DWF’s Top Ten Trends in Outsourcing Relationships

Date: 28/07/11

Outsourcing has evolved.  Suppliers are working harder to reassure customers that their arrangements can deliver a range of genuine benefits.  Customers are becoming more realistic as to what a supplier can deliver.  Both parties are more enlightened as to the characteristics of a successful outsourcing relationship.  As a result, whilst customers will still inevitably focus on cost there is a growing realisation that a failure to focus on other key characteristics may drive unhelpful behaviours which may destabilise the relationship.

1.              Desperately Seeking….

We predict (and have already seen) increasing reliance on outsourcing arrangements, particularly in the health and education sectors.  We also predict increasing use of shared services i.e. the use of a common supplier/service to a number of different customers with identical requirements.  Whilst we expect to see increasing use of outsourcing in both the private and public sector, we expect to see the greatest growth of outsourcing and shared services in the public sector.

2.              Just Good Friends….

As customers become more enlightened about their own roles and responsibilities in an outsourcing relationship, we predict an increased focus on working collaboratively with suppliers.  This will go beyond the high-level statements around 'working in partnership' which are difficult to meaningfully capture in a contract and will be implemented through the use of detailed collaborative methodologies and frameworks (including British Standard 11000: Collaborative Business Relationships).

3.              The Long Engagement

Increasingly, we see effort being expended in assessing the cultural ‘fit’ between the customer and the supplier to ensure that the two organisations can 'get on' rather than focusing solely on the commercial profile.  Such assessments include checking references, site visits with other similar customers, assessing the way in which the supplier responds to the tender process, understanding whether the 'sales' team will remain involved after supplier selection etc.

4.              Marriage – Not Just a Wedding

At the height of the outsourcing boom, some customers expected suppliers to solve all of their problems.  Outsourcing was seen as a process by which a customer’s problems could be ‘thrown over the fence’ for the supplier to fix.  As outsourcing arrangements have matured, there has been an increasing acceptance by customers that in order for an outsourcing relationship to succeed, the customer must take responsibility for clearly articulating its objectives and priorities in electing to outsource services, to constantly review those objectives and priorities with its outsourcing supplier and to keep clear channels of communication open with its supplier. 

5.              Love & Marriage

Increasingly, outsourcing relationships are viewed as lifecycles rather than transactions.   The outsourcing lifecycle is often lengthy and complex but the foundations of a relationship must be strong if the relationship is to prosper…….

6.              The Honeymoon

The outsourcing market has reacted to customer dissatisfaction with the failure of outsourcing relationships to achieve the results which were envisaged at the beginning.  We predict increasing use of outcome based agreements where the success of the relationship is not gauged by the supplier's compliance with service levels and KPIs, but by having its success (including its financial success) pinned to the supplier's achievement of clearly defined objectives or outcomes.

7.              Lawful Impediments

As the outsourcing market matures and the legal and regulatory framework continues to evolve, we are seeing customers focus on legal and regulatory compliance issues (particularly in regulated sectors such as financial services where certain rights and obligations must be flowed through to the outsourcing contract).  With the upsurge of interest in cloud computing, ever-increasing sanctions for failure to comply with the Data Protection Act 1998 and the advent of the Bribery Act 2010, we predict increasing focus by customers on the supplier's use of personal data, security arrangements and robust policies and procedures (particularly where supplier's seek to perform services from off-shore locations).

8.              Clouds with Silver Linings

Outsourcing and technological developments are inextricably linked.  New technology provides suppliers with ways of providing innovative, agile ways of working together with service improvements and process efficiencies.  We predict a continuing increase in use of cloud-based technology (as well as other 'pay-as-you-go' models) and consolidation in the cloud computing market as niche players are acquired by larger service providers.

9.              Until Death Us Do Part

Outsourcing methodologies envisage distinct phases as part of an end-to-end lifecycle process including selection, negotiation, contract management and exit.  Our experience of less successful outsourcing relationships is that parties have often failed to maintain clear channels of communication at the right levels within the organisation and to work together to solve issues which inevitably arise.  We predict increasing focus on pragmatic governance arrangements which are tailored for each relationship (and which are not based on an over-engineered 'standard' schedule produced by a law firm requiring endless meetings for no apparent reason).

10.          D.I.V.O.R.C.E

Think about the end at the beginning.  History tells us that not all outsourcing transactions are successful and even successful relationships may eventually come to an end as businesses are bought and sold or as commercial strategies change.  Our prediction is that customers (particularly those who have experienced difficult exits from previous relationships), will spend much more time focusing on the end-to-end relationship including exit and transition issues relating to data, technology, IP, property and staff both on termination and in mid-term step-in scenarios (particularly in the current economic climate where customers may be concerned about the financial strength of certain outsourcing suppliers).