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Current Trends & Pressure Points In Outsourcing

February 9, 2011

Are many new outsourcing deals on hold until we have a better mousetrap? Has the adverse publicity regarding disappointing – and failed – outcomes resulted in many executives questioning the whole principle of outsourcing as a way to run their business?

These were among the questions that were addressed during my recent conversation with Brad Peterson, partner at law firm  Mayer Brown and a widely recognized expert on outsourcing. Early in our discussion, Brad described how the market today is far more driven by renegotiation of existing contracts than by new deals. The surge in outsourcing that was expected as a result of the economic downturn simply has not happened.

Quite clearly, many business leaders remain strongly focused on reducing costs; and outsourcing is still widely perceived as a route to cost reduction. So why wouldn’t volumes be soaring? The answer seems to be two-fold. First, cost reductions are not always proving sustainable. Second, many relationships are proving inflexible in the face of rapidly changing market conditions. Hence there is more concern right now about restructuring what is already in place, than there is about adding to the portfolio.

The interview explored the reasons why current outsourcing deals struggle to deliver to their value potential. And much of the problem seems to lie in the unilateral focus on up-front cost and the failure to think through the true value sources and priorities. This means that far too many contracts are awarded on the wrong principles and the wrong terms and conditions. Resulting relationships not only lack harmony, but are often dysfunctional from the outset.

One key point to emerge during our discussion – which picks up on a theme from a number of my recent blogs – is that renegotiation is perhaps becoming ‘the new normal’. One major learning from recent outsourcing experience must be that long-term (3+year) contracts are inevitably subject to change – not just once and not just minor. Change must therefore be facilitated through appropriate performance monitoring and through clear change procedures. Establishing these begs a number of questions regarding the underlying economics of the deal and may well require new thinking about the scale and source of investment. In Brad’s experience, this issue is becoming better understood, but is not yet adequately addressed in most contracts, except that the right for the customer to terminate early, with a specified termination fee, is becoming more common.

We also discussed a recent report from EquaTerra that suggested contracts are becoming longer and that negotiations are becoming more confrontational. Brad agreed with both findings and commented: “Before the recession, there was more talk about partnering and collaboration. The downturn switched customers back to an unrelenting focus on cost; this has forced suppliers to cut corners, to find sources of saving. Overall, this makes things more adversarial”. And when it comes to contract length, Brad sees increased regulation as the major culprit. He cited as an example the ‘virtual doubling’ of privacy and data protection rules in the last 3 years.

The full interview is available to IACCM members on the website at www.iaccm.com.

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