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CEOs WHO FAIL TO ACTIVELY MANAGE OUTSOURCING RELATIONSHIPS MISS OUT ON ‘TRUST DIVIDEND’ WORTH UP TO 40 PER CENT OF CONTRACT VALUE
Well managed outsourcing arrangements based on mutual trust can create a 20 per cent to 40 per cent difference on service, quality, cost and other performance indicators over outdated power-based relationships. This is the finding of new research¹ published today by LogicaCMG and Warwick Business School. The study shows that CEOs who neglect to actively manage their relationships with outsourcing partners are missing out on a ‘trust dividend’ worth up to 40 per cent of the total contract value.
The study suggests that companies should agree a relationship charter with their outsourcing partner that sets a benchmark for behaviour, and that regular health checks, balanced scorecards and senior executive dashboards for the customer are introduced as mechanisms for monitoring success.
The Power of Relationships is the second in a series of major reports from LogicaCMG and Warwick Business School on the Outsourcing Enterprise and includes LogicaCMG’s Top Ten Predictions for Outsourcing Relationships 2005 - 2010². The report finds 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.
Andrew de Cleyn, senior vice president, global service delivery at LogicaCMG, explains: “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. Significantly, none of the organisations in the study cited a good contract as the key factor. Good relationship management techniques, such as flexible working arrangements, willingness to change, and frequent and effective communication, were however regularly highlighted.”
Professor Leslie Willcocks from Warwick Business School, co-author of the report, explained: “Our research analysed 1200 case studies of outsourcing contracts from across the world since 1990. 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. Real trust is not naïve. It comes from planning, is steered by the right people, structures, processes and measurement, and is earned from performance. It is clear that relationships are now themselves strategic assets and demand on-going senior executive investment and attention commensurate with their importance. 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."
The key point is that successful relationships do not happen by accident, says Professor Willcocks. Overall strategic business intention must determine the nature of the relationship and the contract. A detailed design is essential to build effective relationships throughout the lifecycle of the deal. This determines the key underlying drivers of behaviour and whether power-based or trust-based relationships emerge.
An important element of successful outsourcing relationships is to ensure that the right people are in place to make them work, finds the study. It identifies a series of personality types on the client and supplier side, who can make or break a contract.
Professor Willcocks concludes: "Our study found a number of outsourcing contracts where adversarial behaviour, inexperience or lack of confidence led to the demise of a relationship. Again, it is the responsibility of the client senior management team to ensure that the right people are managing the relationship. It is also vital that pre-planning work outlines the scope of engagement and that everyone is clear on roles, responsibilities and ownership of tasks."
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