Warning Signs Part II: Is Your Outsourcing Agreement in Trouble?

As the months and years go by and the contract lawyers, advisors, solution architects and salespeople who were involved in your outsourcing agreement become distant memories, it is not unusual to find that some of your original sourcing objectives are not being met as you had envisioned.

Frequently, it is difficult to figure out exactly what is wrong, but you know that something is no longer working the way you have come to expect it to. In our previous eNewsletter, we described the first six warning signs to look for when assessing the current state of your outsourcing agreement, below are warning signs 7 – 12.

Each of these points below can indicate that it’s time to take some sort of corrective action. By understanding and acting on these warning signs early, you can maximize your upside opportunities and minimize any negative impact and value leakage.

7 Performance Metrics

 The intent of performance metrics is to measure the provider’s overall performance by virtue of concise, unambiguous metrics that are both easily understood and simple to validate from a client’s perspective. Service Levels Agreements (SLAs) and Key Performance Indicators (KPIs) target levels should be aligned to your business needs. Sometimes, the provider struggles to meet the service levels, and in these cases you and the provider should be discussing them in a structured manner to determine the root cause of the problem, if any penalties are due, and suggestions for permanent corrective actions.

A common phenomenon that often goes unchecked is “seeing green, but feeling red.” This occurs when the service levels are technically being met (and the provider is feeling good) but you sense there are still significant issues with the provider’s delivery of services. In this case, you need to dig deeper. Either the service levels are not aligned to your current needs or the metric calculations are incorrect. You should review your options for re-allocating service level credits, promoting or demoting performance metrics in importance based on changed business priorities, and creating new service levels to measure performance in new areas not originally envisioned when the contract was signed.

If your agreement contains continuous improvement language, you also need to ensure that the calculations have been done correctly and in a timely manner to raise the expected and minimum levels of performance. Obtaining and maintaining alignment of service levels to business needs is essential for the long-term health of the relationship

8 Geo-Political Risks

Most likely, your provider has moved some IT support functions offshore. While many locations, such as India and the Philippines, are reasonably stable, other locations may cause you concern and be viewed as higher risk. Review your contract to determine your current rights regarding service locations. Also, determine your role in reviewing and approving any future movements of work.

Talk to the provider and understand the specifics regarding disaster recovery and business continuity plans for current delivery locations. If there is an issue affecting a site, how will services to you continue uninterrupted? Ask about things like redundant networks, backup sites, cross-training of personnel, and physical security. A provider may pay a service level penalty if they miss a metric due to site issues, but it’s probably only a small percentage of the actual business impact to you and your company. For this reason, this issue may be more important to you than to them, so you will need to continue pushing for an acceptable resolution.

9 Changing Technology

As time goes by, your IT requirements will change in response to changes to your business drivers and as new technology becomes available in the IT industry. Recent examples of advances in the technology industry include server virtualization and cloud computing. Is your contract flexible enough to adapt to these kinds of changes? Some changes may require substantial re-engineering of pricing mechanisms, SLAs and/or statements of services. You should view changes in technology as opportunities to restructure the affected components of the contract, ideally with lower costs for your provider resulting in lower prices for you.

10 Process Misalignment

Outsourcing providers will want to use their standard processes for delivering services. While leveraging the process capabilities of a provider is a good thing in general, the processes are often rolled-out into the environment without a true understanding of how they need to interface with processes used by business end-users and your retained IT organization. Misaligned processes can cause slow response, missed communication, missed expectations, and increased effort by teams on both sides. In some cases, a provider will need to be flexible and adopt client processes rather than use their own internal processes. Normally these types of issues can be resolved, but if you are finding misaligned processes to be a continual issue, that could be an indicator of misaligned objectives at a higher level.

11 Governance

A critical factor for successfully managing an outsourcing agreement is governance. Governance defines the roles and responsibilities of both parties related to the management and delivery of outsourced services. It also provides the framework for how both parties work together to support strategy, innovation, and business planning. Good governance means you and the provider are meeting on a regular basis to discuss and resolve issues related to strategy, planning, policies, objectives, contract change control, SLA performance, dispute resolution, day-to-day operational performance and procedures, improvement initiatives, process integration between the parties, and the funding of out-of-scope requests.

Too often, there is little attention paid to defining and executing the right governance structure that allows both parties to manage the outsourcing relationship. A lack of proper governance can quickly lead to missed deliverables, missed expectations and damaged relationships. By integrating governance into normal work activities you will be in a much better position to manage the contract towards a successful outcome. If the provider does not accept their responsibilities as part of the governance, this could indicate that they are not prepared to make the investments necessary for a long-term successful relationship.

12 Ease of Doing Business

This is a “catch-all” category, but is probably most indicative of the overall health of the relationship. When issues come along, or changes are required, is your provider easy to do business with? Would you sign another agreement with them? Or does every item seem to start a lengthy, painful process to get to resolution? Ideally, your provider will work with you towards solutions that make sense for both parties, and they continually adjust to your changing business needs. If you find that does not regularly happen, perhaps there are diverging goals and interests that need to be identified and addressed.

In conclusion, you should be on the lookout for these warning signs, as well as the ones included in Part I of this series, to determine if it’s time to take corrective action. The presence of just one or two of these, by themselves, may be completely resolvable in and of themselves. However, when you detect several “yellow lights on the dashboard,” you need to carefully assess if it is time to reevaluate your outsourcing agreement. There are many options you could choose, including overall renegotiations, tower-by-tower renegotiations, source some work to other providers, or selectively bringing some or all services back in house. A sourcing advisor can help you evaluate your current outsourcing agreement and relationship and recommend the best course of action for you.


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