When Outsourcing Goes Off the Rails

The practice of using outsourcing as a management tool is little more than 10 years old, and many executives who used outsourcing early on are now facing the end of an outsourcing relationship entered into in the early 1990s. Some of these deals have proven to be less than satisfactory in meeting the original goals and objectives that motivated the client to enter into an outsourcing arrangement.

A significant percentage of major outsourcing agreements implemented during this period terminated in failure; others were renegotiated as a result of this dissatisfaction. The American Management Association has estimated that 25 per cent of all outsourcing deals have failed. Analyst groups have suggested that 60 per cent of the current outsourcing deals will not be considered successful.

Invariably, the root cause of failures in outsourcing arrangements is found in the “scope” definition contained in the contractual documents. In a Computer Weekly report, Stuart Payne, COO at outsourcing consultancy Morgan Chambers, remarked, “The classic example of a customer not getting what they expected from outsourcing usually boils down to the fact that they did not think carefully enough about what they wanted. Most suppliers are clearly able to offer value-added services, but these things have to be properly articulated from the bidding stage of the deal and then written into the contract.”

Now that outsourcing has a track record to look at, we are in a position to better understand the dynamics of such relationships and learn how we can make them better. The 10-year contract inked in 1994 by U.S. rail company Amtrak with outsourcing firm ISSC is now past the halfway point, and serves as a good example for exploring the outsourcing relationship. It is now obvious that some of the goals and objectives were not achieved to the degree expected. With hindsight, it is easy to identify the reasons neither Amtrak nor ISSC fully achieved the benefits expected from the arrangement.

For Amtrak’s part, some of the reasons for not achieving the expected benefits included: too much focus on tactical goals and not enough focus on strategic goals; slowness at dispute resolution; inadequate contract management; slowness in addressing service level failures; and the making of informal modifications to the contract. On the ISSC side, problems occurred due to: staffing issues; scope issues; underestimating moves, adds and changes; and underestimating desktop user requirements.

Several other factors contributed to the difficulties in the relationship:

• The companies failed to develop an explicit and mutual understanding of all scope requirements.

• Both parties focused too heavily on legal and financial issues and concerns.

• The subcontracting plan received too little attention prior to signing the contract.