By Steve Ranger, 24 November 2005 13:25
NEWS
Companies that use harsh service level agreements to bully their outsourcing supplier could be missing out on a "trust dividend" worth up to 40 per cent of the total contract value.
Outsourcing based on mutual trust can create a 20 per cent to 40 per cent difference on service, quality, cost and other performance indicators, according to research by LogicaCMG and Warwick Business School.
Companies should agree a relationship charter with their outsourcing partner to set a benchmark for behaviour, and make sure regular health checks, balanced scorecards and senior executive dashboards are used to monitor progress.
The report said this means that the days of traditional outsourcing contracts, in which companies rely on punitive service level agreements (SLAs) and penalties to their service provider, are numbered.
Report co-author, professor Leslie Willcocks from Warwick Business School, said in a statement: "We found that contracts with well-managed relationships based on trust - rather than stringent SLAs and penalties - are more likely to lead to a 'trust dividend' for both parties."
He added: "Our study found a number of outsourcing contracts where adversarial behaviour, inexperience or lack of confidence led to the demise of a relationship."
And he warned: "Ignoring the value of properly managed outsourcing relationships is tantamount to corporate negligence - simply because it has such a huge impact on return on investment and the potential value gained from outsourcing."
Andrew de Cleyn, senior vice president, global service delivery at LogicaCMG, said in a statement: "Power-based relationships are poor substitutes for trust-based partnerships given the high transaction costs of monitoring and imposing sanctions and the limited goals that can be pursued by both parties."
Comments
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1. martyn
Is this "be nice to your outsourcer week" and I've missed the announcement?
Everywhere I look there are articles about how it is the purchasers fault if things go wrong, don't take stuff back inhouse, client was inexperienced etc etc.
Meeting your commitments and not whining continually is the best way to keep a client happy.
2. Charles Smith
The outsourcers now plead that their performance should not be monitored by SLA's? The reported wording reflects mumbo jumbo management speak that would delight an Professor of MBA studies, yet evoke hysterical laughter from a contract lawyer.
Are they saying that if contracted service levels are not achieved that their clients should shrug their shoulders and do nothing?
Non-performance of agreed service levels is the equivalent of a hidden price increase.
Are these outsourcing experts really admitting the projected cost savings by outsourcing (service importing) may be imaginative fiction?
3. Spencer Allman
Reality… Most outsource agreements are so unbalanced in terms of commitments, remedies, and risk in favor of the outsourcer (as they are based on their form agreements) one can often only conclude TRUST is about all the clients can count on. As a result, the outsourcer posses the power. One could say TRUST as a relationship principle has a well-established track record. Can we give Governance an opportunity, please?
Only a firm that failed to meet their promises would suffer penalties, right? And now those same firms which have failed to meet their promises want us to abandon diligent management process and rather trust them. Huh?
It’s well understood that penalties never begin to cover the actual cost to the business of service delivery failures. No IT organization wants to ever collect penalties from an outsourcer. If fact, penalties are not penalties in the true sense at all, but incentives to ensure delivery commitments are kept. Businesses are most satisfied when commitments are kept. TRUST ME.