Outsourcing Problems and Solutions’
Managing a long-term outsourcing relationship is no easy task. Over the years, Everest has worked with
clients to pin-point the root causes of dysfunctional or unsatisfactory outsourcing relationships. Experience
shows that the following are common contributing factors to imperfect outsourcing relationships:
1) Pricing and service levels are established at the start of the contract and usually contain no meaningful
mechanism for continuous improvement. 2) Differences in buyer and supplier cultures often cause
misunderstanding and distrust. Even if the cultures are compatible, the two parties still have fundamentally
different goals and objectives that are frequently difficult to harmonize. 3) All outsourcing contracts are
based on key assumptions regarding technologies, business conditions, personnel, and other relevant issues.
As soon as the contract is signed, these assumptions begin to change. However detailed the contract or
favorable the terms, most contracts cannot anticipate the changes in an evolving environment. This
phenomenon tends to ensure that one, if not both of the parties will become disenchanted with the
relationship. Longer term contracts that lack flexibility tend to increase the likelihood of dissatisfaction. 4)
Once the contract is in force, there is a great temptation for both parties to sub-optimize the relationship and
attempt to better their lot at the expense of the other. The inflexible nature of the contract usually favors the
supplier. 5) Buyers frequently underestimate the time and attention required to manage an outsourcing
relationship, or worse, they hand over management responsibility to the vendor. The outsourcer begins to
operate in a priority vacuum, and service levels tend to deteriorate because the outsourcer's agenda is not in
sync with the buyer's business objectives. 6) Lack of management oversight is usually the result of two
factors: 6a) The team that negotiated the contract often does not stay engaged in contract management. A
new team that may or may not understand the contract's intentions are given responsibility for managing
the relationship. 6b) Employees that understood the pre-outsourced environment have been transferred to
the outsourcer's team. This disruption in continuity can have significant adverse effects on the outsourcing
relationship.
To gain an understanding of how these forces can be counteracted or avoided, and how a win-win
relationship can be created and sustained, contact Everest at +1 972 980 0013 or +1 888 383 7738.
To obtain a greater understanding of Everest's vision of the outsourcing process, click on the hyperlink to
get to Everest's white papers.
The Brave New World of Outsourcing
By Peter Bendor-Samuel
A new day is dawning for outsourcing as the practice moves beyond cost containment and into
position as a tool for corporate strategy. Today companies across the world are taking a hard look
at their operations and at least considering outsourcing some of their functions. Some are even
taking the giant leap of outsourcing a portion of what has been considered their core competency
work.
The executives who have outsourced part of their business processes are reporting success. As
Price Waterhouse's Joe Vales tells us in the BPO Solutions column, a survey done by
Yankelovich Partners for Price Waterhouse indicates that top executives at corporations around
the world are satisfied with their BPO activities to date. Moreover, many of them are looking for
new areas to outsource.
As staggering as the possibilities for strategic outsourcing may be, everyone involved in the
industry -- both vendors and customers -- must be aware of the realities involved in turning those
possibilities into success stories. Outsourced functions do not operate in a vacuum. Companies
who are considering outsourcing should look at the impact on the entire corporate operation and,
with their vendors, take steps to ensure that processes interface smoothly.
We've made the point in this publication before, and I'll make it here again --companies cannot
assume that outsourced functions require less management. While fewer management people
may be required, those who are on the management team must have the keenly honed skills
necessary to interact effectively with the vendor management team. This truth becomes
especially important if outsourcing is expected to move beyond simple cost containment to a
position of corporate strategy.
Also essential is the involvement of senior level management. When outsourcing becomes a
strategic tool, the relationship becomes a partnership where the outsourcer is functioning in the
customer's stead in ways that can affect the entire company. Having senior executives committed
to the process and actively involved can forestall problems and enable swift resolution when
difficulties do arise.
