By starting with four basic elements in agreements, buyers can realize the transformation objectives they desire but often struggle to achieve from their outsourcing relationships. Read on to learn recommendations from our findings evaluating sourcing proposals over the past two years.
It is no secret that when buyers evaluate proposals for IT and BPO work in a managed services model, they consider various criteria such as provider capabilities, cultural alignment, pricing, etc. But one of the most important selection criteria, without a doubt, is the transformation the organization can achieve through the provider’s solution.
Based on our experiences in reviewing existing engagements, transformation is the biggest gap between buyer expectations and provider performance. The outcomes often are not transparent or measured, and when they are, the results are subpar.
This observation is astounding. Transformational outsourcing can reduce the outsourcing spend or total contract value (TCV) and improve the user experience, quality, and timeliness. While buyers know they need to focus on this critical aspect, they visibly struggle to realize the desired transformation objectives through their outsourcing relationships.
Here are a few examples that highlight the extent IT and BPO providers can fall short of expectations:
Example 1: A Tier 1 IT service provider was near the end of an application management service contract with a mid-sized US-based manufacturer. During the entire term, it charged the client for specialized automation resources as well as proprietary automation platforms. While the provider believed it had done a great job by piloting various use cases, no meaningful reduction in the number of full-time equivalents (FTEs) could be attributed to its efforts, leaving the customer dissatisfied.
Example 2: A leading BPO service provider was in the middle of its managed BPO services contract with a large UK-based client. Even though multiple transformation projects had been initiated and completed, neither the provider nor the client had measured the results because it was a fixed-price contract, making the business benefits unclear.
Four elements to ensure transformation
To overcome issues with lack of transparency, the following elements should be included in agreements after the initial proposal sales spin:
- Have the provider commit to a practical level of benefits from transformation
- Agree to a mechanism to measure the benefits and hold the service provider accountable for delivering on them (for example, link non-performance to reduced fees for the provider)
- Ensure regular transformation governance to identify new initiatives, track execution of existing ones, and measure the intended benefits compared to the plan
- Incentivize providers to deliver beyond the committed benefits through mechanisms like gainsharing
Once these basic aspects are part of the agreement, further steps can be taken to ensure the benefits realized are best in class and transformation is achieved.
Discover more about outsourcing deals and contracting in our webinar, Pricing Actions to Capture Outsourcing Savings and Drive Success in 2023.