Shaping Deals That Last: The Principles of Dynamic Outsourcing

by David Thomas and Simon Knowles

If you read the press or consult the analyst/advisor community, it is clear that there are two themes running through the outsourcing industry at the moment. Firstly, the outsourcing market is growing. Secondly, outsourcing is not delivering on expectations.

Now, we at CSC work with many clients around the world. None are stupid, all have a good understanding of their goals and the market alternatives available to them, and nearly all retain well-qualified advisors to assist them. So why would such informed clients continue to buy a product that is so obviously flawed?

The issue is simple, even if the solution is not.

The outsourcing challenge

The basic concept of outsourcing remains highly attractive, which is why the outsourcing market is growing. The more mature infrastructure-related services are growing steadily, the applications and offshore markets are growing quickly, and the newer business process segment is growing exponentially.

On the other hand, it is true that outsourcing is not delivering on expectations. Over 50 percent of deals fail and around 75 percent fail to deliver the value expected by both parties. Well over half need to be renegotiated in the first 18 months due to “material divergence between supplier and customer.”

Two issues drive these dysfunctional outcomes:

• Accommodating change and innovation over the life of the contract
• Managing the array of partners participating in the overall sourcing strategy.

Historically, outsourcing arrangements have contemplated a one-to-one relationship between supplier and client over an extended period of time. Both parties assumed the only changes over that period would be the price and performance of services, the volumes in which they were consumed, and perhaps the technology platform from which they were delivered.

Traditional outsourcing arrangements do not cope well with radical change. They are transactional in nature and assume that much of what may happen in the next five to 10 years can be envisaged and captured in contract. They focus on legal remedies against nonperformance and attainable penalties rather than on the behaviors that each party will exhibit when faced with opportunity, threat, or regulatory requirement.

No surprise then that in the “failed arrangements” referred to above suppliers are almost always discharging their contractual obligations in full. The real issue is that those contracts no longer reflected clients’ needs and actually discouraged suppliers from meeting clients’ real, rather than contractual, needs.

The new agenda for outsourcing

Today’s requirements are very different. Business needs are changing more quickly than ever and technology is shifting so rapidly that it is now common for “breakthrough” changes to occur within the life of any contract. Fewer clients are now prepared to award all infrastructure and applications-related services to a single vendor. Outsourcing transactions are now more likely to focus on overall business effectiveness than on simple cost reduction and performance improvement.

Understanding how to design a sourcing strategy to be a collaboration of best-of-breed partners working together to innovate, transform and create measurable improvements to the overall business, rather than a collection of contracts offering price/performance gains within each specific domain, is becoming a hot topic.

This new approach, which we call “dynamic outsourcing,” is built around five principles.

Focus on business outcomes    Increasingly, the technical goals and measures within outsourcing contracts are becoming secondary to overall business objectives defined by the sourcing strategy. These objectives define the intent of the contract and the specific business capabilities and outcomes associated with each stage of the transformation plan. Charges are associated with business improvement and capability rather than with narrow technical measures. As a consequence, the relationship is dynamic and remains vital over an extended period.

Create a collaborative sourcing model            Most organizations are “serial outsourcers,” optimizing each transaction with little regard for the eventual collaboration between the portfolio of partners they are creating.

From a strategic standpoint, a traditional sourcing approach leads to a collection of competitively advantaged contracts. However, when later business improvements are contemplated, they require the cooperation of many partners to achieve the planned outcome, and once that outcome is achieved there are likely to be winners and losers amongst the partners.

Dynamic outsourcing acknowledges the need for each sourcing transaction to be designed to fit into a collaborative sourcing model as well as to be optimal in its own domain. These considerations are made explicit in the solution, transition, transformation, and governance as well as in the commercial and contractual approach.

Align client and supplier intentions     Dynamic outsourcing aims to focus on the real requirements from a business perspective and to be realistic about the supplier’s need to recover investments and make profit. For example, setting a target service level of x percent for a service delivered for y dollars and consumed at a given volume may represent the best view of the requirements in year three of a relationship, but is unlikely to be realistic across the full term of the contract.

It may be more appropriate to suggest that:

• Service performance and costs will be maintained in the top x percent relative to the clients competitive peer group;
• Service performance and costs will remain competitive with other suppliers of similar services, etc.

Such definitions are more likely to endure than traditional metrics. Designing this level of alignment is highly rewarding but challenging. Unlike traditional approaches, it requires a level of trust and collaboration among all parties.

Build mechanisms for sustainable transformation        Traditional outsourcing — a single period of aggressive transformation to improve services followed by a sustained period of continuous improvement — is no longer sufficient to maintain market-leading performance. Today’s market requires sustained transformation throughout the life of the outsourcing relationship.

Sustained transformation can best be achieved by extensive use of Business Process Management techniques and tools. BPM enables the capture, representation, optimization, and deployment of business processes without reference to the underlying or supporting technology. The fusion of BPM with more conventional outsourcing approaches makes the interaction between technology and business transformation explicit.

Ensure appropriate systems of governance/alignment Dynamic outsourcing assumes a multipartner environment providing end-to-end service delivery. It assumes that the objective is to harness the combined capabilities of the various partners to meet client goals, whether those goals are driven by opportunities, threats, market requirements, or innovation. This requires an innovative operating model and a radically different approach to governance.

Dynamic outsourcing is a new approach to outsourcing relationships that focuses on business objectives rather than on technological goals. It is designed for a flexible, multipartner environment that accommodates and exploits change so that the relationship remains vibrant over time. When we move from a collection of contracts to a collaborative model combining the skills of the world’s best suppliers, the results can be extraordinary.

David Thomas is vice president and Simon Knowles is marketing director of CSC’s European Business Development. This article is based on research undertaken by CSC's Leading Edge Forum - Executive Programme.