In May I interviewed Geraldine Fox from Compass Management Consulting, who warned that outsourcing customers too focused on saving money up front might end up paying more than expected over the life of an outsourcing contract due to a practice called back-end loading, in which providers try to make up some of their initial losses by imposing higher costs in a contract's later stages.
Now, according to a story on vnunet.com, the credit crunch is making it difficult for providers to offer those early discounts. Compass analyzed 100 recent outsourcing deals and found a lack of such cost incentives. Says Compass consulting director Andy Gallagher:
Just as the credit boom transformed the outsourcing sector's ability to fund discounts based on an annuity stream from contracts, the shrinkage of credit will have a transformational effect on the sector.
What does this mean for companies striking new outsourcing deals or revisiting existing ones? It will entail working closer with providers to together analyze performance and identify areas for improvement.
This kind of partnership, with an emphasis on process improvement and business transformation, has always been an ostensible aim of outsourcing. With quick and easy cost savings off the table (at least temporarily), perhaps more companies will actually take this approach.