The trouble with outsourcing...


You have selected a five star service provider, picked a tried and tested solution, and your lawyers have fought hard to negotiate your contract…so why has it all gone wrong?

In order to attain the intended benefits of outsourcing, change management and governance are critical to the process, and yet time after time outsourcings break down through failure to recognise this. Based on our own experience with clients across all sectors, we have identified our Top 5 change management and governance impediments to outsourcing. Accepting that change management and governance requires a continuous commitment from your authority throughout the outsourcing lifecycle (through planning, negotiation, implementation and delivery) will help ensure the success of your outsourcing.

1. Lack of understanding of the contract

Contracts are generally negotiated at a senior level of management, with input from relevant stakeholders at different intervals. Unsuccessful outsourcings are more likely to result where negotiations are rushed or where the relevant stakeholders are not fully engaged in the decision making process. Business managers do not always appreciate the detailed operational constraints that may operate within the business (e.g. the detailed requirements for processing of purchase orders), so appropriate engagement at the right time is essential.

Particular problems arise where (i) decision makers are ill prepared or unwilling to accept the outsourcing, which may colour their views on how the outsourcing should operate, or (ii) where an outsourcing contract is renewed, but with differences, with incumbent staff unaware, or unwilling to adopt a revised way of implementing the contract.

Many of these problems can be mitigated by:-

ensuring a joined up approach to instruction, with business managers, contract managers and operational staff involved in the decision making process during contractual negotiations;

(ii) taking the appropriate time to negotiate the contract and get it right first time;

preparing a detailed Contract Guide as soon as the contract has been signed, including legal guidance, and where appropriate, operational guidance. Essential to this is ensuring that all key processes are clearly defined and circulated to relevant staff; and
(iv) delivering training to legal and operational staff on the pertinent aspects of the new contract.
2. Lack of in-house management or resource
3. Loss of key personnel and poor knowledge transfer

For existing staff and incumbent service providers, outsourcings cause considerable uncertainty. At this time, staff may seek alternative employment elsewhere, potentially leaving your authority or your incumbent service provider either before the outsourcing (or renewed outsourcing) or during the transition period. In addition, operational staff may be diverted by transitional matters. Significant consequences can arise from this:-

Your authority or your contractor may require to backfill with inexperienced or unskilled staff, leading to service detriment;

Services may not be properly provided or managed during the transition, leading to operational risk;
Key knowledge for the outsourced service that is not fully documented, may be permanently lost.
These risks can be mitigated by public authorities:-
increasing resource during the transition to minimise service detriment;
requiring all service critical data to be documented and maintained during the lifetime of the contract or if an initial outsourcing, as part of the internal existing service provision, which documentation should be checked regularly by your contract management team; and

preparing for backfill by training other internal staff in relevant aspects of the services, or identifying appropriate external contractors in advance of transition.
4. Inability to meet demand/upscope

Demand fluctuations can arise for various reasons. Often, on the run-up to an outsourcing or outsourcing renewal, sourcing bodies will curtail projects. There are often legitimate reasons for this, such as anticipated commercial benefits under the new outsourcing or the additional expertise offered by the new service provider. This will often result in an artificially high demand for services immediately following the outsourcing, at a time when the new service regime has not been long established. In practice, arrangements for these new services, including how they are prioritised, estimated, approved, scheduled and performed will be made at a time when the services are in transition, with obvious risks for implementation. Authorities should be careful therefore to consider a more staged transition and service implementation programme, to ensure performance standards are met.

Sourcing authorities also need to consider which of its business requirements are likely to fluctuate in the future e.g. whether impending legislative or regulatory change may impact any of the requirements for services, and obtain warranties as to resource for such eventualities.
5. Customer resistance and cultural clashes

Service providers are increasingly tasked with the role as 'change agent' for the new service, with responsibility for changing the historical processes, behaviours, systems, software and even personnel. Rarely does the service provider have full control over all of these matters, and it is essential therefore that outsourcing authorities build in the necessary internal programmes to permit such change. This will often involve long term engagement with staff before during and after the transition. Even if short term behavioural changes can be managed, there remains the danger that staff will revert to old habits. Ongoing governance, and dialogue are essential to mitigate such risks.

Additionally, cultural clashes can arise, with different cultural expectations around speed of delivery, flexibility and decision making. These tensions arise increasingly with offshore outsourcings, where language and communication barriers can sometimes exacerbate problems. Authorities need to be aware of these issues and manage them appropriately. Cultural differences may result in a need for a more detailed contract, where 'industry norms' that may be implied in local supplier relationships cannot necessarily be relied upon in offshore deals. Local employment laws can also impact offshore service delivery - we have seen for example, offshore service level agreements in offshoring deals drilled down to permitted toilet and smoking breaks!