Tag: outsourcing relationship

There’s a US$90 Billion Dollar Party Going on – Are You Invited? Advice on Winning Upcoming Outsourcing Contract Renewal Opportunities | Sherpas in Blue Shirts

While there are increasingly fewer first generation outsourcing opportunities, a large number of IT outsourcing (ITO) and business process outsourcing (BPO) deals are coming up for renewal over the next 18 months. With US$90 billion in total contract value at stake, the renewal market provides cause for excitement or concern, depending on where your organization stands.

If you are a service provider with hefty contracts coming up for renewal through end of 2014, and have yet to agree to terms with the clients, you should be worried. Very worried. Chances are that your competitors have already formed teams of “hunters” and are circling your prized relationships, waiting to pounce. The reality is the incumbency win rate is falling from the 90s to the mid 80s, and is likely to plummet further, as buyers see renewal time as an opportunity to implement positive change:

  1. In a challenging business environment, enterprises are looking to alter contract structures to bring in stronger accountability for outcomes from service providers
  2. Buyers are increasingly open to unbundling large, sole-sourced contracts, thereby undermining relationship profitability as incumbents lose the opportunity to cross-subsidize deal components
  3. Enterprises are also using renewal time to shape and execute portfolio level strategies, as they seek to use more aggressive offshoring, leverage specialized and smaller niche players, or consolidate portfolios across a few key service providers

Following are several key components Everest Group recommends you include in your defend (your own) and attack (your competitors) contract renewal game plans:

Defense

  • Pinpoint vulnerable accounts and establish executive level connects long before the contracts come up for rebid
  • Identify competitors that may be eyeing your relationships
  • Address key concerns from clients. This can be tricky because your clients may not necessarily open up to your account managers. Having an outside-in perspective helps
  • Anticipate hearing, “There’s nothing wrong with you guys, we just decided to change our direction.” Here, you need to consider how well aligned you are with your customers. Can you walk your talk, and their walk? In certain cases, you might need to evaluate whether you want to end up cannibalizing your own revenues as the client wants to move to new operating models.

Offense

  • Identify competitors’ accounts under threat, and the clients’ key concerns
  • Pin down clients’ pain points and their associated fit with your capabilities. But note that these first two activities are challenging without having a neutral party the buyers can open up to
  • Generate focus within the sales organization. Have dedicated sales teams going after specific accounts, armed with messages that are likely to resonate, and are aligned with the prospects’ thinking
  • Beware of inheriting the poisoned chalice! There are certain accounts you want to avoid (and that your competitors will be happy to let loose)

It is unlikely that you will need just a pure offense or defense game plan. You might have to fight tooth and nail to retain certain relationships, but if you go about it the right way, there are large opportunities for incremental shifts in market share.

Let the US$90 billion dollar party games begin!

For drill-down data and insights into outsourcing transaction trends by function, geography, industry, and service provider type, and implications for key stakeholders (both buyers and suppliers), please see Everest Group’s newly released report, “Impending Contract Renewals: A Futuristic View of the Renewals Market Place.”

Indian “Strategic” Outsourcing Deals: Can the elephants dance when the music changes? | Sherpas in Blue Shirts

Time and again, we come across press releases from India’s biggest corporate houses announcing deals with large providers that are labeled “strategic” or “total outsourcing” partnerships. The hallmark of a typical strategic deal is a long-duration sole-source partnership with one large provider for infrastructure and/or applications. The provider is then made responsible for evolving a medium- to long- term technology roadmap for the buyer, and managing the execution of the roadmap through itself or other vendors.

Some of these partnerships are truly “strategic,” wherein providers genuinely share risks and rewards of the implementation, while many others are simply monikers for large, long-duration asset heavy deals with straightforward delivery objectives. Yet both cases seem to go counter to the trends in the mature sourcing markets, where buyers have long since abandoned such heavy-duty contracts.

There seems to be an interesting pattern among these buyers. They are typically telecoms or financial services companies that are trying to gain a foothold in newly deregulated or traditionally underserved markets with suddenly lowered entry barriers. These were large markets for basic, standardized products and services with low margins, where only a few would ultimately survive. In their race to be the “kings of the hill,” companies could afford to be customer-agnostic, as long as they got their basic services and sales models right. There are two important technology implications for companies in this phase:

  1. With heavy investments into sales and marketing, they start looking to other departments such as IT for investment avoidance. There is a tendency to put in place a leaner internal IT group, which is not equipped to handle a large set of provider relationships. Further, under budgetary pressures, they tend to view ideas on outsourced asset ownership and control more favorably.
  2. Facing haphazard and chaotic growth, management typically struggles to match capacity with demand. They increasingly look for partners that can bring predictability to their operations, with plug and play set-ups at service levels that are just about acceptable to end users.

Large IT providers that hear these management challenges when pitching are in a position to strike these large long-duration deals. And with well-structured contracts, the partnership may actually work very well…for at least the initial few years.