One of the ways in which problems can be forestalled is for the customer to do a thorough
internal analysis before moving into outsourcing. The decision makers should be very clear on
what it is they want outsourced, why they have chosen that particular function, how the
outsourcing of that function will impact other facets of their operation, and what results they
expect from the outsourcing of that function. Then that information must be clearly communicated
to the vendor, along with the customer's expectations of levels of service to be provided. Vendors
cannot meet expectations if they don't know they exist.
The times ahead will be exciting ones. Technology and increasing comfort with business process
outsourcing are enabling companies to reshape their perations in innovative ways. New alliances
and new ways of partnering are creating increasingly complex relationships. The customers and
vendors that will prosper in this brave new world will be those that establish trust-based
environments where flexibility and clear dialogue are key to the relationship.
The New Realities of Outsourcing
By Peter Bendor-Samuel
The old rigid, cost-based, IT-only outsourcing relationships are being dumped by the wayside in
favor of new relationships that go further and in more directions than ever imagined in the past.
The impetus for this reshaping of the industry is a move among businesses to identify and focus
on their core skills. Everything else is "game for outsourcing," according to MCI Systemhouse's
Lenny Darnell.
Almost every supplier we interviewed talked about business practice or value-based -outsourcing as the shape of outsourcing's future. Mary Ellen McKee of Andersen Consulting said
clients are looking to outsourcing to gain competitive advantage, transform their workforce and
reach new levels of performance.
As businesses reach for those goals, the structure of relationships also will change. The
"strategic value" that has been bandied about in industry discussions for years has finally come
into its own -- and that, said Perot System's Jim Champy means that pure outsourced big deals
will decrease, as customers look for partnerships and other less traditional outsourcing
arrangements.
The New Realities of Outsourcing (cont.)
CSC's Chuck Jarrow concurred. With the increased recognition of the benefits of outsourcing as
a business strategy, partnership, he said, has become more than just "a fancy phrase." Flexibility
and speed in delivering business solutions are just two of the reasons Jarrow cited for companies
moving away from vendor relationships and into partnerships.
As the marketplace shifts, customers also are more open to selective outsourcing, a change that
has created new opportunities for niche vendors to team together in delivering specific services to
specific customers. "We're going to see more contracts that are structured on the basis of finding
the best of breed in particular areas," said Digital Equipment Corporation's Wendell Jones.
Spinning out of that situation will be an explosion of new vendors, creating an increasingly
competitive landscape and presenting new challenges for the traditional big players. Dean
Davison of Meta Group said one of the greatest impacts of new technology and the infusion of
new vendors will be a proliferation of outsourcing into almost every IT organization by the year
2000. The practicing will become an industry standard, according to Barry Weigler of the
Sourcing Interest Group. "Today," he said, "if a manager doesn't look at all the ways of obtaining
resources to do the best job for the company, he's not doing his job right."
The new opportunities opening in outsourcing are myriad. Darnell pointed to the entire area of
human resources, from benefits to payroll and compensation to cash management. Michael
Corbett of Corbett and Associates cited the pharmaceutical industry as one where more than half
of the research is conducted on a contract basis and about 15 percent of manufacturing is
performed under outsourcing agreements.
The New Realities of Outsourcing (cont.)
Then there is networking, which AT&T Solutions' Rick Roscitt said is "poised to take off like a
rocket ship. Banks, he said, are leading the way in that field.
And the field of e-business is still in its infancy, according to Doug Elix of IBM Global Services. He
predicted that by the year 2000, over 50 percent of everything that is spent externally on IT
services will be expended around e-business activities.
Despite the rosy future that gains in technology and new opportunities are expected to deliver,
most of the vendors cited a common challenge -- the lack of skilled people to deliver services to
their customers. Jeff Rich of ACS said the problem will only worsen in the next few years, as the
number of new computer science graduates fails to keep pace with burgeoning demands for
service. To meet that challenge, outsourcers are going to have to be creative in the way they
utilize and manage their skilled people, he said.
