Finding a 'Just Right' Approach to Outsourcing


Everyone, whether they are willing to admit it or not, loves a fairy tale. I am no exception and was thus drawn to this Wall Street Journal story. It relates the short tale of a company that is experiencing a just-right relationship with its outsourcing providers after struggling with contracts that were too open-ended and too rigid.


In its first outsourcing relationship, the unnamed French company used its provider's standard contract. The company found itself paying extra for any service not mentioned in the contract and having to foot the bill for equipment upgrades, also not covered in the contract.


This is a hazard mentioned in IT Business Edge's 2007 interview with John Buyers, a partner and head of Commercial, Outsourcing and Technology at international law firm Stephenson Harwood. Speaking of such standard contracts, he said:

It is inevitable that such a standard form agreement will reflect the supplier's position on every single aspect of the deal. It will therefore be restrictive in areas where the supplier perceives that they could lose money, such as, for example, liquidated damages and service credits. Conversely, such contract terms will make it very easy to enable the supplier to charge you for extras which you might think should be included in the base price.

The French company ended the relationship and, adopting the popular multisourcing approach, engaged two providers and created shorter, far more specific contracts. But the lack of flexibility in the contracts led to distrustful and ultimately unproductive relationships between the company and its service providers.


I wrote about this in 2007, citing a KPMG study that found "massive" service-level agreements often drove up outsourcing costs and complexity.


The French company ended those relationships as well. In its latest relationship, it struck a balance between its earlier two approaches, and one that appears to be serving it well. The article mentions cost savings of "several million euros," after an initial increase of outsourcing costs in the first year of its new contracts.


An example of the approach taken in the new agreement: The French company set a specific budget, but left it up to the provider to determine the best way to spend it to bring about the desired business transformation.