Problems in these deals start to manifest when companies are faced with two inflection point challenges:

Inflection in strategy: Sooner or later, slowing industry growth will bring the companies to re-evaluate their businesses. As already seen in the Indian telecoms industry, intense competition causes price points to steeply fall close to marginal costs, and companies then begin to shift their focus from chasing growth to profitability. This is the point at which companies typically start to pay attention to their customers and try strategies for differentiation – either through price skimming for value-added services or by offering adjacent products and services. This may involve following their profitable customers across their lifecycle at non-traditional touch points to fulfill unmet needs. At the other end, consumerization of technology will offer disruptive opportunities to reach customers and offer commoditized services at throwaway prices with minimal service costs.

To execute these strategies, companies will find they need to play in an ecosystem of alliances with partners requiring seamless transition of customer data to facilitate these decisions. Additionally, as they move towards customer-centric models, they will find a need to revisit their one-size-fits-all standard service models for technology and process infrastructure.

Inflection in technology: Buyers in strategic IT deals also implicitly assume that a seasoned IT partner will automatically bring cutting-edge innovative solutions as technology evolves. There are three important behavioral reasons for challenging this assumption:

  1. First, when there is a disruption in the underlying technology itself, it often arrives loaded with a lot of skepticism and lack of perceived commercial value right until the point it disrupts. Incumbent providers (with no better ability than buyers to foresee the end states) are likely to under-estimate comparative benefits of these disruptions in their assessments.
  2. Second, even in cases where the end states are clear, IT partners may suffer from conflicts of interest that prevent them from evaluating competing organizations or technologies for innovative solutions.
  3. Third, in the specific context of the account, the provider account organization tends to get settled into a well-oiled machine. With rising costs, it is motivated to scale down its “strategic thinking” on the account, and push more and more work under the factory mode.

No matter how “strategic” the relationship, IT partners often tend to advise or shape outcomes that are directionally well-guided by their contract clauses. When the buyer is grappling with strategic or technological inflection points that have not been foreseen at the time of contract inking, the partner is likely to default to choices that are limited by its own publicly held worldviews, capabilities and vested interests. While the choices may not necessarily be wrong, they do not benefit from a cross-pollination of ideas and approaches that the buyer would have had access to in a more open relationship. As Indian consumer markets and technologies rapidly develop, buyers may find this limitation increasingly unacceptable.

Are You Ready to Renew Your Vows With Your Provider? | Sherpas in Blue Shirts

The unfortunately all too frequent seven-year itch – “the spice is gone…should we stay together?” – doesn’t happen just in personal relationships, it also happens in outsourcing relationships. Past the mid-point of a 10-year outsourcing relationship (or whatever the length of the agreement) buyers and service providers often struggle to identify how to maintain the health and happiness of their contractual relationship. Buyers are interested in increasing the level of commitment from the provider, in the form of increased productivity or continuous improvement initiatives. However, the provider is often challenged with supplying service improvements and decreasing the cost of service delivery at narrowing profit margins. With the remaining years in the outsourcing relationship, what relationship modifications are required to ensure mutual benefits for both parties?

Organizations should review their changing landscape, organization, and business requirements to identify their long-term strategic objectives so they can decide on the model that is most appropriate for delivering their services and the supporting sourcing option(s) to help achieve their goals. For example, the fact that an organization is currently in an outsourced relationship does not require that it stay in one. If the organization has the internal capabilities, access to the necessary resources, and time to implement the strategic initiatives, engaging in a sourcing relationship may not be strategically (nor potentially financially) beneficial. However, an organization that is potentially looking for greater flexibility and scalability, access to new skills and resources that are not locally available, or to capitalize on new technological trends may consider partnering with one or more suppliers who have the ability to support the organization’s objectives due to lack of in-house capabilities.

An organization that chooses to engage in a relationship with a third-party service provider should ensure alignment for the long-term: strategic objectives (i.e., business and organizational objectives), cultural fit (i.e., mission and values), and solution requirements (i.e., feasibility and adaptability of the service delivery model to meet the organization’s needs.) An understanding of all three factors is imperative in determining the future strategy of the functional organization and shaping the future direction of the current outsourcing relationship.

What is the right change for your relationship?

There are several options you can consider:

1. Don’t rock the boat (i.e., Renew): 

  • After an honest look at your relationship, you realize that the ”same old, same old” is actually working for you
  • This is akin to renewing the sourcing relationship where you and your incumbent provider agree to continue with the existing contract with minimal changes  

2. Face lift (i.e., Renegotiate): 

  • Following discussions on trade-offs and compromises, you and your partner decide that some tweaking to your old routine is required in order for your relationship to continue
  • Similarly, you and your incumbent provider agree to modify one or a number of limited elements of the outsourcing contract, e.g., price and service levels

3. Overhaul (i.e., Restructure):

  • Small changes are not going to cut it. In order to make this relationship work going forward there must be some fundamental changes
  • In a strategic sourcing relationship, you may realize that while you’ve had a provider that has offered value over time and will continue to do so, it must be under a new set of circumstances. In this case, you and your provider can undergo a strategy exercise to restructure the services being you’re receiving to ensure that they align with your long-term objectives