This, then, appears to be our industry's immediate future: unprecedented growth, fueled by
technology gains and a new recognition of the strategic value of outsourcing...a reshaping of
relationships to allow for more creative delivery of services...and the sticky but not
insurmountable challenge of attracting, keeping and managing the skilled people to keep the
outsourcing industry moving forward.
A New Way of Doing Business
By Peter Bendor-Samuel
A couple of years ago, e-commerce was just knocking at the door of the IT marketplace. Today,
companies have shoved that door open and are walking through to discover new opportunities
and new ways of doing business more profitably and more efficiently. If the industry prophets are
to be believed, those companies will be joined by many others as customer demand drives ecommerce from an option to a necessity for success.
What does that mean to companies that are just now considering e-commerce or who have taken
the first steps with a web page and e-mail? It means that you should view this as the opportunity
it is, but you should also do your homework and make good, solid business-based decisions as
you move into the electronic arena.
Outsourcing is expected to play a major role in e-commerce. Stan Lepeak, an analyst with Meta
Group, predicts that virtually all organizations will be outsourcing some component of ecommerce. Many organizations will outsource the entire operation. What you, as a company,
need to decide is what part of your e-commerce operation is suitable for outsourcing and what
part, if any, you want to save.
Then you face another set of questions. What vendors have skills that meet your needs? Do you
want to use one full service vendor or multiple vendors? If you go the multiple vendor route, do
you want to manage the relationships or outsource the management? Consider those questions
carefully, because the answers can determine whether or not your e-commerce experience is a
success.
A New Way of Doing Business (cont.)
Business practices is a hot topic in outsourcing these days, and it is relevant in the discussion of
e-commerce. Businesses need to be aware that business practices will change, and part of that
change will be dictated by the demands of e-commerce. This evolution of the industry presents
an excellent opportunity to take a new look at those practices. This new way of doing business
may not only change, but improve the traditional practices.
Apart from selling directly to customers, e-commerce also offers the opportunity for firms to
transact business with one another more efficiently and economically. The internet technology is
enabling companies for whom EDI had been out of reach to take advantages of the benefits of
trading electronically.
Those smaller players now have the opportunity, through e-commerce, to participate in the global
marketplace. They can, through creativity and harnessing the power of the internet, move far
beyond their potential of just a few years past.
Overall, the picture for e-commerce is rosy, although companies may stumble a bit in the
beginning. The key to success in e-commerce, as in any other business relationship, is know your
vendor well. And communicate, communicate, communicate.
As a note of caution, remember that typically it is unwise to to outsource any process or service
that is undefined. E-commerce is in its infancy and just coalescing into the kind of definition and
structure that can support an outsourcing contrct. Companies rushing to outsourcing should be
wary of outsourcing any area where they cannot define the services and measure the
performance of the relationship.
Finally, remember the truth that transcends every business relationship. In order for a relationship
to be successful, all parties involved must win. Contracts must be structured with enough
flexibility and mutual respect to accomodate the dictates of a constantly changing environment.
To look at the future of e-commerce and the role outsourcing is expected to play is to understand
the excitement in a sky's-the-limit environment. E-commerce and outsourcing are natural partners
in exploring the promise of tomorrow.
Peter Bendor-Samuel is president of Everest Software and publisher of InfoServer.
Outsourcing Relationships: Why Are They Difficult to
Manage?
In outsourcing relationships, some information you are never told until it's too late!
Managing a long-term outsourcing relationship is no easy task. Over the years, Everest has worked with
clients to pin-point the root causes of dysfunctional or unsatisfactory outsourcing relationships. Experience
shows that the following are common contributing factors to imperfect outsourcing relationships:
 Pricing and service levels are established at the start of the contract and usually contain no
meaningful mechanism for continuous improvement.
 Differences in buyer and supplier cultures often cause misunderstanding and distrust. Even if the
cultures are compatible, the two parties still have fundamentally different goals and objectives that
are frequently difficult to harmonize.
