Tuesday, 4 January 2011

10 reasons why outsourcing so often disappoints the FS Industry

1.       Outsourcers don’t take enough time to understand the business outcomes that the client is looking to achieve
2.       Financial Services organisations underestimate the cultural transformation that outsourcing involves and rarely complete the transformation of the retained team.
3.       The measures on contract performance dashboards  contradict each other,  are over-complicated and are not aligned with delivering the desired business outcomes
4.       Financial Services organisations don’t take enough time to understand the outsourcer’s business and how and when they make money
5.       Most outsourcing advisors are just that, advisors, who have little or no practical, operational, hands-on experience of delivering outsourcing upon which to base their advice
6.       Financial Services organisations  engage contract negotiators who are rewarded for getting the cheapest (win-lose) deal not the optimal long term (win-win) deal for both parties, see outsourcing as a transaction and not a long-term relationship, have no incentive to keep the deal simple and have no long-term vested interest in the success of the deal
7.       Outsourcers have their sales team lead the deal, who are rewarded on the projected revenue and margin  of the deal with too little phasing  of commission based on performance of the contract. Delivery executives are, at best,  junior partners  in deal
8.       For outsourcing salesmen closing a deal is the only thing that counts (due to their competitive  nature and the make-up of their financial packages), leading to closing the deal being more important than the quality of the deal
9.       Outsourcers play ‘bait and switch’ – the best team are involved in selling the deal, but a less good team is left to deliver it
10.   Investment analysts continue to expect the very high margins  that early outsourcing deals had when the industry was in its infancy leading to unrealistic expectations being put on outsourcers driving scalping once the contract is signed


  1. I would add a couple of others:

    1. Contracts are often predicated on the world staying still for the length of the contract. ARCs and RRCs can be used to flex the contracted services up and down, but little regard is given to the mechanisms that are required to restructure the services as a result of fundamental shifts in the client's business model, competitive environment and user requirements. This can result in a contract that is basically performing to SLAs, but not meeting business / user needs.

    2. Clients often expect innovation for free. They need to understand that through the contract they will get the benefit of any core services and technology R&D undertaken by their Service Providers, and may also get additional benefit of R&D targeted at their sector in general. However, innovation that is targeted at their specific requirements doesn't come for free.

    3. Clients need to strike the right balance between retaining architectural control and allowing the outsourcers enough degrees of freedom to perform. I have seen many examples of client's security and architecture teams delaying approvals for months, which has had a direct margin impact on the outsourcer, both in terms of additional cost and SLA penalties.

  2. Thank you Kate. I absolutely agree with the 5 rules that you outline, each of which, in some way, goes to address the ten causes of sub-optimal performance that I outlined in the blog. Of course if you look at the opposite of each of the causes you find the ways to be far more successful in outsourcing. The ten points have been distilled from the many successful and less successful outsourcing relationships that I have worked on either as the outsourcer, the outsourced or have advised on.

  3. Jonathan - you should explore Vested Outsourcing. The University of Tennessee researched very successful outsourcing deals and examined what made them successful. One of the deals we studied was a Microsoft / Accenture for their back office procure to pay outsourcing deal which won both an Everest Award and an Shared Services Outsource Network award. The findings? The successful deals followed five core "rules" when structuring their deal and governance structure.
    - use an outcome-based vs a transaction-based business model
    - focus on the what - not the how
    - clearly define and measure desired outcomes
    - create a pricing model with incentives that optimize for cost/service tradeoffs (pays the service provider an incentive when the service provider achieves both)
    - create a governance structure based on insight vs oversight

    Bottom line - if you want success - do what is successful and follow the rules. It will avoid the 10 woes you outline.

    You can learn more at the University of Tennessee's dedicated website on the topic at www.vestedoutsourcing.com.

    Kate Vitasek
    Faculty, Center for Executive Education
    University of Tennessee


Please feel free to comment. Your opinion is important. All comments will be moderated before publication.