4. Out with the old and in with the new (i.e., Re-compete):

  • You’ve talked it through with your partner and realize the relationship is not going anywhere. You need someone more supportive and responsive to your needs, and decide it’s time to see other people
  • The decision to re-compete your delivered services is driven not only by cost, but also by your organization’s long-term strategy. If you assess that your current provider is not capable of supporting your cost and strategic goals, it’s time to start seeing other service providers

5. It’s not you, it’s me (i.e., Repatriate):

  • You’ve assessed your relationship, and discovered that you are happiest being on your own.
  • Over time, as your organization evolves, you may find yourself in a position where your long-term goals are best met by bringing services back in-house. This can be the result of M&A activities, a fundamental shift in business strategies, etc.

All kidding aside, buyers must go through a complex exercise when approaching the end of their strategic sourcing relationship. The initial step is to understand their organization’s 10-year strategies and objectives, then begin assessing the current relationship for fit. We typically find there is no single correct answer and, instead, the resulting engagement strategy is a hybrid of the above options. As the marketplace embraces new technologies, the multi-vendor answer is becoming increasingly common. Unlike in personal relationships, it may be beneficial for an organization to have more than one sourcing partner to maintain competitive tension and to optimize the fit with the buyer’s strategies. Organizations can choose their flavor of service providers, a Tier 1, niche, or offshore provider, depending on their objectives and requirements. However, they need to balance the complexity of managing a multi-vendor environment against the benefits provided by each vendor. We strongly encourage full disclosure and consistent communication in a multi-partner model to ensure smooth day-to-day operations and successful service delivery from both/all providers. After all, a little competition never hurt anyone.

Not Having Problems is a Problem | Sherpas in Blue Shirts

I always pause, and frequently cringe, when buyers in the first months of a new outsourcing relationship say that everything is going well because they are not having any problems. Although a honeymoon period is attractive and lulling, it isn’t reality. Reality is that the success of an outsourcing relationship will not be measured by the absence of problems, but rather by the ability to effectively resolve problems.

Outsourcing engagements are far too long and involve too much change to expect that the need to address misalignment at some point (or many points) during the lifecycle of the agreement will not arise. The sooner the buyer and supplier face this fact and begin proactively dealing with potential problems, the better the relationship will perform over time. Solving problems together is a habit, and it should be intentionally cultivated.

Over the past eight years, I have had the benefit of meeting many winners of Everest Group’s Outsourcing Excellence Awards, which annually recognize excellence in outsourcing relationships between buyers and suppliers. Both the buyer and supplier relationship managers apply for the award, submit to detailed interviews and, if chosen, participate in the annual awards event.

I am consistently struck by how the winners of these awards describe the strength of their relationships in terms of the challenges they have overcome. They are not stories of “love at first sight” followed by “happily ever after.” Additionally, most of the winners seem to have a buyer who is unafraid to point out the ugly in a situation, but then focuses on being constructive in helping address the ugly – whether it be the supplier’s ugly, the buyer’s own ugly or a joint ugly.

Open communication clearly helps enable such a relationship, and aids in creating a mindset of building the relationship to endure and avoiding unhelpful blame games (note this does not mean avoiding addressing root causes). I’ve observed that there are three signs of a positive relationship that has developed the joint habit of effective problem solving:

  1. Respect for the motivations of the other. As the buyer and supplier develop an appreciation for each other’s motivations, they have the opportunity to develop trust – and trust is critical to a solid, ongoing relationship. Similarly, each must truly respect the motivations of the other. They must not try to over-simplify or argue the motivations, but rather use the understanding to see situations through multiple perspectives. This ability to honestly see through multiple lenses enables generation of more creative solutions for resolving problems.
  2. Confidence in bringing others into problem solving. The teams managing a relationship are often hesitant to bring others into a problem-solving session. They typically fear this will be viewed as failure on their part, or that it may create unintended and unpredictable outcomes. As a result, most problems stay within the day-to-day team too long, and are raised only as the problem intensifies. By more confidently bringing others into problem-solving efforts, new ideas can be considered more quickly. Additionally, others can often help remove constraints that may be limiting the current problem-solving initiative.
  3. Humor to keep things in perspective. While problems shouldn’t be taken lightly, they must be kept in perspective. Issues that arise this week, month or quarter will be replaced with others. There will always be new challenges, and the tone with which they are addressed should be as constructive and pleasant as possible. If the tone is negative and unconstructive, human nature dictates that everyone will want to avoid dealing with them! A small bit of humor and being able to poke fun at the situation can help remove the emotional edge and allow everyone to focus their energies on substantive solutions. Besides, if you can’t enjoy working with each other, then something is wrong and needs to change.

Preferring smooth sailing is natural, but not realistic. Not being real about solving problems is the bigger problem – and the one that will linger. Start early in developing the right habits for solving problems and your outsourcing relationship will be stronger and more able to stand the test of time.

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