 All outsourcing contracts are based on key assumptions regarding technologies, business
conditions, personnel, and other relevant issues. As soon as the contract is signed, these
assumptions begin to change. However detailed the contract or favorable the terms, most contracts
cannot anticipate the changes in an evolving environment. This phenomenon tends to ensure that
one, if not both of the parties will become disenchanted with the relationship. Longer term
contracts that lack flexibility tend to increase the likelihood of dissatisfaction.
 Once the contract is in force, there is a great temptation for both parties to suboptimize the
relationship and attempt to better their lot at the expense of the other. The inflexible nature of the
contract usually favors the supplier.
 Buyers frequently underestimate the time and attention required to manage an outsourcing
relationship, or worse, they hand over management responsibility to the vendor. The outsourcer
begins to operate in a priority vacuum, and service levels tend to deteriorate because the
outsourcer's agenda is not in sync with the buyer's business objectives.
 Lack of management oversight is usually the result of two factors:
 The team that negotiated the contract often does not stay engaged in contract
management. A new team that may or may not understand the contract's intentions are
given responsibility for managing the relationship.
 Employees that understood the pre-outsourced environment have been transferred to the
outsourcer's team. This disruption in continuity can have significant adverse effects on
the outsourcing relationship.
Redefining Outsourcing: The Value Model
A White Paper by Peter Bendor-Samuel, President, Everest Software Corp.
Overview
The dilemma for the outsourcing customer is, "How do I turn my outsourcing relationship into an ongoing
asset? How do I make it a source of value that drives ongoing benefit to the company and the value chain?"
To answer these questions, we must first reflect on how the outsourcing industry has changed over the
years, and then examine the old versus the new outsourcing model.
Most outsourcing relationships created over the first 20-30 years of the outsourcing industry were by
companies that were in financial trouble; often referred to as "an ox in a ditch," and that were not doing a
good job in the areas they outsourced.
These old structured relationships tended to favor the outsourcer and were based on a win/lose model. The
company was distressed and required a significant investment by the outsourcer. The outsourcer then used
that leverage to insist on long contracts with high returns, which were inherently inflexible. The result? The
outsourcer wins and the company loses.
Over the last 10 years however, the trend has changed. Healthy and profitable companies are beginning to
view outsourcing as an essential part of their business strategy. They are looking for outsourcers to deliver
key components of data processing, supply-chain management, warehousing, logistics, HR, accounting,
and other vital components of their business. By divesting themselves of these non-core activities,
companies are realizing they can focus their energy on areas where they have the competitive advantage,
differentiate themselves from their competitors, and take advantage of the cost-savings from the outsourced
functions.
While the reasons for outsourcing have changed, the structure of most outsourcing contracts has
unfortunately not. However, this paper exposes a new structure based on a win/win model where the
company comes to the outsourcer as an equal partner. The outsourcer is a key component of the company's
delivery structure, and they must evolve to meet the company's needs. So rather than getting the company
out of a difficult situation, the outsourcer is an integral part of an ongoing business strategy. The result?
Outsourcers must add value, and customers and outsourcers must develop a more equal relationship.
Redefining Outsourcing: The Value Model
A White Paper by Peter Bendor-Samuel, President, Everest Software Corp.
The Old Outsourcing Model
In the old outsourcing model, contracts are usually put together in haste. The outsourcer takes over a
distressed situation in which service levels can not easily be agreed upon. Consequently, very few
meaningful service levels are defined. The outsourcer provides limited information to the customer in terms
of its cost for providing services, and any inquires made by the customer are given the cold shoulder. The
result is a poorly understood relationship in which both parties blame each other for increasing levels of
nonperformance. These relationships historically result in a win/lose adversarial type of relationship where
both parties seek to win at the loss of the other — the customer seeks to reduce the outsourcer's profits, and
the outsourcer seeks to maximize its profit structure in opposition with the customer.
