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How Outsourcing can Cost you Time and Money

By Nick Abrahams and Nick Martin 

In a recent UK case, BSkyB was awarded a £200 million interim damages payout against its outsourcing vendor as a result of a failed outsourcing projects. This case has refocused attention on what can happen when outsourcing arrangements do not go according to plan.

This case coincides with the Australian release of a survey conducted by international legal practice Norton Rose in relation to technology sourcing practices. They surveyed 40 CIOs, general counsel, heads of procurement and senior executives at technology vendors and customers in the UK, Europe, the Middle East and Asia. The respondents came from a diverse range of business and industry sectors.

The take-away message from the survey for customers is that procurement should be placed firmly at the core of corporate strategy and have proper resources allocated to it for maximum benefit from IT expenditure to materialise.

For vendors, the survey findings provide a valuable insight into the “state of the nation” in terms of the attitudes, aspirations and concerns of corporations buying their technology. Below are some of the findings from the survey and lessons both sides can learn from them.

Commercial Drivers.

Customer interviewees were asked what were the main commercial drivers underpinning their technology and outsourced services sourcing strategy. Unsurprisingly, the most frequently-cited responses were cost reduction and increasing business efficiency, but these were not the only important factors. A healthy proportion of respondents, especially in the banking and insurance sectors, cited access to new technologies and the introduction of market leading systems as being the main commercial driver. Surprisingly, and worryingly, a significant minority of respondents felt they were not “close enough to the business” to give a definitive view as to the main commercial driver. An endemic ignorance of what drives a sourcing decision will inevitably reduce the chances of the project being successful, or make success harder to measure.

Investing in procurement.

Interviewees were asked how they selected teams for sourcing projects, and less than one third of respondents said they regularly involved business sponsors in the teams, with some customers perceiving that it was often difficult to get senior management engagement. This presents a real danger that the sourcing will not meet the business objectives, and the IT and procurement specialists “running the show” will view the procurement too narrowly, concentrating solely on financial or technology aspects. In addition, 38 per cent of respondents said sourcing team members were often expected to progress the procurement alongside their “day job”. Again, this is a concerning issue. It is crucial that the selected sourcing team members have enough time and resources to fully commit to the project.

Building relationships.

83 per cent of customers said they wanted to build strategic partnerships with their key technology vendors. However, both vendors and customers said in reality their relationships often did not live up to expectations, and struggled to identify objective criteria against which relationships could be judged. Most customer respondents wanted to form a “strategic partnership” with vendors supplying business critical systems over the longer term, but there was no consensus on what that meant and relatively few customers felt such a relationship could be mutually beneficial. From the vendors’ perspective, the ubiquitous “strategic”, “partnership” or “alliance” label was too often meaningless or didn’t match the reality of an aggressive procurement with a customer only interested in hammering down price or securing robust contract terms. Both customers and vendors would do well to bear in mind that a true strategic partnership is one where both parties have a positive influence over the other’s business, and act accordingly from the outset.

Getting the contract right.

In sourcing, a good contract is one fully aligned with the business case and success criteria for the project. However, there was no consensus amongst respondents on what was good practice for ensuring contract terms were aligned with business needs. Only 43 per cent had a formal procedure in place to ensure the contract was aligned with the underlying business case. Very few respondents had a process whereby the original business sponsor reviewed the entire contract before its execution. Clearly, a one-size-fits-all approach cannot work. The entire project team, not just lawyers, must be involved in contract preparation, and enough time must be built into the process to allow a full contract review before execution to avoid operational issues further down the track.

In summary, outsourcing continues to grow in popularity, though it has changed from the days of the massive “big bang” deals of 5-10 years ago to more short term strategic sourcing projects. Alignment of the interests of the customer and the vendor are critical in any outsourcing deal and this can often be a time consuming task at the beginning of any such relationship. However, given the time and money lost in failed engagements (not to mention disputes/litigation), it is time well spent.

Nick Abrahams is a partner and head of Sydney office and Nick Martin is a senior associate with international law firm, Norton Rose. Nick will set out the full findings of the Norton Rose Outsourcing Survey at the Norton Rose seminar on “Global Best Practice in Outsourcing” to be held in Sydney on March 31 2010.

Source:  The Sydney Morning Herald

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