Publication Date: November 22, 1996

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Outsourcing: After the Honeymoon

By Ken Shulman

You've made the move. You've found a vendor. You've negotiated and signed a bomb-proof contract. From here on, you'll be able to concentrate on the guts of your business while the vendor will take care of all those messy computing and customer service problems that seemed to take up so much of your company's time and to generate so little revenue. You do what you do best. Your vendor does what he does best. Everyone wins, especially your customers.

It may sound like a marriage made in heaven. And in a few outsourcing relationships, it has been. For the most part, however, there are no fairy-tale endings. More and more, companies are learning that they have to work hard at living happily ever after with their outsourcing partners.

"Historically, companies have outsourced those functions that they no longer want to deal with," says Mike Wethington, president of Synet, a Minneapolis-based professional services organization whose clients include Nation's Bank, American Family Insurance and 3M. "They hire an outsourcer in the hopes that he can resolve all of their own internal problems. When you build a house, you don't cede all of your responsibilities to the general contractor. You work with him, so he builds the house that you had in mind. There has been a general abdication of certain functions in business, and particularly in computing and customer service. I believe this is a major mistake. Whether these functions are performed internally or externally, management has to be involved if it hopes to obtain the desired result."

As the practice of outsourcing becomes more common and mature, companies and their vendors are shedding many of their early illusions. Each side is realizing that there are no quick fixes to business or technology problems. Each side is realizing that the relationship will require constant attention and constant negotiation, no matter how well-defined the original contract may be. "The outsourcing contract is never detailed enough," says Pierre Gaussiran, who was hired as a senior manager by National Bank of Canada after the bank signed a 10-year, $1 billion (Canadian) outsourcing contract with IBM/ISM in May 1994. "I know this from experience, because it is my job to fill in the blanks."

With 641 branches and $50 billion (Canadian) in assets, National Bank of Canada had opted to outsource all of its computer operations including mail, printing and telecommunications functions. Because it also intended to sell its technology assets, the bank needed an outsourcing partner who was financially solid as well as professionally competent; this made for a relatively short list of candidates, and the bank eventually selected IBM/ISM. The final outsourcing contract ran over 200 pages, and included three binders of appendices as well as a listing of all the assets that were transferred in the deal. Still, one month after the relationship began, National Bank of Canada hired Gaussiran to manage the relationship on a full-time basis.

"You can't document everything that is going to happen," says Gaussiran, who holds weekly meetings with management personnel from both IBM and National Bank of Canada to discuss the state of their relationship. "There are always unexpected issues. And these have to be examined according to the intent of the contract, rather than according to what exactly has been written down."

Managing a Changeable Relationship

A number of factors can cloud what once appeared to be a crystalline relationship. Business conditions and objectives can change abruptly, requiring a radical revision of the outsourcing contract. Even the best agreement can be put to a severe test by the rapid and often unpredictable evolution of information technology. A company may agree on a price with an external vendor for mainframe support, only to move most of its operations into a client/server environment a few years into the outsourcing relationship. A change in software or hardware or business processes can radically alter the volume of work assigned to the external vendor. While some service levels can be indexed, it is virtually impossible to anticipate how technology will affect the nature of a particular outsourcing relationship three or five years down the road.

"No matter how thorough you try to be, you cannot foresee every detail," says Fred Joy, senior analyst at META Group in Stamford, Conn. "For this reason, a contract should not be considered ironclad. I've never seen one without a 'to be determined' or 'by mutual agreement' clause. You write a contract in a point of time. The way that technology and business are moving today, it doesn't take long for that point in time to be modified into a new situation. The way you handle change is of critical importance to the contract."

For many consultants, managing an outsourcing contract depends largely on being prepared to manage the vendor. Ceding too little control to a vendor can prevent him from performing his duties effectively. Ceding too much control could allow him to provide services that are not aligned with a company's business or customer service strategies. "It's all very nice to talk about partnerships and alliances with your vendor," says Jim Slane, director of IT services management at Onsett International Corp. in Cambridge, Mass. "But in the end, you are performing a business transaction with them. You want to create a very formal service-level agreement. You want to have positive and negative incentives. And you want to maintain some sort of leverage."

The most obvious - and in many cases the most effective - form of leverage a company can use to influence its external vendor is the threat of termination. "In order to maintain a credible position regarding service level and price competitiveness, you have to convince your vendor that you can go elsewhere," says Chuck French, a META Group consultant who specializes in managing existing outsourcing relationships. "Every effort should be made to avoid the termination of an outsourcing contract. But a good termination clause is a vital element of the relationship. We are not in this to beat up on the vendors. We understand what their cost structures are. But we have to convince our clients that they have a credible threat to terminate the contract and hire another vendor."

Short of termination, there are several other options available to companies that want to maximize the performance of their external vendors. Slane cites the case of Citicorp, an outsourcing contract his company helped to negotiate and continues to monitor, as an example of good vendor management. After concluding that an external vendor could provide a more economical desktop and LAN infrastructure, Citicorp negotiated an outsourcing deal with two companies: Digital Equipment Corp. (DEC) and Electronic Data Systems (EDS). In engaging multiple vendors, and in maintaining control of several key business processes, Citicorp is able to dictate the nature of the services that these vendors provide.

"These vendors are using Citicorp's common internal processes, as opposed to using DEC and EDS processes in separate areas," Slane elaborates. "In making the vendors conform to its standards, Citicorp remains relatively independent of its vendors. If it should decide to terminate its outsourcing relationships, it will not be a hostage to the vendors' technology."

While vendor management is essential to the success of an outsourcing relationship, too much attention can be as damaging as too little. Vendors need sufficient autonomy in order to perform their jobs effectively.

"When you hire a carpenter, you may tell him that you want your porch built in redwood, and in a certain shape or size," says Slane. "But you don't tell him how to swing his hammer or use his saw. Too many companies today spend their time trying to get a vendor to do a job in a certain way. For me, that's no longer outsourcing. That's contract labor. A company should concentrate on performance, not on effort or time or activities. Remember, you're hiring the vendor because he knows how to do certain things more effectively than you do."

Ken Shulman writes from Cambridge, Mass.

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Chuck French, Pierre Gaussiran, Jim Slane and Michael Wethington are featured speakers at DCI's Outsourcing Lifecycle Conference. For information on the next conference, please see our online brochure.

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