These contracts tend to be commodity in nature and focus on a single element of a process such as the data
center. Once the pricing is determined, normally at the start of the contract, it does not change to adjust for
the cost of living adjustment (COLA). For example, a company outsources its data processing department
in which it is spending $20 million/year, and the outsourcer agrees to do the same functions for less — $15
million/year. However, costs rise with inflation and increased usage. Over the next 3 or 4 years, it creeps
back to $20 million or more because there are no requirements for continuous improvement in pricing. The
pricing is usually transaction oriented (per transaction), and the transactions are stated in technical terms
that are difficult to relate back to the business. These contracts tend to be long term — between 5 and 10
years — and have significant early termination costs.
Redefining Outsourcing: The Value Model
A White Paper by Peter Bendor-Samuel, President, Everest Software Corp.
The New Outsourcing Model
In the New Outsourcing Model, the customer looks at the outsourcer as a long-term asset that is a source of
ongoing value to the company. As an asset, time and resources are dedicated to managing the relationship
and maximizing its value. The customer's resources are held accountable for extracting value from the
outsourcing relationship. The intent is to keep the relationship for as long as it brings value —
understanding that over time new parties and new alliances may need to be formed as technology and
organizations change. Therefore, customers strive for long-term relationships and align the outsourcers
motivation by developing appropriate incentives and penalties. They invest in tools that can objectively
measure outsourcer performance and contribution as well as foster communication. There is an
interdependency between the two organizations — change in one affects the other. Therefore both parties
must understand the cost drivers of the two infrastructures and coordinate changes so as not to drive
additional costs into the process. Customer and outsourcer must behave as an integrated supply chain rather
than win/lose adversaries.
Redefining Outsourcing: The Value Model
A White Paper by Peter Bendor-Samuel, President, Everest Software Corp.
The Value Model -- Everest Management Framework
In today's world of ever-increasing competition, it is no longer feasible for an outsourcer to provide a fixed
price over multiple years that does not anticipate learning curves, improvements, and changes in
technology. These costs need to be transmitted through the supply chain so as to provide lower costs to the
customer. Other principles underpinning this value model are:
 Results are measured on an objective basis
 The outsourcer is rewarded for providing value in proportion to the value that it creates
 The outsourcer's interests are kept aligned with those of the customer
 The outsourcer and the customer are interdependent during this relationship — changes in one
side's infrastructure will affect the other
 The relationship must change over time to reflect new business objectives, technologies, people,
and business conditions.
By Nick White
Outsourcing
Outsourcing Will Bring Mixed Blessings
After building the world's biggest outsourced net, Unilever's Nick White says farming out everything isn't
for everyone
Twenty-five years ago I helped Reuters build one of the largest private networks in the world. This was as far
in the direction of home-grown networking as possible, with terminals physically adapted from
minicomputers, proprietary 300-baud modems, custom-developed protocols and X.25 software, and even
dedicated satellite transponders. I suspect we couldn't even spell outsourcing.
Fifteen years ago, I joined a U.K. clearing bank, Midland, and helped it build an integrated private group
telecommunications network. Through a subsidiary company, Midland Network Services, we got into the
outsourcing business, selling the excess capacity of the bank's strategic infrastructure to savings banks and
travel agents. There were times when we considered outsourcing the entire infrastructure, but we didn't want
to risk Midland's core services.
Six years ago I joined Unilever (London) to help build a global telecommunications network. There was only
one option—outsourcing.
From this brief history, one might draw one of four possible conclusions: that I am a telecommunications
mercenary willing to change my strategic principles depending which way the wind is blowing; that the
business requirements of my employers were different in each situation; that the industries in which I worked
were different; or that the telecommunications industry had changed so much that outsourcing was no longer
a dirty word. There is an element of truth in all four options. That's what makes it so difficult to predict the
next 25 months of outsourcing, let alone the next 25 years.
