Outsourcing: Breaking Up Is Hard To Do

By Robert McGarvey

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Here’s the problem: you are increasingly frustrated with your outsourcing provider, which is experiencing extraordinary employee turnover, they are not showing creativity in problem solving, and they are resisting tweaks to the contract designed to put their focus where you really need it, not where you thought you needed it when the contract was inked two years ago.

At least those are the big grumbles heard increasingly from many companies that have been outsourcing. Word of advice: before dumping that outsourcer know that breaking up just may bring even more and bigger problems your way. That’s the testimony of experts and also of companies that have navigated these waters.

Reality check: Know for starters is that pretty much every major outsourcing destination is showing stress. Across India, the primary offshore destination for outsourcing contracts, complaints about turnover are legendary and prices are definitely on the rise as India wrestles with a strengthening rupee and internal inflation. But it’s not just India that’s experiencing issues. China, too, is struggling to meet demand and complaints about Russia are mounting.

Another reality is many companies are now looking to move to new outsourcing providers. The outsourcing industry is maturing and many multi-year contracts are coming to the end of term. The upshot: “We are seeing a greater propensity for shifting outsourcing contracts,” said Michael Latchford, a principal consultant in PA Consulting Group's IT Consulting practice.

Also driving this is “a push for vendor consolidation,” said Peter Bendor-Samuel, CEO of the Everest Group, a global consulting firm focused on outsourcing. According to Bendor-Samuel, many large companies have determined it’s more efficient to trim the number of outsourcing partners and that’s increasing the tumult in the sector.

If the good news is that there’s mounting movement of outsourcing deals, the bad news is that changing vendors raises its own, typically thorny issues. “This is not like switching long distance plans,” said Doug Mow, a senior vice president at outsourcing provider Exigen Services.

“What’s in your contract with the outsourcer regarding transition?,” asks Latchford. “What access to data does the contract give you? What do you own?”

This is the nasty rub and it surprises many organizations that set about shifting to another outsourcer. That’s because most had a comparatively smooth experience moving work to the outsourcer. Emotions of downsizing aside, there was no question about ownership of process or data and, in most instances, the internal employees whose positions were being eliminated cooperated with the shift—if only to keep their paycheck coming in as long as possible. Third-party outsourcers may not be so cooperative, and neither may their employees who just may circulate their resume on the first day they hear about the loss of the contract.

And that just may trigger enormous difficulties for the company that’s looking to shift to a new outsourcer, e.g., Do you still know how to get the work done? The question is definitely not academic, said Jagdish Dalal, managing director of the International Association of Outsourcing Professionals. “When companies outsource, they often lose the know-how associated with the outsourced work.”

“Be honest with yourself about how much visibility you have into your vendor and the work processes,” cautions Latchford.

Easy Pezi, Sometimes

Warnings aside, in some cases, the hurdles turn out to be small. At Internet security company Ping Identity in Denver, Bill Wood, vice president of engineering, relates that when his company shifted a big outsourcing contract (“we were getting sloppy work and the provider had very high attrition”) from India to Russia, “ … we held all the code, we always had, so switching was no more complicated than throwing a switch.”

But in other cases, a transition is lengthy and arduous. When senior healthcare provider Golden Door moved its outsourcing contract, company CIO John Derr said that between “ramped down” efforts by the outgoing provider and the need to bring the new provider up to speed, productivity took a hit for 12 months. And that’s despite the fact the contract provided for a mandatory nine-month period of cooperation with transition on the part of the terminated provider. Detailed contract language also gave Golden Door ownership of all relevant knowledge—“It’s an open question how easy it in fact is to get the knowledge back, no matter what the contract says,” indicates Derr.

Derr adds that those challenging experiences aside, he recently thought about switching providers yet again. But settled for a “heart to heart talk” about what he really needed to see from his outsourcing vendor.

Do understand this however: even when switches go easily, nobody is suggesting that it’s smart business to move to a different outsourcer on a whim, or even on a possibility of saving a small amount of money. That just would not be smart. Ping Identity’s Wood, whose switch was painless, indicates that every week he gets three or four calls from would-be outsourcing partners. He’s happy with his Moscow partner’s price, the work is good quality, so Wood just hits delete on proposals to switch. When the going is good, the good keep going … that is just smart business.