a disturbingly large proportion of relationships have a significant adversarial component. While this fact, on the surface, should be deeply disturbing to both the customer and supplier communities, the elements that drive the conflict, when understood, also can produce positive benefits.

First, let's look at why these adversarial relationships develop. In part, the very fundamentals of outsourcing contribute to this type of situation. Think of an outsourcing contract as being much like a container, with additional pressure being introduced into that container every day. That pressure is driven from two sources: the supplier side and the customer side.

Every supplier has an obligation to its stockholders to grow revenue and increase profit. The supplier also faces the fact that the technical nature of the service or commodity being outsourced changes over time. For example, the fundamental nature of desktop services is constantly changing. While the speed of change may differ between services, the fact that change exists is a constant.

On the other side of the equation are the customer's business objectives, in which change is driven by competitors, regulations and other economic factors. These changes combine with those on the supplier side to introduce pressure into the contract container on a daily basis.

Rethinking Contracts

In recent years, the approach that most companies and consultants have suggested is to make stronger contracts that tend to favor customer more than the traditional outsourcing deals. That has reversed the previous trend in which contracts historically favored the supplier.

Let's go back to our container analogy. Think of changing from a plastic container to a titanium container. No container -- or contract -- however strong, can withstand an increase in pressure on continuous basis forever. What often happens is when you don't provide a vehicle for escape of those pressures, those pressures turn inward and become destructive. That's what happens in relationships. The pressures become a source of most of the acrimony or conflict between supplier and customer.

Vendors, however, do not view shorter contracts as an automatic solution. They have a laundry list of reasons for wanting longer contracts, beginning with the fact that backlog is a factor in the way their corporate stock is valued. There's also the fact that entering a contract is expensive, and suppliers have a vested interest in trying to make them as long as possible to amortize the transition costs over a longer period of time. They want to avoid the business dislocation of having to renegotiate. Last, but by no means least, suppliers historically have been able to achieve much higher profit margins in the latter part of contracts, so the shorter contracts tend to eliminate some of the profit benefits.

Positive Pressure

Another approach is to change the way we look at pressure. Pressure in and of itself is benign, much like water pressure, which can be put to productive as well as nonproductive uses. Water pressure in a flooded river is very destructive. It erodes the banks and destroys property. However, water pressure also can be used to turn a turbine, create electric power, drive water mills, and achieve other beneficial purposes.

In much the same way, these pressures that are being introduced in contract also can be used for beneficial purposes. What is needed is a valve or some vehicle with which to channel the pressures.

At Everest, we believe that pressure relief can be achieved by creating metrics or by directing the outsourcer to assist in achieving business objectives, and then developing a series of targets and metrics to measure those consequences. As the vendor deploys their energies to meet the targets, they create value, which can be the basis for growing revenue and/or growing profit in a win-win way, rather than at the expense of the customer. In other words, the vendor creates value and gets to participate in some of that value.

An important footnote to that approach is that we've found that business objectives, all things being equal, tend to have short-term lives. Therefore, the value generated in achieving business objectives also is short-lived and should be shared over a short term. That can, vary, however, depending on the business objective under consideration and the type of value that is created.

Changing Perceptions

Even if the customer chooses not to reward the supplier for achieving the business objective -- which we believe would be a mistake -- having the metrics in place transforms the nature of relationship. Objective metrics enable the supplier to be perceived as creating value beyond the services or commodities provided as part of the contract.

This, then, is the two-step solution to having a contract container that retains its shape and performs as expected. By combining shorter-term contracts and rechanneling energy to productive uses, we have the basis for win-win relationships that last beyond the length of contract. Moreover, significant, ongoing value is being created -- and that, after all, is what most people outsource to achieve.

Peter Bendor-Samuel is editor and publisher of InfoServer and president of Everest.

Publish Date: September 1998

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Focusing on 'What,' not 'How'

Copyright © 1998 - Everest Partners, L.P.

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