What are some of the possibilities? On one end of the spectrum, outsourcing of network services may grow
to resemble a utility like electricity, where the customer does no more than turn on the switch (and pay the
bills). At the other end, outsourcing may be used for processes so critical that businesses will still closely
manage and own the relevant resources and equipment.
Even if the utility approach becomes prevalent, the global reach of outsourcing suppliers is likely to remain
patchy. That means tomorrow's multinationals will need a mix-and-match approach—and tomorrow's
outsourcers must be ready to work with their competitors, even if a single-supplier strategy is the target.
Still, it's clear that trends are encouraging the spread of outsourcing. Multinationals are extending their reach
farther than ever, often to places where they have no local expertise. Even the fortunate few with networking
talent around the globe may not be up to the task of tracking complex political and regulatory conditions.
These same companies are coming to rely far more on their networking infrastructure for tasks like EDI and
other business processes—and finding that management of all this is expensive.
At the same time, service providers are turning their outsourcing offerings into commodities, which makes it
harder to justify private networks. Rapidly falling tariffs are putting payback on capital for private networks
at high risk. Meanwhile, carriers are realizing greater economies of scale through the ever-increasing
capacity of fiber and satellite services, and they're also squeezing more bandwidth out of existing equipment.
Also, for the first time, providers are able to tout a secure and predictable public Internet.
Even with these advances, hardly anyone would advocate or predict a future of total outsourcing. So
businesses will need guidelines to determine how much or how little outsourcing will be appropriate.
Certainly, in mature competitive markets, private in-house networks won't make sense. For globally
distributed networks whose constituent parts frequently change, transmission services should be outsourced,
but management of routing may remain an in-house task or be outsourced to a different supplier.
But there are also scenarios in which outsourcing probably will not make sense. For very stable topologies
linking a limited number of fixed sites and requiring high levels of performance, dedicated private networks
are probably best. Outsourcing may also be unwise in situations where staff costs are a low percentage of
overall costs.
Warning Signs
One thing seems certain: Problems with outsourcing are likely to continue. Insufficient assessment of vendor
bids and failure to contract in sufficient detail have created loopholes through which outsourcers are eager to
drive their 40-ton trucks. Measurement systems have proven inadequate in monitoring vendor performance
and SLAs (service-level agreements).
It was assumed that outsourcers were more efficient in their own industry than their customers. But the 40
percent savings claimed to be possible only through outsourcing may also be achieved by internal
reengineering. For those considering outsourcing, I have one piece of advice: Never outsource a mess.
Optimize it first. Then ask the outsourcer for the 40 percent savings.
This balancing of benefits and problems has produced other powerful lessons for those considering
outsourcing. The clearest message is probably that outsourced network services require more (quantity) and
better (quality) internal management than internal network services. Don't outsource the company's control
mechanism, since that likely means losing control.
It's also important to watch how outsourcers set priorities. Outsourcing may replace one set of turf fights with
another. Companies that agree to outsourcers' fees may end squabbling over internal cost-sharing only to find
their outsourcer making unpopular decisions about whose problem to fix first. Further, these decisions may
involve a choice between a company and its competitor, rather than between business units within the same
company.
Career Helper
But for all these potential pitfalls, net managers are still likely to outsource network services at record levels.
Outsourcing used to be viewed as departmental suicide, and telecommunications managers avoided it like the
plague. The last 25 years have shown, however, that self-inflicted outsourcing is often a route to promotion.
This happens because managing outsourced services is a more difficult and strategic job.
Proper management of outsourcing requires expertise not only in networking, but also in judging other
practitioners of the same skills. In essence, network managers become driving instructors, not just drivers. Of
course, this assumes that the network manager has, or can develop, the skills. These skills will have to be
learned quickly, and partly on the job.
Will outsourcing still be around in 25 years? The fact that there are now associations for network outsourcing
suggests it has reached levels of respectability and maturity that will ensure its survival. This will probably
be true as long as networking remains outside the core business of a sufficient number of customers.
Outsourcing, therefore, is probably here to stay—and to grow.