The 7 Classic Outsourcing Mistakes

The 7 Classic Outsourcing MistakesBy Jeff Richards
Managing Partner

It is an unfortunate reality that most outsourcing deals fail to reach their true potential. Over the course of assisting many clients with outsourcing, we have found that the following seven things, either alone or in combination, are the major causes of dissatisfaction with outsourcing:

1) Failing to Define Goals and Objectives

Perhaps the largest source of value leakage in the outsourcing process is failing to articulate a clear outsourcing strategy. Why? Because, most companies don’t state or even understand what their “real” outsourcing objectives are – from both the financial and non-financial standpoints.

Bottom line: you will not reach your destination if you don’t know where you’re going.

2) Focusing Strictly on Reducing Costs

Outsourcing usually starts as a way to reduce costs. However, much has been written that suggests focusing strictly on reducing costs leads to problems. Our experience corroborates this.

For example, rarely are services truly a commodity. Excessive focus on costs in the negotiation process can lead to an adversarial supplier/customer relationship. What is critical to the long-term success of the service provision is that companies need to establish is a healthy, team-based relationship with the service provider.

3) Fumbling Contract Management

Outsourcing a process does not relieve you of the responsibility to manage the vendor and your strategy. No, you should not be providing day-to-day management of the service provider. But you will need to invest time in defining how you will work with your new business partner and what the new management processes will be – and get this into writing in the outsourcing contract.

The most common mistake we see in this area is that companies think they are outsourcing but are actually subcontracting for cheap labor and keeping the management overhead. Proper contract management can avoid this situation.

4) Doing It Yourself

Entering into an outsourcing relationship is not something most companies do on a regular basis. For best results, get assistance from a company whose primary business is providing advice about outsourcing transactions. This will enable you to level the playing field and potentially greatly reduce the time and frustration associated with the process.

5) Not Getting It in Writing

You must get everything in writing BEFORE you sign the contract. This sounds obvious, but this mistake occurs all the time. Time spent in defining the costs, services, roles and responsibilities will serve you well later.

At a minimum an outsourcing agreement should contain the following four elements:

  • Terms – How to manage the relationship, what happens if disagreements arise, and what are each party’s termination rights.
  • Services – This is the Statement of Work (SOW) that describes the services being rendered and each party’s responsibilities. The explanation of “how” the services are to be rendered is often documented outside the contract in a Procedures Manual, to allow for more flexibility. However, all procedural changes must be approved by both parties.
  • Service Levels – The key measurements of what is expected and the minimum acceptable levels of service, with well-documented descriptions of potential penalties or “Performance Credits.”
  • Prices – Get prices upfront for everything you can imagine you might want. The price will be better during contract negotiations than when you ask for something later.

Writing it down causes both parties to better understand the other party’s vision. In most cases it is the process of “writing it down” that really adds the value.

6) Using Black Box Pricing

One price for everything sounds great until something changes. Then you discover that the provider can charge whatever they want because there is no pricing transparency.

Many vendors will price their services low with the objective of making up the shortfall on the Change Orders. Clearly understanding the components and what drives them gives you greater ability to make decisions regarding possible changes.

7) Not Providing Proactive Contract Management

This classic outsourcing mistake is one of the key reasons that outsourcing fails. Remember, even though you’ve outsourced a process or function, you’re still accountable for its performance as viewed by your organization.

Devising strong service level agreements (SLAs) is vital – but is not enough. You must also provide ongoing proactive management of both performance to SLAs and the overall relationship between you and your service provider. This is the only thing standing between you and service degradations, dissatisfaction, executive escalations, unplanned change orders and early renegotiation or termination of the contract.

Depending on the scope and scale of what you’ve outsourced, you may need to assign full-time resources, possibly even a team, to manage your contribution and the service provider’s performance. If this relationship is treated as a partnership, and the issues that will invariably arise are quickly addressed, it is likely your contract will run its term and allow you to renew or begin this process again.


About Jeff Richards

As an inspirational leader with the ability to develop the “big picture” strategy then drive it down to executable tactics for implementation, Jeff leads our Professional Services team. Clients benefit from Jeff’s 25+ years of experience developing and implementing transformative business strategies.

Jeff’s experience spans both industry (including Materials, Operations and IT Management) and consulting. He developed a unique global perspective during his tenure in significant P&L management-level positions in both Asia and Europe.

About CIO Professional Services

CIO Professional Services LLC is a top-rated IT (Information Technology) consulting firm, based in the San Francisco Bay Area, specializing in strategic IT consulting and business / IT alignment. Companies come to us seeking assistance with their information technology strategy as well as to source interim CIO / CTO employees or fractional CIO / CTOs.

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