Cure Transaction based Outsourcing Pitfalls, Enter Vested

Vested Outsourcing – Five Rules that well transform outsourcing by Kate Vitasek (published by palgrave macmillan) gave a fresh perspective of why most of the outsourcing contracts fail in the end and how rectify this malady rampant in the IT outsourcing business.

Let’s look at the traditional reasons for outsourcing, even though cost is one of the primary reasons, there are many more

  1. To improve product or service quality
  2. To mitigate labor shortage
  3. to better respond to capacity constraints
  4. As a catalyst for a major step change that cannot be achieved in-house
  5. To enable the company to focus on core competencies
  6. To provide seamless 24×7 services or development
  7. For cost restructuring or converting fixed costs to variable costs
  8. To reduce time to market by accelerating development or production through the additional capacity
  9. To reduce risk by transferring risk to the service provider

Common issues with traditional outsourcing approaches or the 10 ailments:

  1. Penny wise and pond foolish
  2. The outsourcing paradox: outsource to expert but insist on defining the requirements and work scope very strictly leading to inefficient processes for service provider
  3. Activity Trap: the more transactions I perform the more money I make – doesn’t matter whether it’s needed or not. In one outsourcing agreement, the new manager didn’t require any previous reports but he kept getting 300 unwanted reports as per previous agreement and was charged $75 for each report costing 22.5k grant each month
  4. Junkyard dog factor: duplication of overheads and over-prescriptive process management – typically happens in retaining best employees to write the SOW – rather than sending them to the other side
  5. The Honeymoon effect: Each other want to impress first but reality takes over later
  6. Sandbagging: to prevent honeymoon, time based incentives/bonus payments kick-in only to make the other side only do the necessary to get the bonus and nothing much
  7. Zero-sum game: always lead one to win and other to loose and the repercussions. Whatever good for outsourcing guys is bad for the company that outsourced.
  8. Driving Blind Disease: lack of formal governance process to monitor the performance of the relationship, dashboards and scorecards are important to track.
  9. Measurement Minutiae: to much micromanaging has its counter-effects
  10. The power of not doing: Establishing measures of the sake of measures and never following up with action – kind of missing prevention is better than cure concept

Outsourcing Models

  1. Transaction Based: You do and I pay
  2. Outcome based: You deliver a 20-minute turnaround time for a specific activity, I pay for this result
  3. Investment based: Become another profit center
  4. Vested based: a hybrid model that lies between 2 & 3

Rules to make it work:

  1. Focus on outcomes, not transactions – WIIFWE and not WIIFME – what’s in it for me
  2. Focus on the WHAT, not the HOW
  3. Agree clearly defined and measurable outcomes
  4. Pricing model with incentives to optimize business
  5. Governance structure provides insight and not merely oversight

It has a good case study on Dell & Genco ATC vested model journey.